Money Sense
Dr. Walter Rinderle, a member of Vincennes
Catholic School Board, a member of Sacred Heart Catholic Church, an educator
on finances,
with the assistance of Elizabeth Ellis, financial
counselor for S. Ind. Home Ownership has prepared some "Money Sense" info to benefit both our school students and the adult community. The information includes:
Part 1 Dollar Sense/cents for Teens WHY A "FINANCIAL FITNESS" PROGRAM FOR KIDS? Kids today get and spend much more money than ever before--about $264 per month on average. Unfortunately, most teens (and adults) are unprepared to manage their personal finances and drift into serious debts. Kids are prime targets for retailers and advertisers, encouraging them to buy the "latest fashions" and more and more "stuff." In fact, with credit cards, kids are lured into debt before they realize what has happened.
The average college student upon graduation has about $5,000 to $6,000 in credit card debt, the average family $8,000. Often people have great difficulty in getting out of this debt--with interest costing as much as or more than the original items. Besides debt, most teens (and adults) save very little of their money. In fact, about half of the U.S. population lives "paycheck to paycheck." For these reasons, we think that "money skills" must be taught to all grade and high school students--and that they are as important as social skills. The purpose of our seminars, then, is to teach our kids how to handle money now, how to save dollars, how to spend money wisely, and how to invest for future goals. We want to show them that money gives independence, more choices, and lessens worries; it also allows them to help others. We want to show that setting aside small amounts of money now at an early age will compound into considerable riches in years to come; in fact, investments can yield much more than the total salary that one will make from working.
In effect, two “people” will be producing wealth for you: yourself and your investment accounts. Although money in our society is important--some say a "Great Big Deal"--we want kids to keep money in perspective and not be obsessed with it; in short, we want to show that money is less important than relationships and that it can be used for helping others. Hence, our course is designed to motivate our kids to begin good financial habits that will last a lifetime. As the Greek philosopher Aristotle said 2,500 years ago, "Good habits formed at youth make all the difference."
Hopefully these hand-outs will encourage kids and parents to talk with each other about money. After all, most financial habits are learned at home. HOMEWORK ASSIGNMENT #1 ASK PARENTS FOR HELP. Write answers on a separate sheet and bring to class by_____________________. Class discussion will take place about 10 days after each assignment is given. Many websites are available to help students on Google/Yahoo, etc. such as kidsbank.com; finance.idaho.gov/kids.aspx; jump$tart.com; consumerjungle.com-high school curriculum. Check the library for books also.
1. What is money? It’s purpose? Whose pictures are on our bills? What do the symbols and numbers mean? What coins do we have? Find the words "Liberty," "In God We Trust," "The United States of America," and "E Pluribus Unum" (One out of Many). Why are the edges of some coins not smooth? Do other countries have their own money? What did people in the past use for money if they had no paper or coins? (shells such as wampum, barley, cattle, tobacco, stones, different metals, etc. Have you ever exchanged your items for someone else's? This is called Barter. What are the difficulties of using barter? Where can young kids put their money? Do you have a jar or piggy bank? (If not, make one). When should one open a "savings account" at a bank? Why would this be called a "custodial" account? Have you or your parents opened one yet? (Do so). What is a "passbook"? a "deposit slip"? a "check"? How does one "endorse a check?
2. How do you and other kids normally get money (Income)? Family chores? Allowances? Gifts? Scholarships? Getting A's? Gifts? Selling stuff such as...? Jobs such as...? Starting a business like creating web sites? Baby-sitting? House-sitting? Tutoring? Garage sales? Re-cycling cans? What are some money-making ideas you can think of? Do your parents set guidelines on how allowances should be spent? Should they? Do they insist on saving some money? Do you have a Social Security Number? If not, download a form at www.ssa.gov (click "forms").
3. What does the average kid or teen spend money on (Expenses)? How much do you spend yearly on music? How many CD’s does the average teen have? How much might these have cost? How could you save money on them? If you had to sell them to raise cash, how much would you get? How much is spent on clothes? Eating out? Entertainment? Other items? What is a budget? Why are budgets important for everyone? What are the benefits?
Assignment: Keep track of your expenses for one week by category: fast food, snacks, eating out, transportation, entertainment, phone, clothing, personal, charity, etc. How much do you spend? Do you make wise choices? What is meant by impulse buying? If you had to live on your own, how much would it cost for rent? furniture? utilities? other "stuff"? How can living at home give you a head start for your post-high school years?
4. So far, are you basically a saver or spender? What is meant by the personal savings rate? In 1984 it was about 11% of earned income. Today it is about 1.75%. The goal should be to save at least 10% of money you get. Why do many people live “paycheck to paycheck”? Why is it difficult to save money? (Give at least 5 reasons). Why do we buy "stuff" we don't really need? Make a list of things you think you need. Are these needs or just wants? Why should one save for the future? (Give 3 reasons). How much could you save per week beginning now? Explain these sayings: "A penny saved is a penny earned" (B. Franklin) and "It's not what you make; it's what you save" that is important. What are some ways to save money? 1) Save before spending or “pay yourself first.” 2) See if your parents or grandparents will match what you save. This is a good incentive. 3) Spend less and don't buy things that are unnecessary. (Remember, $50 saved each month at 18 years of age is worth hundreds of thousands of dollars in retirement). 4) Consider the "opportunity cost." You can either spend $50 for a concert now, or have it grow to $142 in 10 years; your latte, pop, and candy at $6 per day in an IRA would be worth about $3.9 million in 60 years.. 5) Start saving change in a jar and when full, take it to the bank. 6) Carry very little money in your wallet, so you won't have it to spend. 7) When considering a large purchase, wait a day or two to think about it. If you have a credit card, keep it frozen in a plastic bag. That way you HAVE TO WAIT. Any other suggestions? DOLLAR SENSE (Rinderle &n Ellis) HOMEWORK #2 Due by__________
5. What are financial goals? What are your short term goals? Give 2 examples. Medium goals? 2 examples. Long term goals? 2 examples. How much will these cost? Why does spending money involves choices (maybe giving up less important things and delaying rewards for better ones later)? How much would it cost to play golf at $50 each week X 40 weeks per year X 70 years? How much would this money earn in a stock account compounding at 10% per year? Why would a financial plan or “road map” for saving be a good idea?
6. Where can one put money for safekeeping and to grow? Do you have a college/ tech school fund yet? What is a savings account? A custodial account? Checking account? A certificate of deposit (CD)? A bond? A stock? A mutual fund? A retirement account—IRA or ROTH IRA or SEP or 401k? What are some advantages of retirement accounts? At 16 you can put earned income up to $4,000 into it per year. Have you started yet?
7. What is interest? Annual percentage rate (APR)? What is compound interest? Why is it sometimes called the “8th Wonder of the World”? (Baron Rothchild) Here are some examples of compound interest: (using the average gains in the stock market over the last 50 years) a 25 year old puts $2,000 in an IRA for 10 years ($20,000 total) and at retirement it totals $545,344; a 35 year puts $2,000 in an IRA for 30 years ($60,000 total) and at retirement it is worth $352,427. If a 16 year old puts $2,000 yearly in an IRA for 14 years, then at 30 puts in $4,000 yearly until retirement, it will be worth about $2 million. Isn't this almost unbelievable? Or if you started with one penny and doubled the amount daily, how soon would you be a millionaire? Answer: 28 days. (1,2,4,8,16,32,64,1.28,2. 56,5.12, 10.24,20.48,40.96,81.92, 163.84, etc.) Each $1,000 saved in an IRA at your age should be worth $32,000 to $64,000 at retirement. $100 invested in an index fund should be worth $146 in 5 years, $236 in 10, $10,672 in 50, and $1.25 million in 100. This is the miracle of compound interest. The important lesson is time--how long you invest. It is crucial to start early--at 16 if possible with a Retirement account.
8. What does the slogan, “earn interest, don’t pay interest” mean? "Live beneath your means"?
9. What is credit? What are some ways one can get credit? What are credit cards? Their advantages and disadvantages? About how much would it cost for a $50 pair of shoes that was charged to a credit card at 15% annual interest with a monthly payment of $15.00? If a college students owes $7,000, it takes $1,400 just for interest payments each year--and probably 18 years to pay off. That is why credit cards are like quicksand. Some words of advice: "when you borrow money to buy something that is unnecessary to you, and that loses value over time, it harms your financial future." (Motley Fool, p. 52) What are some credit card tricks? Offering a low interest rate for several months and then raising it to 16%, offering "gifts," charging late fees, getting you to pay the minimum, etc. Why have credit cards forced record numbers into bankruptcy? Why do 70% of cardholders carry a balance from month to month? What is the average interest? Why do banks want customers to make minimum payments? Why do financial advisors say to pay off cards each month? Avoid annual fees and late fees? What is the grace period? What is a debit card? Advantages and disadvantages?
10. How can one get out of debt? Why do many people never pay off their car loans? house loans? How much interest does one pay to finance a $18,000 car at 8% per year over 6 years with payments of $300 per month? A house over 40 years paying $600 per month? A $100,000 house over 30 years at 7% and paying $650 per month? (check out calculators on the internet). Minimum payments on a $2,000 debt takes 16 years to pay off and costs about $2,500 in interest.
11. How can you save money? Cutting expenses is a great way to have money left over for savings. Explain these concepts for spending less money: Buy on sale; Buy used—clothes, books, etc; Buy at discount and thrift stores; Buy in bulk; Buy store brands (generics) instead of the leading ones; Use coupons and rebates; Buy out of season (except fresh food). Comparison shop. Repair items instead of buying new—or make them. Make your own gifts instead of buying them. Pay cash instead of using a credit card if you may not pay off the bills monthly.. At restaurants skip the soda and drink water. At grocery stores bring a list to avoid buying too much, avoid expensive snack foods; see what is on sale and if it is a bargain. Take your coffee, soda, or lunch with you to school or work. Chip in for pizza and eat with your friends at home. Borrow books, cd’s, special shoes, and other "stuff," etc. Do it yourself. On a vehicle change you own oil and filters. Leave your credit card at home (or freeze it in plastic for real emergencies). Cancel subscriptions and read them at the library. Compare prices for insurance--get reductions for good grades, etc. Learn how to do home repairs and save thousands of dollars. (See the library). Save on utilities—insulate, close doors, use water restrictors. Ask for free samples. Get haircuts at a beauty college. Don’t exceed minutes on cell phones—see which are the best plans for you. For electronics buy factory-refurbished with warrantees. Check overstock.com; classiccloseouts.com; designeroutlet.com; etc. For concerts volunteer as an usher. Any other? How can kids have fun for very little money? Why does having a credit card encourage people to spend more money? DOLLAR SENSE (Rinderle & Ellis) ASSIGNMENT #3 Due by _______________.
12. What is meant by net worth? Assets? Liabilities? How does one arrive at one’s net worth? What would your net worth be at this time? Some assets lose money over time (depreciate) like cars, clothes, stereos, etc. What assets might appreciate or gain in value?
13. What are some financial blunders to avoid? Smoking. One-half pack per day costs $547 per year or $75,000 to $100,000 by the time one is 80; investing that money would yield about $5 million (Motley Fool, p. 81). Surprising? Gambling--including lotteries. You have a better chance of being struck by lightening. Scams--"work at home" etc. If it is too good to be true, it probably is. Poor purchase decisions. This could include a very expensive car, not paying off credit card or car debts. Dumb money mistakes. Ask an adult which ones they made and what they learned from them. These may include acting on hot tips from friends, brokers, and newsletters; loaning money to friends and relatives or co-signing their loans. Living beyond one's means. One can dig a financial hole that is difficult to get out of. To be financially successful, live beneath your means. Buying through "Rent to Own." (It may cost 3-4 times as much). Using Pay Day loans. These have very high interest rates and penalties. Not paying off credit card debt monthly. The goal should be to earn interest, not pay it. Using "instant refunds" to get back money from the IRS. This is a high interest loan with fees.
14. What kind of job could you get? How can a job be a learning experience?
15. What are some job tips? What do you think of these tips: start early, use connections, follow your interests, let friends know you’re looking for a job, check the classified ads and career center, develop skills for the job, do every job well, be professional, show what you can do for your employer, discuss salary at the end, write a thank you note for the interview. Any others?
16. Why do employers look for people who are dependable, honest, hardworking, and willing to learn?
17. What might be some businesses teens could start? (check out youngbiz.com) Babysitting? House and pet sitting? ($100 per week). Washing and grooming pets? ($15-30). Setting up websites? ($100 per page). Teaching computer literacy? ($25 per hour). Picking up groceries for the elderly? Retail jobs? Caddying at the golf course? Newspaper routes? Yard cleanup? Driving the elderly to doctor appointments? What does it take to be successful?
18. How expensive are vehicles for teens? What costs are involved? Does it cost about 45 cents per mile to drive as the Internal Revenue Service calculates? What can you do to lower the cost?
19. Why are "wheels" so important? Why do many people identify themselves with their cars? Isn't it silly to look up to a person who has a fancy sports car financed by the bank compared to a person with an older car who paid cash?
20. What advice would you give to someone looking to buy a used vehicle? (low mileage? maintenance records? insurance rate? age of vehicle? gas mileage? cost of license?) (check out Fool.com/car for tips on negotiating for cars). More?
21. Where can one get a loan for a car? Who would have the best deal--a bank? credit union? car dealership? What are the advantages of getting a 3 year loan instead of 5 year? making a high down payment instead of a low one? a simple interest loan rather than an installment loan? (see bankrate.com)
22. What are the advantages and disadvantages of leasing a vehicle?
23. What are checking accounts? Advantages? What questions must one ask before opening one? (interest earned? minimum balance? special deals for students? number of checks per month? monthly service charge? fees for overdraft? location and hours of operation? check-hold policy?)
24. What are ATM's? Why is it such a money-maker for banks? What questions should be asked? (anual fee? fee per transaction? fees for other ATM's? Why do some people pay $500 per year to use ATM's?
25. What is a credit history? (Check yours free at annualcreditreport.com from Equifax, Trans Union, or Experian)
26. What is meant by investing? What are no-load funds? What are dividends? How can one buy stocks? What are DRIPS? What does financial independence mean to you? most people? How much should one save and invest from each paycheck/allowance/gift? (Most advisors say 10% or more). The rule of 72 tells how long it takes to double your money (divide your rate of return into 72).
27. Investments have risks and trade-off's. Risky investments usually have the potential for large rewards, but are they worth it? Stocks return on average about 10-11%, long term government bonds 5%, short term bonds 3-4%, CD's 4-5%. What is the real rate of return if inflation is 3%? Stocks are listed on the N.Y. and Nasdaq exchanges and have symbols like F for Ford, MSFT for microsoft, etc. When investing in stocks, expect growth and volatility, be patient, expect to have some losers, expect conflicting advice and information
28. What are mutual funds? Some are composed of stocks (equity funds), bonds (fixed-income), CD's (money market) and mixtures of several types. There are also domestic, sectional, growth, value, balanced, index, international and other types of funds. Most charge significant fees to buy (Load Funds) and hold (some as high as 1.4% or more per year). Avoid high fees. Index funds (such as the S&P 500, Wilshire 5,000) often do better than actively managed funds--and are much cheaper. What is meant by diversification? What are U.S. Treasuries? Savings Bonds?
29. What are brokerage accounts? Custodial accounts? Discount and Full Service Brokers? Brokers for small transactions (sharebuilder.com; buyandhold.com). Direct purchase programs. Dividend re-investment plans.
30. What might be some of your expenses as a college student? How could you save on rent? entertainment? travel? clothing? food? One person said that 75% of his expenses were for food and drink--partly from playing "Sugar Daddy" by paying for the whole group (since no one claimed to have cash or a credit card) and going on expensive dates. Why don't more teens and college students "go dutch" instead—each pay his/her own way, as in Europe?
31. When you buy your first house, you will probably get a mortgage. What is that? If you put 20% down, then you won't have to pay mortgage insurance (another fee) and will normally get a lower interest rate. Instead of a single family home, buy a duplex and let the renter of the other apartment pay your mortgage.
32. What are taxes? What kinds are there that you will pay? What is the IRS?
33. What is inflation? How does it affect everyone?
34. What advantages do magazines like Consumer Reports offer?
35. College tips: at 15 years of age get all the information you can. Apply for a Stafford loan (almost all families qualify), a Pell Grant ($3,000 for low income families), consider a junior college which is cheaper than a 4 year, join the military service and get a free college education, or sign up for work-study.
36. Interview at the college of your choice. If you show enthusiasm, ask good questions, apply early, and show leadership, you will be readily accepted--and often granted a good scholarship. If you are offered a scholarship at one college, ask another college to "better the offer." Often they will. You can then go back and tell the original college which may offer you even more aid. Check out the Student Financial Aid Handbook and Motley Fool financial aid list (pp77-78).
37. Being a college freshman is stressful: cooking, cleaning, budgeting time, handling finances, etc. Nearly 75% said they overspent—for food, entertainment, eating out too often, etc. Half said credit cards should be used only for emergencies and the balance should be paid off each month; ATM usage should be minimal, and meal plans should be used to cut the food bills. Check out more tips for college at www.scholarshipamerica.org/ss/files/40moneytips.org.
38.What is a will? When should you have one? If you are over 18, do you have one now? (check the library for books on legal forms).
39. Find 2 books in the library on personal finance for kids, teens, or young adults. List the names, authors, and 3 sentences about the contents.
All in all, students can learn the discipline to defer gratification, save and invest their money, avoid credit car debts, pay off other debts quickly, and become financially independent. Remember that two “people” will help you become wealthy: yourself from a job and your investment portfolio which should make much more money than you do. Save at least 10% of your income for your future plus 10% for charity (gifts, worthy causes, etc.) Help teens build credit by adding the name to your credit card (even if they don’t use it).FINAL WORDS OF ADVICE FROM THE MOTLEY FOOL: I will "Carry no credit card debt. Save 15 percent of my salary. Invest it into the index fund." BIBLIOGRAPHY: Complete Idiot's Guide: Money for Teens; the Motley Fool Investment Guide for Teens; Barron's Money Sense for Kids; The Everything Kids' Money Book; Smart Spending: A Young Consumer's Guide; Two for the Money, The Millionaire Mind; Suze Orman books/TV show (SuzeOrman.com—password=EIEIO; use calculators and investigate her site; also go to TD WATERHOUSE for $100 free under Suze’s saveyourselfplan, enter code #701 to set up account. teens.Fool.com; jumpstartcoalition.org; inversorguide.com/index_english.html; finance.yahoo.com/personal-finance; teenagerstoday.com;
Part 2 Save money in college
1) Try to get a scholarship. Bargain with the colleges you want to attend. Write a good resume showing how they will benefit by having you as a student and alumnus or alumna. Point out what you have accomplished so far, including volunteer work. Remember, there are no such things as set prices for colleges. Each can put together a package of grants and scholarships to attract the persons they want. If U of A offers you a $2,000 scholarship (you don‘t want to go there), tell U of B (your choice) what you are offered and they will often match it or make it larger. Then try the same thing again with U of A and take it to U of B. 2) Meet each teacher and ask if there are any scholarships in that department that were not used. Often students who were offered scholarships do not come to campus or go elsewhere. Convince your teachers that you would be a good candidate for these scholarships. 3) Lower the cost of books which can run $1400 per year or more. Ask the teacher to put a copy on library reserve, sell you his/her desk copy, or allow you to use the previous edition which can often be purchased for $1 instead of a new one at $90. You can also share books with a roommate or friend. 4) See if you can get on “Work Study.” These jobs can advance your career and you could get inside information on upcoming scholarships and grants. You will be able to get to know many teachers and administrators who can write good recommendations for you when you graduate. 5) If you have meal tickets, use them and save your money. Many students use meal tickets only ¾ of the time and eat other meals at restaurants. 6) Curtail eating at restaurants. Instead learn to cook and have occasional “eat-in” parties. 7) Avoid the temptation to spend $10 a day on gourmet coffee, candy, pop, etc. Saving $6 per day in a retirement account will grow to about $1.7 million by retirement. 8) Go “dutch” on dates—each pays his/her own way. You can go out more often this way. 9) If you live off campus, negotiate your rent. Often landlords will lower rents if you have good references and promise not to tear up the place. Offering a higher deposit for a $25 per month deduction in rent is also a good option. 10) Take advanced placement courses in high school which earn both high school and college credits. It is possible to earn college credits for some high school courses. 11) Take college courses while in high school at a local college. 12) Join the Ind. National Guard or a branch of service. You will get free tuition plus $300 to $600 per month. 13) Have relatives or friends set up a "scholarship account" in the name of your school at the college "foundation office." (For example, Rivet student account at U of E; if two of you plan to go there, each family can put money in the account). If aunts want to give you $100 for graduation, have them double that amount and send it to the college instead. With the Indiana tax credit of 50% (up to $400 per couple), they can double their donation at no cost. Where else can you earn 100% on your money overnight? Note: legally, parents cannot do this for their own children. 14) Find a part-time or summer job at a business which will help pay your tuition. Many banks do this as well as families seeking "nannys." They may also pay cash and living expenses in exchange for taking care of their children. 15) Take a job where you will have free housing and meals. Check with your pastor to see which families need someone to help take care of an elderly person. Often they pay $6.00 to $10.00 per hour and give free housing and food (sometimes the use of a car). 16) Tuition pre-payment plans sometimes give a 10%
reduction. 18) You can also "test out" of many 3-6 hour courses at a small fee of $15 to $25 per course. This could save between $300 and $2,000 per course. 19) Check out as many grants and scholarships as possible. Besides the ones you find through the high school or library, ask the financial aid office at every college you plan to attend. Also check "service organizations" in your town or the place where you or your parents work. They may decide to offer you a scholarship, so you will work there during vacations and summers. It is possible to pick up four or five $250 scholarships this way. 20) Check out combined degree programs which allow you to work on your Master’s degree while an undergraduate. 21) If you want to go to an out-of-state college, check on the residency requirements. Some allow you to have in-state tuition after only six months there. 22) Leave the car at home. This can save $2,000 or more in parking, insurance, depreciation, etc. 23) Live at home or with relatives if possible. This may save $300 per month or $3,000 per year. 24) See if the college has cooperative housing which can cost half of dorm fees. 25) Use coupons or check out college discounts at stores. 26) Avoid fees and fines. A parking fee can be $50 to $300. 27) Avoid the ATM machine. You can become addicted to spending more than you can afford. Also avoid Credit Cards and NEVER carry a balance. 28) Avoid cell phone charges or limit the number of calls. Some students spend $100 or more per month by going over their limits. 29) Watch out for scams such as fake Caller ID numbers, fake web sites, computer hackers, muggers, identity thieves, pickpockets, and carjackers.
A REMINDER: GO EASY ON COLLEGE LOANS. They must be paid back with interest. Some students begin their careers $40,000 in debt!! It takes a lot of years (and wasted interest) to pay it back.
For more information log on to SuzeOrman.com. Password: EIEIO; go to Resource Center, and then click Paying for College.
Part 3 Common Sense Economic Advice to Students and Parents
HOW DID THE ANCIENT PEOPLE OF 5,000 TO 6,000 YEARS AGO BECOME WEALTHY? What are the secrets they discovered? Babylon was one of the first cities, had the first written language, had the first financiers, the first astronomers, and the first irrigation canals to grow crops. They were probably the first inventors of money as a means of exchange and the first to have titles to property.
Pay yourself first from your earnings. Save at least 10 percent. Learn to live on less than you make. Say to yourself, ”A part of all I earn is mine to keep.” (81).
1) Don’t confuse necessary expenses with desires. The latter are unlimited; you have more desires than your earnings can gratify, no matter how much you earn. Hence, budget your necessary expenses on the nine-tenths left. 2) Make your saved money work for you like a slave so you in effect have two incomes, one from wages and one from your savings. Guard this treasure from loss and invest conservatively in something you know about. 3) Make your dwelling a profitable investment. Don’t rent or lease (unless you will move in a short time); own your own home (and auto). 4) Save for old age and retirement when you can’t work. 5) Cultivate your own powers and intelligence to become wiser, more skillful, (higher paid), and respectful of yourself as a valuable person. 6) Take advantage of opportunities that come your way. Good luck can be enticed by accepting opportunity. Men of action are favored by the Goddess of Good Luck. 7) Have adequate protection for the unexpected (fire, sickness, etc.) 8) Have determination to reach your goals. Determination will find a way. 9) If you are in debt, live on seven-tenths of your income. Save one tenth and pay off debts with two-sevenths.
HOW YOU CAN BECOME A MILLIONAIRE by Ed Dzwonkowski
You are invited to join the Millionaire’s Club. No membership fees or dues. Just follow five steps: 1) Set your goals and write them down so they are not just “wishes.” 2) Create a plan of action. 3) Follow your plan year in and year out. 4) Chart your progress. 5) Modify your plan as needed.
“The Eighth Wonder of the World is compound interest.” This saying is attributed to Albert Einstein (and the Rothchilds). Compounding is like money growing on trees. Every $100 saved becomes $1,083 in 26 years at 10%. All it takes to become a millionaire is to save $61 a week over 35 years. (At age 20 it takes only $1.50 per day). It is that easy to join the Millionaire’s Club. Is 35 or 45 years too long? Chances are that you will live that long, so why not decide to be a millionaire at age 65? Saving $264 a month means you will have saved $111,000, but you will have hit the million dollar mark. The rest or $889,000 is all compound growth!!
A millionaire’s greatest ally is time. If you wait ten years to get started, you’d accumulate a mere one-third of that million! If you begin at 20 with $61 per week, you would have 2.5 million by age 65.
A millionaire’s two worst enemies are procrastination and taxes. If one waits until age 36 and invests $2,000 per year for just 10 years (a $10,000 investment), he will have $236,000. If he waits until 46 and invests $2,000 per year for twenty years (a $40,000 investment), he will have $110,000 less! To cut taxes use retirement accounts and concentrate on capital gains. Also keep invested. (Start a business and use the deductions to shelter income).
Are you willing to sacrifice $264 a month today for the next 35 years in order to have a $5,000 a month income for life ($60,000 per year)? You can withdraw 6% of your money each year and never run out of money!
The First Rule to become a millionaire is Spend Less Than You Earn. All it takes to be a millionaire is $111,000 or 11%; the other 89% magically comes through compound interest. Spending has to take a back seat to saving. A part of what you earn is yours to keep forever.
The Second Rule is Invest the Difference in Appreciating Assets. Most assets like cars, furniture, clothes, etc. depreciate in value.
All investments can be classified as “Loanership” or “Ownership.” Loanership investments are bonds, Certificates of Deposit, U.S. Treasure Bonds, corporate bonds. These are safer investments but produce a lower return. Ownership investments are a business, real estate, and stocks. These tend to outperform the first group of investments, so one should have more invested in Ownership. Know what risks you are taking with each investment. These include market risks (be in the US and other markets), business risks (invest in several businesses), default risks (check credit history), liquidity risks (keep ½ to 1 year of cash for emergencies), interest rate risks (ladder your CD’s), inflation risks (buy companies with increasing dividends), currency risks (invest outside of the USA), etc. All investments have some risks. A mutual fund gives one diversity and professional management. One can also set up monthly deductions from checking to invest each month in a fund. This is called the Automatic Investment Plan. This is the easiest way to save—you never see the money.
One’s greatest risk is the Wealth Risk—running out of money during the 25 to 40 years in retirement.
Asset allocation is something you must determine based on your comfort level. This is a pyramid with Aggressive growth at the top (5-10%), Growth next (20-25%), Growth and Income (35% or so), Income (20%), and Cash Reserves for emergencies (10% or so).
Remember: “If you can’t afford to pay cash, you can’t afford it.” Avoid paying an extra 20% or more for instant gratification. Wait until it is on sale and pay with cash. You will save 30-40%. Debt is a Four Letter Word than millionaires find distasteful.
The sad truth is that most people DO NOT become financially independent. (The average household has about $8,000 in credit card debt and a total of over $70,000 in debt. One must EARN INTEREST, not pay it out). Robert Frost said there are two roads one can travel. Take the Road Less Traveled and become financially independent.
O.K. Lets get started on your way to becoming a millionaire. Just sign the contract below and resolve to save that monthly amount. Refer to the contract daily or at least weekly.
YOUR MILLIONAIRE CONTRACT
Starting today I am a “Millionaire in the making.” Starting today I will pay myself first. I will save and invest $_________ or ______% from each paycheck and not touch it until I retire. My goal is to become a millionaire by age _______.
Signed:___________________________________ Dated:____________________
INVEST IN YOURSELF: SIX SECRETS TO A RICH LIFE by Marc Eisenson, Gerri Detweiler, and Nancy Castleman.
Eliminate “if only” statements from your vocabulary. Also don’t use “can’t,” “won’t,” ”it’s their fault.” Name five things you’ve always wanted to do but haven’t. Simplify your life. Go to slnet.com; simpleliving.com; newdreams.org. 2. Put your family first. Only you can decide your priorities but use your family as a resource. 3. Make the most of your time. Make a quality-of-life scale for different people and God. Learn to say No if activities are not benefiting your time or energy. Remember, no one is indispensable. Burn calories instead of money. Learn a new skill to improve your quality of life. Take time off to re-invigorate yourself. The academic calendar is good for you. 4. Turn your spender into an investor. Cheap brokerages are suretrade.com and dripinvestor.com. 5. Buy or rent? Whether the house will be a great investment depends on the local economy and location. A mortgage is not really a good tax shelter. You still have to pay about 72 cents out of every dollar and you can deduct only about 28 cents.
Prophet, prophet, where is the profit? Sometimes renting can be much cheaper than renting (p.75 figures). Prepay on your mortgage, especially in the beginning where 90% of the payment is just interest. If you pay less than 20% down, you will have to pay for extra insurance on the loan. 6. How much is enough?
Retirees running out of money can use reverse mortgages (reverse.com). Read The Five Minute Lawyer’s Guide to Estate Planning by Michael Allan Cane. Use a revocable trust to avoid probate costs. You still need a will (Nolo Press, Simple Will or ca-probate.com/links.htm. 7. Wherever you work, be in business for yourself. You will change jobs and careers many times, so develop your skills and take them with you to the next job. The secret to having maximum control over your life is to live comfortably on less than you earn. Be motivated by choosing work you enjoy. Find out what you enjoy doing (and you will never have to “work” another day in your life. If you find a job you think you might like, volunteer there to see what it is like. Don’t burn bridges. See careerpath.com. The more people you know, the better chances of finding a job. Work where the “perks” are. They are often 35 to 40% of one’s wages. Find a job with a retirement plan and medical savings plan. Go into business. To be successful in your own business, choose a business you enjoy, keep costs down, offer attractive prices, and deliver a high quality product. Remember that Apple 8. Computer started in a garage. List your “portable career skills.” Be ready to use one or more if you are laid off. Working for yourself is the most fun you can have. 8. Small change makes a big difference.
Buy on sale. You can save 30% or more. Save 10% of what you earn. Pay cash. That $1,000 couch will cost $1,400 if you finance it over five years. Buy used. Nothing is ever new for more than a few seconds anyway. Rein in holiday spending! Make some of the gifts instead. Learn to be frugal. Ask yourself, If I didn’t need it yesterday, why do I need it today? Stay clear or scams, schemes, and other rip-offs. Don’t buy anything on a phone. Go to consumer.gov. Shop at the end of the month especially if salespeople are trying to make quotas. They are more apt to give larger discounts then. 9. Invest in your own debts and make 7 to 20%.
Avoid credit card debt. You are not what you wear, spend, or own. A $3,500 purchase paying the minimum will cost you $11,162! Paying off credit cards is one of the best investments you can make, period! Use cards if you pay them off each month; take advantage of their “amazing grace.”
Always pay more than the required minimum. Pay an extra $100 on your $734 a month mortgage and save $48,421. The more you pre-pay, the more you will save. 10. Check out car expenses.
AAA figures about 45 cents per mile. The average person will spend well over one half million dollars on vehicles at this rate in today’s dollars. Shop for insurance. Hang on to the old car if it runs good.
Summary: The way to wealth is straightforward and simple: Spend less than you earn, avoid debt, and then save and invest for growth. When you save, don’t put all of your eggs in one basket. (See wealthbuildernews.com and moneyinsider.msn.com).
TOTAL WEALTH: LIFETIME WEALTH AND LIFELONG SECURITY by Mac Barnes. To accumulate a million dollars you must set up an endowment account and rely on compound interest, not touch the money in this account (you can’t have your cake and eat it too), consider investing in the Vanguard Index Trust 500 Portfolio (VFINX) or other index funds which have very little turnover and taxable gains, and defer taxes. An endowment account if different from a savings account where we save and then use the money to buy a car, refrigerator, etc. Compound interest can double your money every five to ten years, meaning that $1 can become $64 or $128 dollars. An index fund gives one diversification and professional management. Find a fund with low management costs like Vanguard. Spyders are receipts for an index fund on the American Stock Exchange. They trade all day long, not just at the end of the day like index funds. However, one must pay brokerage fees to buy and sell them. Live a lifestyle of paying cash rather than going into debt which means you will have a lower standard of life. However, don’t touch the retirement account to buy a car, house, etc. When investing your endowment funds, use dollar cost averaging—put money into it monthly or quarterly. Also buy when assets are on sale—when they are cheaper. Consider giving assets away and offsetting your losses. You can also purchase a charitable annuity which gives you monthly income and after you die the asset goes to charity. Know what
your risk aversion is. Don’t invest in things that keep you awake at night. Leave wealth to your heirs by making matching grants to get them to save. Avoid the common mistakes most people make. 1) Selling when the market is down, 2) Staying out of the market because it might go down, 3) Buy a stock and watch it go down (have a sell limit), 4) Buy something that is too risky, 5) Try to make money as an in-and-out trader, 6) Buy something because it will lower your taxes, 7) Believe someone who says he can make you a fortune, 8) Brag about your investments (keep a low profile), 9) Think too much of your investment skills. See www.total-wealth.com.
Part 4 How to Become Independently Wealthy
WOULD YOU LIKE TO BECOME A MILLIONAIRE OR AT LEAST FINANCIALLY INDEPENDENT DURING YOUR LIFETIME?
THEN TAKE THE FOLLOWING STEPS: 1) SET UP A BUDGET AND TRACK EXPENSES, 2) LIMIT DEBTS, ESPECIALLY CREDIT CARD DEBT, 3) TRY TO AVOID TOO MUCH DEBT TO PAY FOR COLLEGE, 4) SET UP A SAVINGS PLAN, AND 5) FOLLOW THE ADVICE OF MILLIONAIRES.
FIRST, SET UP A BUDGET AND TRACK EXPENSES FOR FOUR WEEKS:
FOOD CREDIT CARD regular meals charges meals out/snacks interest BEVERAGES debt to date pop/tea/coffee/etc CHARITY/GIFTS alcohol SAVINGS regular/stock/bonds TOBACCO PRODUCTS retirement CLOTHES MONTHLY INCOME designer clothes MONTHLY EXPENSES regular clothes ASSETS-TOTAL DEBTS=NET WORTH shoes/accessories SPORTS equipment activities TRANSPORTATION (.35-45 cents per mile) gas/oil/tires QUESTIONS TO CONSIDER: repairs/upgrades How can one become a “smart consumer?” insurance/license Why is budgeting important? FURNITURE Why do so few Americans become debt- LEISURE free or financially independent? cd’s/tapes What is good debt? bad debt? number owned Americans are “spending money like it’s going movies/games out of style, gambling the rest, and absolutely trips ignoring the future.” (Money for Life, Steve concerts Crowley, p. 97). STEREO EQUIPMENT “Debt is like a drug: instant gratification at a COMPUTER horrible price.” (Crowley, 79) software/games “Many Americans are living from paycheck to UTILITIES paycheck and are only one step from phone homelessness.” (Crowley) cable The average family has credit card debt of 8,000 other and three credit cards. Your objectives: LOTTER/GAMBLING cut spending by 5% to 20%, RENT pay yourself first (savings plan) 5% minimum CLEANING avoid credit card debt--16-18% interest, dry-cleaning forget the lottery; it’s a rip-off, laundry/drying use compound interest to your advantage, supplies budget to track spending & pay necessities. MEDICAL/DENTAL How does one establish good credit? COLLEGE Example of compound interest: by investing $1.00 books/fees per day for 69 years one saved $25,185 tuition which grows to $1 million at 8% interest. miscellaneous Buying a house with a 30 year mortgage means GROOMING/COSMETICS paying 3 times the asking price.
SECOND, ONE MUST CUT OUT NEEDLESS SPENDING.
The media says, buy now, go into debt, buy the "best." The result is that one becomes an "economic slave" and leads a life of stress, fear, and unhappiness. What are some typical ways high school and college students waste their money?
a) buying hundreds of CD's and tapes ($7-$12 each) b) buying professional stereos for a car or home ($1-5,000) c) smoking cigarettes ($1-2 per day) b) buying cases of beer (1-2 cases per week) and other alcohol ($15-%40 per week) e) spending large amounts on dates ($50-100) or concerts f) buying designer sunglasses ($100) or clothes ($85 for a T shirt) g) buying expensive Christmas gifts (make them instead) h) buying a high powered car with insurance payments between $1,000 and $2,800 per year; buy an “old reliable” car instead. i) buying Lotto tickets ($5 per week) j) wanting a new car at graduation k) piling up college debts (some owe $40,000 and more when they graduate) l) wanting a large wedding costing $10,000 or more. m) charging purchases with a dozen or more credit cards and paying 18% interest which means one will pay two or three times the original price. One can cut expenses drastically and have money to invest for college, a car, home, illness, and retirement. (Read Andrew Tobias, The Only Investment Guide You'll Ever need and Joe Dominquez, Your Money or Your Life). Their advice: 1) Don't go shopping. Consumption is an addiction. 2) Live within your means. 3) Take care of what you have. Repair it. 4) Wear it out. Many things will last several years longer. 5) Do it yourself. Find books that show you how. 6) Anticipate your needs and buy on sale. 7) Research value, quality, durability and multiple use. 8) Get it for less. Comparison shop and bargain. 9) Buy it used. Frequent Goodwill, Salvation Army, St. Vincent and yard sales.
THIRD, AVOID CREDIT CARD DEBT.
1) Don’t use CREDIT CARDS which add an extra 20% or more to every purchase. (You can save $1,000 per year or more). A $2,000 purchase will cost about $4,400 over eight years if you pay the minimum per month. According to National Public Radio 9/6/01 eight of ten students have credit cards; 2/4 have “maxed” them out. A George Washington University study cited on CNBC said the average student carries $5,052 in unpaid debt. Cut up your credit cards or as a student suggested, freeze them in a zip-lock bag in ice (in case you might really need them someday). Be careful of common credit card ploys to steal your money. Some banks get you to move your balance to a lower rate card, but then don’t give that rate. They often change to a higher rate (sometimes 26%) on the pretext that your credit is not A-1. Avoid cash advance. Many charge fees and an extra 5%; to repay the latter you must note on payments that they are to repay the cash advance first. Also banks sometimes hold your payment a week, so you will be charged a $29 late fee. 2) Pay off high debt such as credit cards quickly. Use savings to do this. 3) Make gifts for Christmas and birthdays which will cost maybe 20% of store gifts. Savings can equal $10 per gift or $100-200 a year. 4) Buy groceries on sale, with coupons, or buy lower priced store-brands. Avoid high priced snack foods. You can save $500 to $1,000 a year. 5) Eat at home. An $8 meal in a restaurant can cost only $2.50 at home. Limit yourself to only one restaurant meal a week. Buy frozen pizzas for $2 each instead of $10 from a pizza joint. You can save $25 per week or $1,300 a year. 6) Cut unnecessary purchases, such as bottled water (2 per day = $104 year) , tobacco (2 packs a week = $300 year), and alcohol (1 case of beer per week = $650 year), especially vending machine products such as pop, candy, and snack food ($20 week = $1,040 year). 7) Don’t use the ATM, especially if you have to pay extra charges. If you don’t have much cash in your pockets, you won’t be tempted to buy whatever you see.
DANGER FOR BUYERS: since Roman times the law has been caveat emptor: “let the buyer beware.” This means that the buyer has little recourse if a product is defective or not what was promised. However, in the USA today one can negate certain contracts within specified time limits and the buyer has a few protections. Nonetheless, the buyer is responsible for paying even if he/she was outsmarted. For example, 1) You could be buying someone else’s problems, especially if you are purchasing a used car. Do not believe the speedometer reading; many are turned back. 2) Watch deferred payments on purchases. “No payments until next year” means that if you miss the deadline by one day, you must pay high interest from the date of purchase. 3) Switching credit cards to a lower interest card may mean that it will be much higher after six months or that the lower rate will not apply to you.
FOURTH, AVOID TOO MUCH DEBT TO PAY FOR COLLEGE
1) Take advanced placement courses in high school which earn both high school and college credits. It is possible to earn college credits for some high school courses. 2) Take college courses while in high school at a local college. 3) Join the Ind. National Guard or a branch of service. You will get free tuition plus $300 to $600 per month. 4) Have relatives or friends set up a "scholarship account" in your name or in a narrow way at the college "foundation office." (For example, Rivet student account at U of E). If aunts want to give you $100 for graduation, have them double that amount and send it to the college instead. With the Indiana tax credit of 50% (up to $400 per couple), they can double their donation at no cost. Where else can you earn 100% on your money overnight? Note: legally, parents cannot do this for their own children. You could also approach friends of the family. 5) Find a part-time or summer job at a business which will help pay your tuition. Many banks do this as well as families seeking "nannys." They may also pay cash and living expenses in exchange for taking care of their children. 6) Take a job where you will have free housing and meals. Check with your pastor to see which families need someone to help take care of an elderly person. Often they pay $6.00 to $8.00 per hour and give free housing and food (sometimes the use of a car). 7) Check out work-study programs at college. These jobs pay from $4.75 to $6.00 per hour. Try to find a job in your field. If you do a good job, your boss may recommend you for a scholarship or internship. 8) Test out of certain courses when you arrive at college. For example, if you had German in high school, you can often earn up to 9 credits (worth $600 to $2,000) at no cost by taking one semester of college German. 9) You can also "test out" of many courses at a small fee of $15 to $25 per course. This could save “big bucks.” 10) Check out as many grants and scholarships as possible. Besides the ones you find through the high school or library, ask the financial aid office at every college you plan to attend. Also check "service organizations" in your town or the place where you or your parents work. They may decide to offer you a scholarship, so you will work there during vacations and summers. It is possible to pick up four or five $250 scholarships this way. 11) Bargain with the colleges you want to attend. Write a good resume showing how they will benefit by having you as a student and alumnus or alumna. Point out what you have accomplished so far, including volunteer work. Remember, there are no such things as set prices for colleges. Each can put together a package of grants and scholarships to attract the persons they want. If U of A offers you a $2,000 scholarship (you don‘t want to go there), tell U of B (your choice) what you are offered and they will often match it or make it larger. Then try the same thing again with U of A and take it to U of B. 12) Lower the cost of books which can run $1400 per year. Ask the teacher to put a copy on library reserve, sell you his/her desk copy, or allow you to use the previous edition which can often be purchased for $1 instead of a new one at $60. You can also share books with a roommate or friend. A REMINDER: GO EASY ON COLLEGE LOANS. They must be paid back with interest. Some students begin their careers $40,000 in debt!! It takes a lot of years (and wasted interest) to pay it back.
FIFTH, ONE SHOULD MAKE THE SAVED MONEY COMPOUND.
HOW MUCH CAN YOU SAVE? Do without pop, candy, and snaks for a day. Will you save $3? $5? $5 a day equals about $1 million in an IRA account by the time your retire. If a person puts $2,000 a year into an IRA from age 18 to 28 (only 10 years), it will be worth $600,000 at age 70 1/2 compounding at 8%.
LASTLY, FOLLOW THE ADVICE OF MILLIONAIRES.
A. DR. LOUIE DAYSON SPOKE ON "MILLION DOLLAR HABITS." Dr. Dayson told the students they would be facing a new situation when they began to retire: their retirement age would be raised to 70, they would live as retirees for an average of twenty-two years, and Social Security would provide only limited assistance--perhaps only pay for utilities. Hence, everyone must begin NOW to save for that period of life. Dr. Dayson called compound interest "the 8th Wonder of the World." Using the Rule of Seven, money doubles every seven years: every $500 becomes $1,000, $2,000, $4,000, $8,000, $16,000, $32,000, and then $64,000. The key is to begin in high school. The sooner one begins a savings program, the more will be available for retirement. If one saved $2,500 for just ten years, this amount would multiply into approximately $1.6 million by retirement. At present everyone can put $2,000 into an IRA account yearly which is tax free. Do it! It can even be a relative's money as long as you have earned that amount. This is the best guaranteed way to become financially independent. One can even begin with small sums. Dr. Dayson asked, "How much per week could you save? $5? $10? $25?" He then gave some ways to save that money. "Save 50 cents a day by drinking water instead of a can of pop, borrow music tapes and CD's from the library, cut your own hair, use coupons, don't smoke (it's better to burn the money than ruin your health), don't play the Lottery, and do without." Most of what people buy ends up in the garbage anyway. Dr. Dayson said that his father told him as a teenager to "save ten percent of his earnings." He did this (and more), even as a soldier in the army. Dr. Dayson said that most people want to put off saving for retirement until they are almost retired. Many "Baby Boomers" who are reaching 50 are now asking themselves how they will be able to retire. 76% have no retirement money; many are still in debt for their houses and cars. "What you need to realize is that you must earn two incomes: one for yourself and one for the old person you will become. If you don't save for yourself, no one else will." Dr. Dayson then pointed out that it does not take much money to become a millionaire. After setting up a weekly savings plan, people should put the money into various mutual funds to diversify. Magazines such as Financial World, Forbes, Personal Finance, and Money give a lot of valuable information. In summary, everyone can start "with nothing" as he did in Frichton, Indiana, and become independently wealthy. Then one can share this gift of wealth with others.
B. NOLAND AND ELIZABETH MCCLURE SPOKE ABOUT six main financial axioms that they lived by. (One can read about these axioms in every personal finance book or hear them on the Suze Orman Show). A. “Buy reluctantly.” One can’t save money by joining the national pastime of shopping. They asked themselves, Do I really need this? They didn‘t accumulate expensive items, like boats, campers, weekend houses, or the latest fashions. They did without and invested the money. B. “Buy on sale.“ They always watched for sales, used coupons, and bought at thrift stores, saving 20% to 50%. Why thrift stores? They believed items were new only for 1 day. |