financial literacy cfa society of buffalo introduction · 76%of americans live paycheck to paycheck...

F inancia l L i teracy

CFA Society of Buffa lo

Introduct ion

Guess their net worth:

$320 Million

$440 Million

$3.2 Billion

https://www.youtube.com/watch?v=ib-0_N9G0Lo

76% of Americans live paycheck to paycheck

55% of Americans DID NOT save a penny last year

97% of Baby Boomers HAVE NOT saved enough to retire

$1 TRILLION in Credit Card Debt Outstanding

$1.2 TRILLION in Student Loans Outstanding

$11.6 TRILLION in Total Consumer Debt Outstanding

Why is Financial Literacy important?

What we hope you will learn…

What is debt? Is all debt bad?

What is interest?How do you compare loans?

What is investing?When should you start investing?How should you build a budget?

Gameplan

Session 1:Net Worth

InterestCompounding

DebtInvesting

Session 2:Income

ExpensesBudgeting

TipsTools

Building Block: Net Worth

Assets Liabilities Net Worth

Assets

Savings

Investments

Liabilities

Mortgages

Car Loans

Credit Card Debt

Student Loans

Unpaid Bills

HouseSavings

Investments Car

MortgagesCar Loans

Credit Card DebtStudent Loans

Unpaid Bills

Example:

You pay for a $250 TV with cash, how does that impact your net worth?

Example:

Cash $250

Liabilities $0

Net Worth $250

Example:

Cash $250

Liabilities $0

Net Worth $250

Example:

Cash $250

Liabilities $0

Net Worth $250

Example:

TV $250 Liabilities $0

Net Worth $250

Example:

Net Worth $250

Example:

Net Worth $250

Example:

You pay for a $250 TV with a credit card, how does that impact your net worth?

Example:

TV $250Credit Card $250

Net Worth

Example:

Net Worth

Example:

Net Worth

Example:

You buy a $150k home, paying $30k down and taking a $120k mortgage. Does purchasing the home increase your net worth?

Example:

Cash $30k

Liabilities $0

Net Worth $30k

Example:

Home $150k Liabilities Net

Example:

Home $150k

Mortgage $120k

Net Worth

Example:

Home $150k

Mortgage $120k

Net Worth $30k

Building Block: Interest

Is interest good or bad?

Credit Card Interest

good or bad?

Credit Card Interest

good or bad?

Savings Interest

good or bad?

Savings Interest

good or bad?

Interest can workfor you

or against you

Building Block: Compounding

Credit Card Interest – 20% Rate

$0 Year 0 Year 1 Year 2 Year 3-$1,000 -$1,000

-$200-$1,200

-$1,000-$200-$240

-$1,440

-$1,000-$200-$240

-$1,728

Investment Interest – 10% Rate

$0Year 0 Year 1 Year 2 Year 3

$1,000 $1,000$100$1,100

$1,000$100$110$1,210

$1,000$100$110$121$1,331

Building Block: Compounding5% Savings vs 5% Debt

$0$1,000 $1,000 $1,000 $1,000

-$1,000 -$1,000 -$1,000 -$1,000-$50

$50 $50

-$50-$52.50

-$55.13-$52.50

$52.50 $52.50$55.13

$1,050$1,102.50

$1,157.63

-$1,050-$1,102.50

-$1,157.63

$0$1,000 $1,000 $1,000 $1,000

-$1,000 -$1,000 -$1,000 -$1,000-$50

$50 $50

-$50-$52.50

-$55.13-$52.50

$52.50 $52.50$55.13

$0$1,000

-$1,000

-$55.13-$52.50

$52.50$55.13

$1,157.63

-$1,157.63

$0$1,000

-$1,000

-$55.13-$52.50

$52.50$55.13

$1,157.63

-$1,157.63

+1,157.63 Liabilities +1,157.63

Assets -1,157.63 -1,157.63

Interest can work for you or against you.

When it works for you it buildsyour net worth, when it works against you it destroys your net

worth.

Example:Would you rather get a $1,000,000 cash today or a penny per

day doubled each day for 30 days?

Example:Penny per day doubled each day for 30 days:

$10,737,418.23

$2,000,000

$4,000,000

$6,000,000

$8,000,000

$10,000,000

$12,000,000

Day 1 Day 5 Day 10 Day 15 Day 20 Day 25 Day 30

What is debt?

What is debt?Debt is when you borrow money and then have to pay it back at a later

Debt is also known as a liability.

Examples of Debt:

Credit Cards, Mortgages, Student Loans, Personal Loans

What is the purpose of debt?

What is the purpose of debt?Debt enables you to purchase things you wouldn’t otherwise be able to afford.

Houses

College Education

Emergencies

What is the cost of debt?

The cost of debt is…

Guess the interest rate on an average car loan?

Guess the interest rate on an average mortgage?

Guess the interest rate on an average student loan?

Guess the interest rate on an average credit card?

How important is the interest rate?

Let’s say you take out a $120k mortgage at the average mortgage rate – 4.38%. How much does that mortgage cost in total,

interest included?

Principal $120,000.00

interest included?

Principal $120,000.00Interest $95,816.58

interest included?

Principal $120,000.00Interest $95,816.58Total $215,818.65

Let’s say you take out that same $120k mortgage at the credit card rate – 16.71%. How much does that mortgage cost in total,

interest included?

Principal $120,000.00

interest included?

Principal $120,000.00Interest $485,730.42

interest included?

Principal $120,000.00Interest $485,730.42Total $605,730.42

While this is an unrealistic scenario (you would never buy a house on a credit card), it shows the importance of the interest rate.

4.38% 16.71%Total $215,818.65 $605,730.42

Difference 389,911.77

Is debt good or bad?

Taking out a loan to finance the purchase of a $30,000 Rolex to look cool and impress your friends

Good or bad use of debt?

Taking out a loan to finance the purchase of a $30,000 Rolex to look cool and impress your friends

Taking out a car loan to purchase a reliable Toyota Camry car so you can make it to and from work

Taking out a mortgage to buy a house in a nice neighborhood at a reasonable price

Using a credit card to buy a new 60” TV for your man cave to watch Buffalo Bills games

How does debt impact net worth?

A good use of debt enables a purchase of an asset that retains value or adds to your net worth long after the debt has been paid off.

For instance, a home retains value for many years. A college education enables you to earn more money and build your net worth.

That pair of shoes you bought on a credit card is going to be worth almost nothing after just a few uses! This is destructive to your net

worth.

What makes a good use of debt?

Invest ing

What is investing?

By definition investing is the purchase of an asset with the idea that the asset will provide income in the future or will later be sold at a higher

price for a profit.

What is investing?

Stocks

Houses

Businesses

What are investments?

10% Annualized Return

1990 - 2014

How much do you have to invest to buy a house in 10 years?

$150,000 home

$150,000 home20% Down Payment = $30,000

Average return on investment = 10%

$1,882 per year

$1,882 per year$156 per month

$1,882 per year$156 per month$36 per week

How much do you have to invest to be a

millionaire?

How much do you have to invest to be a millionaire?

$1,219,630

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000

25 30 35 40 45 50 55 60 65

Start at 25, save $2,500/year

$1,219,630

$454,859

$272,954

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000

25 30 35 40 45 50 55 60 65

$1,219,630

$454,859

$272,954

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000

25 30 35 40 45 50 55 60 65

Average Annual Personal Income in the United States:

$31,099

Average Annual Personal Income in the United States:

$31,099So to save $2,500/year, that’s just

8%of the average income.

If you can make the average income, invest 8% of your paycheck, and earn the average

rate of return,

YOU CAN BE A millionaire

$2,500/year is equivalent to:

$2,500/year is equivalent to:$208 per month

$48 per week

$48 per week$7 per day

If you skip out on your daily Tim Horton’s and Chipotle -

YOU CAN BE A millionaire

Income & Budgeting

Review: Net Worth

Building Block: Income

Investments

Paycheck Secondary Income

Tax Refunds

Income

Building Block: Expenses

Utilities

Rent/Mortgage Phone

Groceries

SubscriptionsCar Payments

Loan PaymentsExpenses

Building Block: Income & Expenses

Income

Expenses

Building Block: Income & Expenses

Income

Expenses

Your income goes towards paying your bills (expenses).

The money left over can be saved, invested, or spent which builds your

assets (and net worth).

How can you grow your assets?

Income

Expenses

Assets

Income

Expenses

Assets

1. Increase income

Income

Expenses

Assets

2. Reduce Expenses

3. Both!

Income

Expenses

Assets

Remember?

$1,219,630

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000

25 30 35 40 45 50 55 60 65

How do you make sure you have the $2,500/year to

invest?

What is a budget?

A budget is simply a plan.

What is a budget?

Income

Expenses

A plan on how much you will make,

What is a budget?

Income

Expenses

A plan on how much you will make,

and how much you will spend.

What is a budget?

Income

Expenses

How do you make a budget?

Let your SAVINGdictate your SPENDING

Don’t let your spending dictate your savings.

Think about saving as your number one expense.

Expenses#1 Savings#2 Housing#3 Groceries#4 Other Bills

Example: BudgetingIncome

Paycheck $1200Expenses

Rent $800Shopping $200Utilities $50

Groceries $150Total $1200

What’s wrong?

No savings!

What’s wrong?

No savings!Savings - $100

How about now?

Savings - $100

How about now?

We have more expenses than

income!Savings - $100

How about now?

income!

Savings is #1 expense, so

something else must go…

Savings - $100

How about now?

income!

Savings is #1 expense, so

something else must go…

Savings - $100

$1300 $1200

Savings $100Rent $800

Shopping $100Utilities $50

Now we have:

1. Included Savings in our budget

Now we have:

2. Reduced our Expenses

Now we have:

3. Balanced our budget

Now we have:

3. Balanced our budget

What do we do next?

“A budget tells us what we can’t afford, but it doesn’t keep us from buying it.”

William Feather

Where did Mike Tyson go wrong?

Did not understand net

Did not understand

compounding

Did not budget

Did not save

Did not invest

Where did Mike Tyson go wrong?

Mike Tyson went broke because he was not Financially Literate.

Tools to apply what you have learned:

Build and track your budget throughout the month with this easy to use mobile app.

Save the “spare change” automatically from debit card

transactions.

Check your credit score for free and get tips on how to

better manage credit.

Invest in stocks and ETFs commission-free.

Bring all your accounts together with this app that

can track all of your expenses.

Create budgets, track bills, check your credit score – a great personal finance tool.

Thank You!

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