financial literacy cfa society of buffalo introduction · 76%of americans live paycheck to paycheck...
TRANSCRIPT
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1
F inancia l L i teracy
CFA Society of Buffa lo
Introduct ion
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Guess their net worth:
$320 Million
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Guess their net worth:
$440 Million
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Guess their net worth:
$3.2 Billion
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Guess their net worth:
$0
https://www.youtube.com/watch?v=ib-0_N9G0Lo
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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?
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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?
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Gameplan
Session 1:Net Worth
InterestCompounding
DebtInvesting
Session 2:Income
ExpensesBudgeting
TipsTools
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Building Block: Net Worth
Assets Liabilities Net Worth
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Building Block: Net Worth
Assets
House
Car
Savings
Investments
Money
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Building Block: Net Worth
Liabilities
Mortgages
Car Loans
Credit Card Debt
Student Loans
Unpaid Bills
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Assets Liabilities Net Worth
HouseSavings
Investments Car
MortgagesCar Loans
Credit Card DebtStudent Loans
Unpaid Bills
Building Block: Net Worth
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Building Block: Net Worth
Example:
You pay for a $250 TV with cash, how does that impact your net worth?
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Building Block: Net Worth
Example:
You pay for a $250 TV with cash, how does that impact your net worth?
Cash $250
Liabilities $0
Net Worth $250
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Building Block: Net Worth
Example:
You pay for a $250 TV with cash, how does that impact your net worth?
Cash $250
Liabilities $0
Net Worth $250
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Building Block: Net Worth
Example:
You pay for a $250 TV with cash, how does that impact your net worth?
Cash $250
Liabilities $0
Net Worth $250
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Building Block: Net Worth
Example:
You pay for a $250 TV with cash, how does that impact your net worth?
TV $250 Liabilities $0
Net Worth $250
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Building Block: Net Worth
Example:
You pay for a $250 TV with cash, how does that impact your net worth?
TV $250 Liabilities $0
Net Worth $250
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Building Block: Net Worth
Example:
You pay for a $250 TV with cash, how does that impact your net worth?
TV $250 Liabilities $0
Net Worth $250
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Building Block: Net Worth
Example:
You pay for a $250 TV with a credit card, how does that impact your net worth?
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Building Block: Net Worth
Example:
You pay for a $250 TV with a credit card, how does that impact your net worth?
TV $250Credit Card $250
Net Worth
$0
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Building Block: Net Worth
Example:
You pay for a $250 TV with a credit card, how does that impact your net worth?
TV $250Credit Card $250
Net Worth
$0
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Building Block: Net Worth
Example:
You pay for a $250 TV with a credit card, how does that impact your net worth?
TV $250Credit Card $250
Net Worth
$0
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Building Block: Net Worth
Example:
You buy a $150k home, paying $30k down and taking a $120k mortgage. Does purchasing the home increase your net worth?
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Building Block: Net Worth
Example:
Cash $30k
Liabilities $0
Net Worth $30k
You buy a $150k home, paying $30k down and taking a $120k mortgage. Does purchasing the home increase your net worth?
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Building Block: Net Worth
Example:
Home $150k Liabilities Net
Worth
You buy a $150k home, paying $30k down and taking a $120k mortgage. Does purchasing the home increase your net worth?
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Building Block: Net Worth
Example:
Home $150k
Mortgage $120k
Net Worth
You buy a $150k home, paying $30k down and taking a $120k mortgage. Does purchasing the home increase your net worth?
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Building Block: Net Worth
Example:
Home $150k
Mortgage $120k
Net Worth $30k
You buy a $150k home, paying $30k down and taking a $120k mortgage. Does purchasing the home increase your net worth?
![Page 29: Financial Literacy CFA Society of Buffalo Introduction · 76%of Americans live paycheck to paycheck 55%of Americans DID NOT save a penny last year 97%of Baby Boomers HAVE NOT saved](https://reader033.vdocument.in/reader033/viewer/2022050202/5f55bfbe40b400338464f6a4/html5/thumbnails/29.jpg)
Building Block: Interest
Is interest good or bad?
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Building Block: Interest
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Building Block: Interest
Credit Card Interest
good or bad?
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Building Block: Interest
Credit Card Interest
good or bad?
BAD
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Building Block: Interest
Savings Interest
good or bad?
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Building Block: Interest
Savings Interest
good or bad?
GOOD
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Building Block: Interest
Interest can workfor you
or against you
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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
-$288
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Building Block: Compounding
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
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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
$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
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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
$50
-$50-$52.50
-$55.13-$52.50
$52.50 $52.50$55.13
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Building Block: Compounding5% Savings vs 5% Debt
$0$1,000
-$1,000
$50
-$50
-$55.13-$52.50
$52.50$55.13
$1,157.63
-$1,157.63
Assets Liabilities Net Worth
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Building Block: Compounding5% Savings vs 5% Debt
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Building Block: Compounding5% Savings vs 5% Debt
$0$1,000
-$1,000
$50
-$50
-$55.13-$52.50
$52.50$55.13
$1,157.63
-$1,157.63
Assets Liabilities Net Worth
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Building Block: Compounding5% Savings vs 5% Debt
+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.
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Building Block: Compounding
Example:Would you rather get a $1,000,000 cash today or a penny per
day doubled each day for 30 days?
OR
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Building Block: Compounding
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
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Building Block: Compounding
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95
F inancia l L i teracy
CFA Society of Buffa lo
Debt
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What is debt?
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What is debt?Debt is when you borrow money and then have to pay it back at a later
date.
Debt is also known as a liability.
Examples of Debt:
Credit Cards, Mortgages, Student Loans, Personal Loans
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What is the purpose of debt?
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What is the purpose of debt?Debt enables you to purchase things you wouldn’t otherwise be able to afford.
Houses
College Education
Emergencies
Cars
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What is the cost of debt?
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What is the cost of debt?
The cost of debt is…
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What is the cost of debt?
Guess the interest rate on an average car loan?
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What is the cost of debt?
Guess the interest rate on an average car loan?
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What is the cost of debt?
Guess the interest rate on an average mortgage?
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What is the cost of debt?
Guess the interest rate on an average mortgage?
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What is the cost of debt?
Guess the interest rate on an average student loan?
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What is the cost of debt?
Guess the interest rate on an average student loan?
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What is the cost of debt?
Guess the interest rate on an average credit card?
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What is the cost of debt?
Guess the interest rate on an average credit card?
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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
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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 $120,000.00Interest $95,816.58
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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 $120,000.00Interest $95,816.58Total $215,818.65
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How important is the interest rate?
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
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How important is the interest rate?
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 $120,000.00Interest $485,730.42
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How important is the interest rate?
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 $120,000.00Interest $485,730.42Total $605,730.42
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While this is an unrealistic scenario (you would never buy a house on a credit card), it shows the importance of the interest rate.
How important is the interest rate?
4.38% 16.71%Total $215,818.65 $605,730.42
Difference 389,911.77
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Is debt good or bad?
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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?
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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?
BAD
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Taking out a car loan to purchase a reliable Toyota Camry car so you can make it to and from work
Good or bad use of debt?
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Taking out a car loan to purchase a reliable Toyota Camry car so you can make it to and from work
Good or bad use of debt?
GOOD
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Taking out a mortgage to buy a house in a nice neighborhood at a reasonable price
Good or bad use of debt?
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Taking out a mortgage to buy a house in a nice neighborhood at a reasonable price
Good or bad use of debt?
GOOD
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Using a credit card to buy a new 60” TV for your man cave to watch Buffalo Bills games
Good or bad use of debt?
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Using a credit card to buy a new 60” TV for your man cave to watch Buffalo Bills games
Good or bad use of debt?
BAD
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How does debt impact net worth?
Assets Liabilities Net Worth
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How does debt impact net worth?
Assets Liabilities Net Worth
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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?
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130
F inancia l L i teracy
CFA Society of Buffa lo
Invest ing
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What is investing?
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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?
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Stocks
Bonds
Houses
Businesses
What are investments?
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10% Annualized Return
1990 - 2014
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How much do you have to invest to buy a house in 10 years?
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How much do you have to invest to buy a house in 10 years?
$150,000 home
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How much do you have to invest to buy a house in 10 years?
$150,000 home20% Down Payment = $30,000
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How much do you have to invest to buy a house in 10 years?
$150,000 home20% Down Payment = $30,000
Average return on investment = 10%
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How much do you have to invest to buy a house in 10 years?
$150,000 home20% Down Payment = $30,000
Average return on investment = 10%
$1,882 per year
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How much do you have to invest to buy a house in 10 years?
$150,000 home20% Down Payment = $30,000
Average return on investment = 10%
$1,882 per year$156 per month
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How much do you have to invest to buy a house in 10 years?
$150,000 home20% Down Payment = $30,000
Average return on investment = 10%
$1,882 per year$156 per month$36 per week
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How much do you have to invest to be a
millionaire?
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How much do you have to invest to be a millionaire?
$1,219,630
$0
$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
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$1,219,630
$454,859
$272,954
$0
$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
Start at 35, save $2,500/year
Start at 40, save $5,000/year
How much do you have to invest to be a millionaire?
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$1,219,630
$454,859
$272,954
$0
$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
Start at 35, save $2,500/year
Start at 40, save $5,000/year
How much do you have to invest to be a millionaire?
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Average Annual Personal Income in the United States:
$31,099
How much do you have to invest to be a millionaire?
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Average Annual Personal Income in the United States:
$31,099So to save $2,500/year, that’s just
8%of the average income.
How much do you have to invest to be a millionaire?
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If you can make the average income, invest 8% of your paycheck, and earn the average
rate of return,
YOU CAN BE A millionaire
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$2,500/year is equivalent to:
How much do you have to invest to be a millionaire?
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$2,500/year is equivalent to:$208 per month
How much do you have to invest to be a millionaire?
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$2,500/year is equivalent to:$208 per month
$48 per week
How much do you have to invest to be a millionaire?
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$2,500/year is equivalent to:$208 per month
$48 per week$7 per day
How much do you have to invest to be a millionaire?
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$2,500/year is equivalent to:$208 per month
$48 per week$7 per day
How much do you have to invest to be a millionaire?
$2 $5
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If you skip out on your daily Tim Horton’s and Chipotle -
YOU CAN BE A millionaire
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174
F inancia l L i teracy
CFA Society of Buffa lo
Income & Budgeting
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Review: Net Worth
Assets Liabilities Net Worth
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Building Block: Income
Investments
Paycheck Secondary Income
Tax Refunds
Income
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Building Block: Expenses
Utilities
Rent/Mortgage Phone
Cable
Groceries
SubscriptionsCar Payments
Loan PaymentsExpenses
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Building Block: Income & Expenses
Assets Liabilities Net Worth
Income
Expenses
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Building Block: Income & Expenses
Assets Liabilities Net Worth
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).
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How can you grow your assets?
Income
Expenses
Assets
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How can you grow your assets?
Income
Expenses
Assets
1. Increase income
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How can you grow your assets?
Income
Expenses
Assets
2. Reduce Expenses
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How can you grow your assets?
3. Both!
Income
Expenses
Assets
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Remember?
$1,219,630
$0
$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
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How do you make sure you have the $2,500/year to
invest?
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What is a budget?
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A budget is simply a plan.
What is a budget?
Assets Liabilities Net Worth
Income
Expenses
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A budget is simply a plan.
A plan on how much you will make,
What is a budget?
Assets Liabilities Net Worth
Income
Expenses
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A budget is simply a plan.
A plan on how much you will make,
and how much you will spend.
What is a budget?
Assets Liabilities Net Worth
Income
Expenses
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How do you make a budget?
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Let your SAVINGdictate your SPENDING
Don’t let your spending dictate your savings.
How do you make a budget?
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Think about saving as your number one expense.
How do you make a budget?
Expenses#1 Savings#2 Housing#3 Groceries#4 Other Bills
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Example: BudgetingIncome
Paycheck $1200Expenses
Rent $800Shopping $200Utilities $50
Groceries $150Total $1200
What’s wrong?
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Example: BudgetingIncome
Paycheck $1200Expenses
Rent $800Shopping $200Utilities $50
Groceries $150Total $1200
What’s wrong?
No savings!
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Example: BudgetingIncome
Paycheck $1200Expenses
Rent $800Shopping $200Utilities $50
Groceries $150Total $1200
What’s wrong?
No savings!Savings - $100
$1300
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Example: BudgetingIncome
Paycheck $1200Expenses
Rent $800Shopping $200Utilities $50
Groceries $150Total $1200
How about now?
Savings - $100
$1300
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Example: BudgetingIncome
Paycheck $1200Expenses
Rent $800Shopping $200Utilities $50
Groceries $150Total $1200
How about now?
We have more expenses than
income!Savings - $100
$1300
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Example: BudgetingIncome
Paycheck $1200Expenses
Rent $800Shopping $200Utilities $50
Groceries $150Total $1200
How about now?
We have more expenses than
income!
Savings is #1 expense, so
something else must go…
Savings - $100
$1300
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Example: BudgetingIncome
Paycheck $1200Expenses
Rent $800Shopping $200Utilities $50
Groceries $150Total $1200
How about now?
We have more expenses than
income!
Savings is #1 expense, so
something else must go…
Savings - $100
$1300 $1200
$100
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Example: BudgetingIncome
Paycheck $1200Expenses
Savings $100Rent $800
Shopping $100Utilities $50
Groceries $150Total $1200
Now we have:
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Example: BudgetingIncome
Paycheck $1200Expenses
Savings $100Rent $800
Shopping $100Utilities $50
Groceries $150Total $1200
Now we have:
1. Included Savings in our budget
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Example: BudgetingIncome
Paycheck $1200Expenses
Savings $100Rent $800
Shopping $100Utilities $50
Groceries $150Total $1200
Now we have:
1. Included Savings in our budget
2. Reduced our Expenses
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Example: BudgetingIncome
Paycheck $1200Expenses
Savings $100Rent $800
Shopping $100Utilities $50
Groceries $150Total $1200
Now we have:
1. Included Savings in our budget
2. Reduced our Expenses
3. Balanced our budget
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Example: BudgetingIncome
Paycheck $1200Expenses
Savings $100Rent $800
Shopping $100Utilities $50
Groceries $150Total $1200
Now we have:
1. Included Savings in our budget
2. Reduced our Expenses
3. Balanced our budget
What do we do next?
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“A budget tells us what we can’t afford, but it doesn’t keep us from buying it.”
William Feather
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Where did Mike Tyson go wrong?
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Where did Mike Tyson go wrong?
Did not understand net
worth
Did not understand
compounding
Did not budget
Did not save
Did not invest
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Where did Mike Tyson go wrong?
Mike Tyson went broke because he was not Financially Literate.
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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.
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241
Thank You!