Transcript Financial Foundation

An Introduction to...
A Teaching Guide
Financial Literacy
Defined
Financial literacy refers to
the basic skills people need
to manage money and make
financial decisions.
2
A Financial Literacy
Crisis

61% of people age 24-64 have no
retirement savings account of any kind.

Average credit card debt among college
students is over $2,300.
3
2002 Personal Finance
Survey
4,024 High School Seniors

Average Score 50.2% -- a
failing grade
Where They Learned
About Money
60
50

Yet, 65% of students said
they felt very or
somewhat sure about
their ability to manage
money
Home
School
Friends
Media
Self
40
30
20
10
0
Jump$tart Coalition for Personal Financial Literacy Study
Home Friends
Self
4
The Good News

As little as 10 hours of classroom
instruction can affect how teens
handle their money

58% of students improved their
spending habits

56% of students improved their
savings habits
NEFE Financial Literacy Study
5
What makes this
Program Different?

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It contains a sound basic instruction on
general personal finance PLUS
It gives solid information on the basics of
investing showing alternatives to savings
It is free and we are not selling anything
Not commercial / State sponsored
Local resources
6
Concepts Addressed


Teach how to think critically and make
sound decisions
Financial Choices & Decisions
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Personal values, goals, needs, wants
Financial decision making process
Financial markets
Financial products and services
Resources of financial information
7
Concepts Addressed

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Students have money but few
management skills
Money Management
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Financial planning and record keeping
Personal economic resources
Spending patterns
Consumer credit management
Saving and investing and Insurance
8
Concepts Addressed

Investor Protection

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Rights and responsibilities
Laws and agencies
Fraud and redress
Concepts, teaching strategies and
materials are compatible with the Voluntary
National Standards in Economics and the
Jump$tart Coalition Guidelines
9
Concepts Addressed

Young people who fail to begin saving and
investing in their youth lose out on
potentially substantial retirement income
10
Financial Foundation
High
Risk
Options futures
Stocks, Bonds
Medium Risk
Lower Risk
Real estate, Mutual funds
CDs, MM, Bank, CU, EE
Financial Foundation
Income, Insurance, Financial Goals/Budget,
Controlled Spending and Manageable Debt
11
FL2010 web site

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Unique community of personal finance
instructors/ chat area
Recognizes frequent visitors
Special version can be made for you
Online version of training guide
Newsletter
Financial news/ Hot sites
12
Web Site

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Local training opportunities
Local trainers are listed
Local unbiased investor education experts/
Dept. of Securities/ SEC/ NASD
Relevant state curriculum standards
Tries to be the start page on the Web for
finance instructors everywhere
13
Workshop Objectives



Promote the importance of teaching
personal finance in schools.
Encourage teachers to incorporate
personal finance concepts into their
classrooms.
Provide an overview of “Personal Finance
for the Economic Classroom Teaching
Guide.”
14
TEACHING GUIDE
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
5 Units
Lesson outline
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
Estimate time of presentation
Objectives, sources of materials, procedures
Worksheets, graphics, overheads
Tests and answer keys
Appendix and Glossary
15
Five, Self-contained
Units
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Understanding financial markets
Making financial decisions
Investment choices and finding and using
sources of information
Recognizing & victim-proofing against
fraud
Developing a personal financial plan
16
Unit 1 - Objectives
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How markets work
Recognizing public companies
What makes stock prices fluctuate
Role of government in securities regulation
18
Why teach this Unit?

Events in financial markets affect all of us
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cost of credit, prices, eliminate or add jobs
student’s every-day lives; mall spending
money, part-time jobs; car purchase
Soon the students will be required to
participate by employer-based retirement
plans or individual investing
De-mystify financial markets
19
Capitalism

Our economic system in which:

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private ownership of property exists
ownership of capital provides income
free competition for getting capital
profit motive is basic to economic life
Laissez-faire, private enterprise, free-price
20
How markets work

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Define markets
Market economy v. command economy
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Financial markets

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markets in which students participate
supply and demand - football tickets ex
exchanges - stock markets
Internet - ebay etc.
21
Recognizing public
companies
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Free enterprise system
Entrepreneurs
Define private companies
Define public companies
Students identify companies they deal with
as public or private
22
What makes stock
prices fluctuate

Investor Actions:

Business Conditions:

Government Actions: Taxes, Interest Rates

Economic Indicators:
Personal Income, Consumer
Spending, Employment, Inflation

International Events:
War, Natural Disaster
Buying/Selling
Profits / Losses
23
Role of government in
securities regulation
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Caveat Emptor
Role of the States
Roles of the federal government
Self regulatory agencies

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NASD
Exchanges
Accountants & Lawyers
24
Regulation of Financial
Markets
Organizations with the purpose of
assuring professional and ethical
investing practices...

Securities and Exchange Commission (SEC)

State Securities Agencies

National Association of Securities Dealers (NASD)

Commodity Futures Trading Commission (CFTC)
25
Unit 1 - Summary

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Definition of economic concepts
specifically free enterprise and markets as
well as other basic terms
Student participation in markets
Financial markets, how they work, how
they affect us and their regulation
Entrepreneurship: public & private
business
26
Unit 2 - Objectives

Simulated step-by-step decision making:
car purchase model

Demonstrate the time value of money

The power of compounding

The costs of credit

Steps in getting financial advice
28
Why teach this Unit?



Students have money but few know how to
manage it
Students who understand and practice
sound financial decision making are on the
road to success
Young people who fail to begin saving and
investing lose out on creating adequate
retirement income
29
Financial Tasks of
Young Adults
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train for a career
Starting a family
establish a good credit record
develop a financial plan
consider insurance protection
save and invest for future goals
30
Financial decision
making model
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Define issue or problem - buying a car (p
2.4)
Gather information
Alternatives and consequences
Make a decision and take action
Modify as needed
31
Weighing trade-offs
and opportunity costs

Delayed v. instant gratification
Needs v. Wants (p. 2.5)
Choice
Costs
Benefits
Trade-offs: job or college

Opportunity costs: job income v college cost
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32
The Time Value
of Money
The time value of money is the growth of money
over time as a result of investment earnings.
Investments made earlier in life have a greater
pay-off than those made later in life.
33
Worksheet
See “How Time Affects the Value of
Money” Student Worksheet, Unit 2,
Page 2-19 and 2-20.See
34
How Long
to Double your Money

Earnings Rate
2%
3%
6%
12%
18%
36%

Years to Double
36 years
24 years
12 years
6 years
4 years
2 years
35
Rule of 72
Double Your Money

72 divided by the % rate of return
equals the number of years
to double your money

At 10% it takes 7.2 years
(7210=7.2)
36
Dollar-Cost
Averaging
Dollar-cost averaging is the technique of investing
the same fixed dollar amount in an investment,
such as a mutual fund, at regular intervals over
a long period of time.
37
Credit Cards

Less than 40% of card holders pay
entire balance each month

If interest is 12% APR
adds 12% to price of items
purchased
38
If You Owe...
$2,000 on a 19.8% APR Credit Card
A Minimum
Payment of
Means a
Debt Lasting
2%……………..…..32 years
3%…………………12 years
4%………………… 8 years
5%………………… 6 years
assuming no new charges
39
If a 21 year old
college student owes
....

$2,300 on 18% APR credit
card

Makes minimum monthly
payment

Will take 33 years to pay off
debt, assuming no new
purchases.
$5,831
40
A What if
Question

What if you could
earn 18% on your
money instead of
paying interest
charges?
41
From Debt to
Earnings

If you pay off
your credit
cards you have
done the
precise
equivalent of
earning 18%.
42
Your Credit Report
How long information
stays on your record?

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Credit inquiries - 2 yr.
Payment patterns - 7yrs.
Bankruptcy - 10 years.
For employment and mortgages over $75,000
information can be kept for a lifetime.
43
Unit 2 - Summary
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Financial decision making for students
Time value of money
Understanding trade-offs and opportunity
cost ( delayed v instant gratification)
Smart decisions about credit
44
Unit 3 - Objectives

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Analyze the differences between saving
and investing
Identify common investment options
using pyramid of risk
What is a prospectus
Interpret mutual fund and stock quotes
46
Why teach this unit?



Understanding “risk and return” is critical to
financial decision making
Young people who don’t know about
saving and investing alternatives are at risk
of being too conservative or too risky
Students will develop critical thinking skills
by examining the credibility of sources and
content of information
47
Savings and
investment products

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Savings products:

Savings accounts

Money-market funds

CDs
Investment products

Stocks represent ownership

Bonds are a type of loan

Mutual Funds
48
Selecting Savings &
Investments

Liquidity: the speed and ease with which
an asset can be converted into cash



How quickly will you need your money
Highly liquid: savings accounts & money
markets
Less liquid: stocks, bonds, CDs
49
Selecting Savings and
Investments
When choosing investments consider…
risk =
potential return or
Interest rate risk
 Business failure risk
 Market price risk

risk =
potential return
Inflation risk
 Political risk
 Fraud risk

50
Other factors in
selecting investments
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Return (historically inflation rate+3%)
comes from earnings,growth or tax benefits
Inflation (rise in price of goods & services)
Diversification (spreading risk)
Taxes (exempting or deferring)
51
How Securities Are
Bought and Sold

New issues registered with SEC and, in some
cases, the state securities agencies.

A prospectus, giving details about a company's
operation and the stock to be issued, is printed
and distributed to interested parties.

Stocks can be purchased though a broker,
directly from the company, via the internet or
through mutual funds
52
Financial Foundation
High
Risk
Options futures
Stocks, Bonds
Medium Risk
Lower Risk
Real estate, Mutual funds
CDs, MM, Bank, CU, EE
Financial Foundation
Income, Insurance, Financial Goals/Budget,
Controlled Spending and Manageable Debt
53
Financial Information

Prospectus - a legal document describing an
investment offered for sale contains:

The goal of the company or mutual fund

Financial statement showing assets and liabilities

Performance (profit and loss) over a period of years

Any fees the investor must pay
54
Understanding Price
Quotations

Stocks are quoted in $ and ¢.

Bonds are...
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sold in $1,000 units but are quoted as 100s
sold by face value, discount, and premium
Mutual funds quote a Net Asset Value (NAV)

NAV = Market value of all the fund’s securities - liabilities /
number of shares
55
Understanding Stock
Price Quotations

High (52 Week)=

Highest price paid in
the last 52 weeks

Low (52 Week)=
Yearly dividend the stock
pays

Lowest price paid in
the last 52 weeks

Stock = Name of the
stock
Div =
Yield =
Percentage return based on
every $100

P-E = Price-to-earnings ratio
(stock price/12 mo. Earnings per share)
56
Understanding Stock
Price Quotations

Volume =
# of share of that stock that changed hands

High, Low Close and Net Change =
The high, low, close and net change in the price of the
stock for the previous day
57
Understanding Bond
Price Quotations

Bond/Coupon Rate/Date of Maturity 

Current Yield 

the annual interest divided by the closing price
Volume 

percentage rate paid annually on the bond’s $1,000 face value
and year the bond ends
number of bonds of this kind sold that day (multiplied by 10,000)
Close/Net Change 
The final closing price of the bond and the change in price for the
day before.
58
What To Look For In a
Financial Advisor?

Credentials 
CFA, ChFC, CPA, RIA, Reg. Rep.,
member IAFP, NAPFA, etc.

Services provided

Costs and fees

How the Financial Advisor is paid 
Fee-only, commission or combination
59
Costs of Investing

High costs are an often overlooked
drag on long-term performance.

Money-saving tips
• be skeptical of load funds
• look for low expense ratios
Industry Average: 1.11%
• pass up 12b-1 plans
60
Unit 3 - Summary

Unit 3 discusses investment choices, reasons to
invest savings and investment choices; the
decisions made relating to investment choices
and the true value of money. Remember that the
purpose of investment diversification is to reduce
risk. Also, let us emphasize to young people how
understanding investment choices and investing
at a young age can help them achieve their lifelong goals.
61
Unit 4 - Objectives

Examine types of investment fraud

Analyze fraud cases for warning signs

Role-play a fraud sales pitch

Examine ethics of fraud and
how to report to authorities
63
Investment Fraud
Estimates are that unwary investors
lose $10 billion a year -about
$1 million every hour
to investment fraud
64
Role play a fraudulent
sales pitch

Call comes from a distant city.

Salesperson counters every
objection.

Offers no risk, high returns
and secret tips.

Demands immediate action.
Script - page 4-19
65
Popular Types of
Investment Scams
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Pyramid schemes
Precious metals fraud
International investing
Stock swindles and insider trading
Franchise/business opportunities
Ponzi schemes
Affinity fraud
66
Investor Protections

The Securities Act of 1933

The Securities Exchange Act of 1934

State and federal securities agencies

Self-Regulatory Organizations (SROs)
67
Unit 5 - Objectives

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

Identify short and long term goals
Determine net worth
Estimate income & expenses
Design a personal financial plan
Make asset allocation for retirement
69
Myths

I don’t earn enough
money to plan.

Young people don’t
need to think about
saving for retirement.

Investing is for people
with lots of money.

Social security is a
business-funded
program for old, poor
people.
70
Why Make a
Financial Plan?
Planning is a tool to help you:
• live within your income
•
•
•
•
•
•
•
know your goals and priorities
meet your expenses
face emergencies
limit credit use
reduce conflict
save and invest for future
gain independence and control
71
A Financial Plan



identify goals
figure net worth
estimate income
and expenses

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
save - pay yourself
Asset Allocation
implement the plan
review and modify
72
Live Within Your
Income

Financial Records

Net Worth

Income/Expenses
(Worksheets in Unit 5)
73
Employee Savings
Plans

25% of the eligible people
do not participate

They lose
• power of compounding
• tax deferral
• employer match
74
Diversification

Select different
categories of
investments among
various industries
to reduce risk.
Stocks
Cash
Reserves
Bonds
75
Average Annual Total Returns
(1926-2001)
10.7%
12%
10
8
5.3%
6
4
3.1%
5.8%
3.8%
2
0
Inflation
U.S.
Treasury
Bills
Source: Ibbotson Associates, Inc.
Past performance is not indicative of future returns.
Long-Term
Government
Bonds
Long-Term
Corporate
Bonds
Common
Stocks
76
Which Investment Mix*
in employer-sponsored plan
‘Aggressive
Growth
Aggressive Growth
Growth
Moderate
Growth
Conservative
Growth
Conservative
Growth
Bonds
Stocks
Bonds
Stocks
100% Stocks
Stocks
80% Stocks
20% Bonds
*Asset Allocation
Stocks
60% Stocks
40% Bonds
Bonds
40% Stocks
40% Bonds
20% Cash
77
Worksheet
See “Employer-Sponsored
Retirement Plans”
worksheet,
Unit 5, pages 5-28 and 5-29.
78
Tips for Financial
Success

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

Get started early
Invest for the long term
Continue to study and
learn
Participate in employersponsored plans
Know when to seek advice
79