Dave Ramsey Foundations in Personal Finance Workbook PDF

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The Lampo Group, Inc. 1749 Mallory Lane Suite 100 Brentwood, TN 37027 800.781.8914 daveramsey.com/school Foundations in personal finance Dave Ramsey Copyright © 2008 by The Lampo Group, Inc. Notice of Rights All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopy, recording, or any information storage and retrieval system, without written permission from the publisher. Permissions Requests for permission to make copies of any part of the work should be mailed to: Permissions—Curriculum Department The Lampo Group, Inc. 1749 Mallory Lane, Suite 100 Brentwood, TN 37027 Note to the Reader This publication is designed to provide accurate and authoritative information with regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering financial, accounting, or other professional advice. If financial advice or other expert professional assistance is required, the services of a competent professional person should be sought. 10 9 8 7 6 5 4 3 2 1 Printed and bound in the United States of America ISBN 978-0-9816839-1-1 Acknowledgements Curriculum Development The Lampo Group, Inc. would like to give special thanks to the following educators for Brenda Thompson their assistance with this project. Their input was essential for creating a financial literacy Editing curriculum that meets the needs of the students and empowers them in the area of Mark Ballinger personal finance. Daniel Chunn Grace Clausing Rachel DeMass Joe Finlay Lindsey Foster Jean Ambrose Kathy L. Jarman Allen Harris Family and Consumer Science Teacher Business and English Teacher Chris Huovinen Marcie Kindred Hall-Dale High School Helias High School Jim King Farmingdale, Maine Jefferson City, Missouri Kim Little Jason Mayes Chris Russell Major Richard Bensemon Penny Kugler Richard Speight Senior Aerospace Science Instructor Assistant Professor of Economics Jane Storie Beth Tallent Northridge AFJROTC UT-931 Director, Center for Economic Education David Taylor Layton, Utah University of Central Missouri Matt Woodburn Warrensburg, Missouri Creative Direction Jan Christmas Paul Farmer Brian Williams Spanish, Government, Economics and Sherri McAfee Design and Animation Art History Teacher Business Teacher Josh Hancock Henry T. Waskow High School Elida High School Jeff Hunter Ken Pruiksma Belton, Texas Elida, New Mexico Video Production Carl Diebold, Sincera Video Lindsey Chunn Len McKnatt Resource Management Teacher Economics Teacher Olive Branch High School Battle Ground Academy Olive Branch, Mississippi Franklin, Tennessee Matthew Daniel Kregg Parenti Economics Teacher Computer and Personal Finance Teacher Cannon County High School Berean Christian School Woodbury, Tennessee West Palm Beach, Florida Jerry L. Dent Jeff Rogers LEAP Alternative Education Instructor Work-Based Learning Coordinator Lakeview High School Heritage High School Lakeview, Michigan Conyers, Georgia Kent Eberspacher Cathy M. Taylor Business Teacher Math Teacher Star Valley High School Satsuma High School Afton, Wyoming Satsuma, Alabama Allen Harris Terri Winkle Director of Content Development Business Teacher Dave Ramsey’s Financial Peace University Western Heights High School Nashville, Tennessee Oklahoma City, Oklahoma Foundations in Personal Finance 3 Dave Ramsey, a personal money management expert, is an extremely popular national radio personality, and author of the New York Times best-sellers The Total Money Makeover, Financial Peace and More Than Enough. Ramsey added television host to his title in 2007 when “The Dave Ramsey Show on the Fox Business Network” debuted nationally. Ramsey knows first-hand what financial peace means in his own life—living a true rags-to-riches-to- rags-to-riches story. By age twenty-six he had established a four-million-dollar real estate portfolio, only to lose it by age thirty. He has since rebuilt his financial life and now devotes himself full-time to helping ordinary people understand the forces behind their financial distress and how to set things right. He resides with his wife Sharon and their three children in Nashville, Tennessee. As Dave Ramsey’s kid, Rachel Ramsey knows a thing or two about money. From an early age, Rachel’s parents instilled in her a healthy sense of financial responsibility. She learned the value of earning, saving and giving—and how debt is the enemy of wealth. Armed with this valuable knowledge, Rachel desires to help others— especially teens and college students—understand the importance of money management. An experienced public speaker, Rachel often joins her father on stage in capacity-crowd arenas to teach basic financial literacy skills. Now in college, Rachel successfully manages her own finances while majoring in Communication Studies. 4 Foundations in Personal Finance table of contents UNIT 1 SAVING and INVESTING Chapter 1 Savings............................................................................................... 9 Chapter 2 Investment Options........................................................................ 21 Chapter 3 Wealth Building and College Savings............................................. 31 UNIT 2 CREDIT and DEBT Chapter 4 Dangers of Debt............................................................................... 47 Chapter 5 Consumer Awareness....................................................................... 65 Chapter 6 Credit Bureaus and Collection Practices......................................... 73 UNIT 3 FINANCIAL RESPONSIBILITY and MONEY MANAGEMENT Chapter 7 Budgeting 101.................................................................................. 93 Chapter 8 Bargain Shopping.......................................................................... 119 Chapter 9 Relating with Money......................................................................129 UNIT 4 INSURANCE/RISK MANAGEMENT and INCOME/CAREERS Chapter 10 Career Choices and Taxes............................................................ 141 Chapter 11 Ins and Outs of Insurance........................................................... 155 Chapter 12 Real Estate and Mortgages......................................................... 169 STUDENT RESOURCES Forms................................................................................................................ 185 Glossary............................................................................................................ 207 Foundations in Personal Finance 5 6 Foundations in Personal Finance UNIT 1 SAVING and INVESTING CHAPTER 1 SAVINGS CHAPTER 2 INVESTMENT OPTIONS CHAPTER 3 WEALTH BUILDING and COLLEGE SAVINGS Unit 1: Saving and Investing 7 8 Foundations in Personal Finance Savings What do other high school students know about saving? Learning Outcomes We asked high school students to describe something they really wanted and List the Baby Steps. thought they had to buy, only to realize later that they wasted their money. Explain the three basic reasons for saving money. Identify the benefits of having an emergency fund. I worked and saved $250 for a guitar Demonstrate that I never learned how to play. how compound Junior, Michigan interest works and understand the impact of annual interest rate. “ I bought some fish that I “ I really wanted this expensive Key terms thought I really wanted. I skateboard that cost $130. I had Baby Steps never fed them, totally lost to have it. Turned out it skated Compound Interest interest in them, and they all no better than the other ones Emergency Fund died. What a waste of money.” that were a lot less expensive.” Interest Rate Junior, Alabama Sophomore, Alabama Money Market Sinking Fund “ I bought a computer game “ I got a pink Coach purse that that didn’t work because I I paid over $200 for and have didn’t read the required maybe used twice.” hardware notice on the box.” Junior, Florida Senior, Missouri 9 before you begin What do you know about saving? Before watching the lesson, read each statement below and mark whether you agree or disagree in the “before” column. Then, after watching the lesson, do it again using the “after” column to see if you changed your mind on any question. Before After Agree Disagree Agree Disagree 1. The amount of money you save depends on how much money you earn. Simply put, you will save more when you earn more. 2. A savings account at your bank is the best place to put your emergency fund. 3. The two biggest factors in compound interest and building wealth are time and the initial amount of the investment. 4. It is okay to use your emergency fund to pay cash for big purchases such as a TV or a cell phone. 5. You should pay yourself first before you pay bills. What are your initial thoughts about saving? What do you want to learn about saving? 10 Foundations in Personal Finance Savings The Seven Baby Steps The Seven Baby Step 1 Steps are the steps you should take to $1,000 in an emergency fund (or $500 if you make less reach financial peace. than $20,000 a year) If you are not in debt, these steps will serve as your compass or Step 2 framework for Pay off all debt except the house utilizing the financial success. debt snowball You will find the Seven Baby Steps explained in detail throughout Step 3 this course. When you begin implementing Three to six months expenses in savings them for yourself, be sure to follow them in order and Step 4 complete each one Invest 15% of your household income into Roth IRAs before moving on to the next. and pre-tax retirement plans Step 5 College funding Step 6 Pay off your home early Step 7 Build wealth and give! Chapter 1: Savings 11 Take the First Step 70% of consumers live paycheck to Baby Step 1 is _______ in an emergency fund. paycheck. The Wall Street Journal If you make under $20,000 a year, put _________ in an The United States has a -.6% savings rate. emergency fund. Department of Commerce _____________ must become a priority. Always pay Only 41% of Americans ___________ first. save regularly. Federal Reserve System The United States has a ___________ savings rate. Half of American households live on less than $46,326 Saving money is about ____________ and ____________. a year. U.S. Census Bureau Money is ________________. END OF VIDEO PART 1 You should save money for three basic reasons: 1. ______________________ 2. ______________________ 3. ______________________ Do you think people who make more actually save Emergency Fund more? Think again. Harris Interactive conducted a survey for CareerBuilder. ______________ are going to happen. Count on it. com (November/ December 2006) Baby Step 1, a beginner emergency fund, is __________ of 6,169 full time adult workers. The in the bank (or $500 if your household income is below survey, according to a Reuters news $20,000 per year). release, found that 19% of workers who make over $100,000 live pay- check to paycheck. 12 Foundations in Personal Finance Baby Step 3 is a fully funded emergency fund of 3-6 months of expenses. “If you do the things you need to do when you need to do them, then someday you A great place to keep your emergency fund is in a ________ can do the things you _________ account from a mutual fund company. want to do when you want to do them.” Zig Ziglar “I’m 14 and want to buy a car in a couple of years. How much money will it take to get a good one?” DAVE’S ANSWER: You can buy a good used car for around $3,000. This may seem like a lot right now, but let me show you how easy it can be. Let’s say you work part-time after school and on weekends. If you make $100 a week and save it all, you’ll have enough for a car in only eight months. Pretty cool, huh? Can’t do $100 a week? Saving a little bit at a time adds up and you will eventually reach your goal. Take a look at the graph below for a few ways it can be done. Chapter 1: Savings 13 “How should I prepare to manage my money when I go off to college and what should I do when I’m there?” Dave’s Answer: One thing you want to be sure to do in college is avoid credit cards. They’re going to be tempting you on every corner. And of course, you need to learn how to operate, balance and reconcile a checkbook. You also need to learn how to do a zero-based budget where you look at what you’re going to spend every month. A friend of mine gives his col- lege-age daughter $200 a month for expenses and she has to do a written plan showing exactly what she’s going to do with that money before each month begins. Your emergency fund is not an ___________, it is insurance. For example... Say you borrow $4,000 Do not ________ this fund for purchases. to purchase a dining room set. The emergency fund is your ____________ savings Most furniture stores will sell their financing priority. Do it quickly! contracts to finance companies. The second thing you save money for This means you will have borrowed at is _____________. 24% with payments of $211 per month for 24 months. So, you will pay a total of $5,064, plus insurance, for that set. Purchases But if you save the same $211 per month for only 18 months, you Instead of ____________ to purchase, pay will be able to pay cash. When you pay cash, cash by using a _________ you can almost always negotiate a discount, so _________ approach. END OF VIDEO PART 2 you will be able to buy it even earlier. 14 Foundations in Personal Finance Wealth Building You should have an The third thing you save money for is emergency fund because unexpected ____________ ______________. things are going to happen. Smart people have known _______________ is a key ingredient when it comes to this for centuries and used to say, “In the wealth building. house of the wise are stores of choice food and oil, but a Building wealth is a _____________, not a sprint. foolish man devours all he has.” (Proverbs Pre-________________ _______________(PACs) 21:20) In other words, having some withdrawals are a good way to build in discipline. money saved back can turn a crisis into an inconvenience. ____________ ____________ is a mathematical explosion. You must start _______. Compound Interest Is Powerful Take $1,000 and earn 10% on it. Your interest at the end of the year is $100. Add that to your original $1,000 and you have $1,100. At the end of the next year, your $1,100 Compound is compounded at 10% interest, so your return on investment is $110. Add that to the interest is interest $1,100 and you now have $1,210. Your interest on $1,210 is $121. So as time passes, paid on interest the amount you earn from interest grows. That is why it is so important that you previously start now. You have more time for your interest to snowball and pick up more and earned; credited more snow! daily, monthly, quarterly, semi- annually, or How to Calculate Compound Interest annually on both Use this simple formula to figure out the future value of a deposit once compound principal interest has worked its magic. and previously credited interest. FV = PV (1+r/m)mt FV is the future value PV is the present value r is the annual rate of interest as a decimal (5% is expressed as the decimal.05) m is the number of times per year the interest is compounded (monthly, annually, etc.) t is the number of years you leave it invested Chapter 1: Savings 15 The Story of Ben and Arthur “I played this internet game site where Both save $2,000 per year at 12%. Ben starts at age 19 you could buy extra ‘pixel’ clothing and and stops at age 26, while Arthur starts at age 27 and hairstyles. I ended up spending stops at age 65. END OF VIDEO PART 3 over $100 on pixels for the game.” Freshman, Alabama Age Ben Invests: Arthur Invests: Saving “I blew all my money trying to get a stuffed 19 20 2,000 2,000 2,240 4,749 0 0 0 0 only $167 animal out of one of 21 22 2,000 2,000 7,558 10,706 0 0 0 0 a month! those machines with 23 2,000 14,230 0 0 24 2,000 18,178 0 0 the claws.” 25 2,000 22,599 0 0 Junior, Florida 26 2,000 27,551 0 0 27 0 30,857 2,000 2,240 28 0 34,560 2,000 4,749 29 0 38,708 2,000 7,558 30 0 43,352 2,000 10,706 31 0 48,554 2,000 14,230 32 0 54,381 2,000 18,178 33 0 60,907 2,000 22,599 34 0 68,216 2,000 27,551 35 0 76,802 2,000 33,097 36 0 85,570 2,000 39,309 37 0 95,383 2,000 46,266 38 0 107,339 2,000 54,058 39 0 120,220 2,000 62,785 40 0 134,646 2,000 72,559 41 0 150,804 2,000 83,506 42 0 168,900 2,000 95,767 43 0 189,168 2,000 109,499 44 0 211,869 2,000 124,879 45 0 237,293 2,000 142,104 46 0 265,768 2,000 161,396 47 0 297,660 2,000 183,004 48 0 333,379 2,000 207,204 49 0 373,385 2,000 234,308 Arthur 50 51 0 0 418,191 468,374 2,000 2,000 264,665 298,665 invested 52 0 524,579 2,000 336,745 $78,000 “I’ve read some of 53 0 587,528 2,000 379,394 and Dave Ramsey’s stuff 54 0 658,032 2,000 427,161 and learned a ton. 55 0 736,995 2,000 480,660 NEVER As soon as I turned 56 57 0 0 825,435 924,487 2,000 2,000 540,579 607,688 caught 16, I started working 58 0 1,035,425 2,000 682,851 up! 59 0 1,159,676 2,000 767,033 and have been saving 60 0 1,298,837 2,000 861,317 money ever since. 61 0 1,454,698 2,000 966,915 After just over a 62 0 1,629,261 2,000 1,085,185 63 0 1,824,773 2,000 1,217,647 year of working, I 64 0 2,043,746 2,000 1,366,005 have saved between 65 0 2,288,996 2,000 1,532,166 $5,000–$6,000 to buy a car. What he says really works.” Ben invested only $16,000! Senior, Alabama 16 Foundations in Personal Finance Rate of Return, or _________________ rate, is important. END OF VIDEO PART 4 81% of teens agree “it’s important to me to have a lot of money in my life.” $1,000 One-Time Investment, No Withdrawal Charles Schwab survey Age 25 to Age 65 (40 years) Only 22% of teens $800,000 say they know how to invest money to make $700,000 $750,378 it grow. $600,000 Where Charles Schwab survey $500,000 you put your 84% of teens have $400,000 money some money saved, $300,000 does with an average of $1,044. $200,000 matter! $93,050 Charles Schwab survey $100,000 $10,285 0 1 in 4 (24%) teens agree that since they 6% 12% 18% are young, saving Annual Interest Rate money isn’t that important. Charles Schwab survey Recap and Review Make savings a priority. START NOW! Compound interest works over time and the rate of return will make a difference in how large your investment grows. Remember Ben and Arthur. An emergency fund is your backup strategy when unexpected financial events happen. Baby Step 1 is $1,000 in your emergency fund ($500 if you earn less than $20,000). Discipline and focused emotion is the key to saving. Use the 80/20 rule. Handling money is 80% behavior and only 20% head knowledge. Anyone can learn to save! Chapter 1: Savings 17 Chapter 1: Money in Review Vocabulary Multiple Choice Amoral 9. For most people, a fully-funded emergency Baby Steps fund will be about: Compound Interest a. $1,000 Emergency Fund b. $3,000-5,000 Interest Rate c. $5,000-10,000 Money Market d. $10,000-15,000 Murphy’s Law Pre-Authorized Checking 10. Ben and Arthur illustrate which principle Priority of saving? Sinking Fund a. rule of 72 b. compound interest c. simple interest Matching d. none of the above a. money market 11. Baby Steps 1 and 3 have to do with: b. $500/$1,000 in an emergency fund a. saving c. 3-6 months of expenses b. emergency fund d. pay off debt c. getting out of debt e. amoral d. both a and b f. discipline g. compound interest 12. You should save for the following: h. Murphy’s Law a. emergency fund i. sinking fund b. purchases j. savings account c. wealth building d. all of the above ___ 1. Saving money for a purchase and letting the interest work for you rather 13. How many Baby Steps are there? than against you a. 4 b. 5 ___ 2. Money is neither good nor bad c. 6 ___ 3. Emergency Fund goes here d. 7 ___ 4. Interest on interest 14. Saving is about contentment and: a. emotion ___ 5. If it can go wrong, it will; b. greed unexpected events c. having money ___ 6. Baby Step 1 d. pride ___ 7. Baby Step 3 ___ 8. Key to wealth building 18 Foundations in Personal Finance 15. The following is true about PACs: 24. Calculate the compound interest for each a. stands for Personal Account Coordinator problem below: b. stands for Pre-Authorized Checking $1,000 at 6% interest for three years c. helps build discipline when saving $500 at 18% interest for four years d. both b and c $1,500 at 12% interest for two years 16. The saving habits of Ben and Arthur help 25. What are the three primary savings goals? to illustrate the principal of compound interest. 26. What changes can you make now in your a. true own life based on what you saw in the b. false video? How will these changes help? 17. Dave’s 80/20 rule says when it comes to 27. Why do you need an emergency fund at money, 80% is head knowledge and 20% your age? is behavior. a. true 28. Why do you need to have $1,000 in the b. false bank before paying off debt? 18. Your income level greatly affects your 29. How does compound interest differ from savings habits. simple interest? a. true b. false 19. Interest is money paid to a saver by a Case Studies financial institution. 30. What was the most important piece of a. true information or concept you learned from this b. false lesson? How will you apply it to your life? 20. The correct order for using your money is: 31. Jeremy has been out of school for two years, pay bills, save, then give. has a good job, and recently got a raise. He is a. true excited about investing and always puts part b. false of his check into savings. Although he has $6,500 in debt left to pay, he is making more than the minimum payments and should be debt free in 15 months. Should he continue to Short Answer save or pay off his debts? Justify your answer. 21. Why do you think the United States has a negative savings rate? How does this relate 32. Melissa is about to get a $200 per month to your personal savings habits? raise. She wants a new television and some furniture. She has $500 in her savings account 22. List the Baby Steps. Why do you think and figures with her raise she will have the Dave skips Baby Step 2 in this lesson? cash to make her purchases easily within a few months. She also has $1,000 in available credit 23. Explain the relationship between having remaining on her credit card and is thinking an emergency fund and Murphy’s Law. about using it to buy everything now rather than waiting until she has the money. What would you tell Melissa? Justify your answer. Chapter 1: Savings 19 20 Foundations in Personal Finance Investment Options What do other high school students know about investing? Learning Outcomes We asked high school students to describe the weirdest get rich quick Explain the KISS scheme they’ve ever heard of. rule of investing. Examine the relationship between Someone told me that I could get rich diversification selling food door to door. After three and risk. days of embarrassment, I ended up Compare and contrast only $5 richer. different types of Junior, Michigan investments: money markets, bonds, single stocks, mutual funds, rental real estate, “I know about a chain “People think you can go to and annuities. letter where you put $1 in Hollywood and become a an envelope, include six street performer until a big- addresses and send it out to time producer discovers you Key terms the top address. Eventually and you become a rich actor.” Diversification people are supposed to send Junior, Missouri Liquidity you $1 each.” Mutual Fund Risk Junior, Alabama Risk Return Ratio Share “I’ve heard people say you can “Someone told me to hide my go to Alaska and work in a money where I would forget canning plant to get rich.” about it and wouldn’t spend it.” Senior, Wyoming Senior, Tennessee 21 before you begin What do you know about investing? Before watching the lesson, read each statement below and mark whether you agree or disagree in the “before” column. Then, after watching the lesson, do it again using the “after” column to see if you changed your mind on any question. Before After Agree Disagree Agree Disagree 1. A mutual fund is a collection of money from different investors used to purchase stocks, bonds, and so on, and is managed by a fund manager. 2. Investing is for a minimum of three years— less than that is savings. 3. The more sophisticated the investment, the more money you get in return. 4. With virtually all investments, as the risk goes up, so does the potential return. 5. It’s hard to find an investment that will average 12% for 10 years or more. List your initial thoughts about investing. What do you want to learn about investing? 22 Foundations in Personal Finance Investment options KISS Rule of Investing $12,356 trillion— Keep it ____________, __________________! the combined assets of the Investment Company Institute’s Never invest purely for ____________ ______________. 8,015 mutual funds as of October 2007. Investment Company Institute Never invest using __________________ money. Only 22% of teens say they know how to invest money to make it grow. Diversification Charles Schwab Survey 51% of teens report that their main reason _______________ means to spread around. for saving is to have enough money for long-term future Diversification _____________ risk. END OF VIDEO PART 1 plans, like college or a car. Charles Schwab Survey The Power of Diversification 12% of teens have stocks and $120k investments in an What would happen if two people each invested account that is held in $110k Investor 2: their name. $10,000—one diversifies, Over $116,000 $100k the other does not—and because of Charles Schwab Survey left it alone for 25 years? $90k diversification! $80k $70k Investor 1 invests... $60k $10,000 for 25 years at 7% $50k Investor 1: Investor 2 invests... Just $57,254 $40k $2,000 and loses it all without $2,000 under his mattress $30k diversification! $2,000 at 5% return $20k Throughout the stock $2,000 at 10% return market’s history: $10k $2,000 at 15% return  97% of five-year $0k periods made money A difference of almost $59,000!  100% of 10-year periods made money. Chapter 2: Investment Options 23 Risk Return Ratio and Liquidity The Securities Exchange With virtually all investments, as the _________ goes Commission (SEC) is the government up, so does the potential return. agency responsible for regulating the stock market. It was When discussing investments, ________________ created in 1934 to increase public trust is availability. after the 1929 stock market crash and the years of the Great As there is more liquidity, there is typically Depression. ____________ return. END OF VIDEO PART 2 Types of Investments 1. Money Markets A C.D. is a __________ ___ __________, typically at a bank. “I am 19 years old and working in my family’s business. I live at home with my parents and my car is completely paid for. How should I start saving for a house and retirement? I want to make sure I am doing everything I can to avoid financial problems in the future. What do I need to do?” DAVE’S ANSWER: Your first goal should be to save 3-6 months of your income (since you don’t really have any expenses). This will be your full emergency fund. Then you should save for anything you plan on doing in the next few years, like getting married or buying a home. On top of that, you should invest into a Roth IRA. The contribution limit for 2008 is $5,000 per year, which comes out to about $416 per month. You can do less than that, but not more. If you start that now, you will be extremely wealthy when you retire. 24 Foundations in Personal Finance Money market mutual funds are ___________risk money market accounts with check writing privileges. Harry, a bright young These are great for ________________ _________. man, was fresh out of college when Bob approached him 2. Single Stocks with an investment opportunity that sounded too good to Single stock investing carries an extremely ______ pass up. degree of risk. “I’ve got some prop- erty on a potential oil field,” Bob said. “For When you buy stock, you are buying a small piece of only $750 you can _____________ in the company. buy a share of the land. You’d be crazy not to get in on this Your return comes as the company increases in investment.” Bob, an expert salesman, ___________ or pays you, its owner, some of the promised Harry would become rich, profits ( ______________ ). and sealed the deal with a simple appeal: “Harry, this is a great 3. Bonds way to diversify your portfolio.” A bond is a __________ instrument by which the Thirty years later, after all the oil was company owes _____ money. pumped out, Harry still hadn’t seen any money from Your return is the fluctuation in price and the his “investment.” It ___________ rate paid. Few individuals do well with turns out that Bob was offering rights ________ _________ purchases. END OF VIDEO PART 3 to land that he didn’t have the right to sell, scamming people 4. Mutual Funds by selling “phantom shares.” Harry’s risky attempt to diversify Investors pool their _________ to invest. cost him $750. What would have Portfolio managers manage the pool or ___________. happened if he put that money in a mutual fund at 12% Your ________ comes as the ________ of the interest instead? He would now have fund is increased. END OF VIDEO PART 4 $22,469. Chapter 2: Investment Options 25 Mutual funds are good _____________ Mutual funds that are term investments. END OF VIDEO PART 5 properly diversified will have investment dollars spread 5. Real Estate equally among four different classes of Least _________ consumer investment. financial assets. 25% International 25% Aggressive You should have lots of __________ before using real Growth (Small Cap) 25% Growth estate as an _________________. (Mid Cap) 25% Growth and Income (Large Cap) 6. Annuities 25% Mid Cap Annuities are _________ accounts with an 25% Small 25% Large ___________ company. Cap Cap 25% International ______ annuities are at a low interest rate of around 5%, aren’t really fixed, and are a _____ investment. _______ annuities are mutual funds sheltered by the annuity covering, thereby allowing the mutual fund to grow tax-deferred. Horrible Investments “October. This is one of the peculiarly dangerous months to Gold speculate in stocks. The others are July, January, September, _________ & Futures April, November, May, March, June, Day _________ December, August, and February.” Mark Twain Viaticals END OF VIDEO PART 6 26 Foundations in Personal Finance “I’m 21 and currently in college. Next month, I’ll be receiving an inheritance of about $40,000. I don’t know anything about stocks, mutual funds or C.D.s, but I don’t want to lose all this money. I don’t have any debt, so what should I do?” DAVE’S ANSWER: I’m glad you’re asking questions. One of the fastest ways to lose money is to put it into an investment that you don’t understand. You don’t need to change your major to Finance to make this happen, but you do have a $40,000 responsibility that you didn’t have before. For now, a simple savings account is fine. I’d park $30,000 in there and just forget about it for a while. Then use $5,000 to set up an emergency fund and maybe blow $5,000 on some things just for you. After all, spending and having fun with money is still important! But here’s something to think about once you’ve educated yourself on investing. If you put that remaining $30,000 in a good growth stock mutual fund, by the time you’re ready to retire you’ll be looking at about $10 million. Talk about being able to retire with dignity and change your family tree! Recap and Review Growth and income Start investing now. funds are very stable and known as large- Diversify. Don’t put your money in only one place. cap funds. Growth funds are Spreading out your money lowers your risk. sometimes known as mid-cap funds and are still growing. NEVER put money into something that you don’t Aggressive growth understand. If you do not understand an investment well funds are wilder and known as small-cap enough to teach someone else how it works, don’t buy it. funds. Building wealth takes time. It is not like a microwave; it’s like a crock pot. Chapter 2: Investment Options 27 Chapter 2: Money in Review Vocabulary Matching Aggressive Growth Stock Mutual Fund a. rental real estate Annuity b. risk return ratio Bond c. 3-5 year track record C.D. d. 5-10 year track record Commodity e. annuity Diversification f. risk Dividend g. small-cap Fixed Annuity h. large-cap Futures i. diversification Investments j. share Growth Stock Mutual Fund k. portfolio Large-Cap Fund Liquidity Mid-Cap Fund ___ 1. Growth and Income Funds Money Market ___ 2. Always check this record when invest- Mutual Fund ing Portfolio Rental Real Estate ___ 3. Spread around the risk Risk International Stock Mutual Fund ___ 4. Piece of ownership in company stock Risk Return Ratio ___ 5. List of your investments Savings Account Share ___ 6. Least liquid of all investments Single Stocks Small-Cap Fund ___ 7. Degree of uncertainty of the return on Speculative an investment Track Record ___ 8. Aggressive Growth Funds Variable Annuity ___ 9. Savings account within an insurance company ___ 10. Risk goes up, return goes up Multiple Choice 11. Liquidity means to spread around and lower risk. a. true b. false 28 Foundations in Personal Finance 12. A single stock is the best place to keep your 19. Which of the following is not a emergency fund. good investment? a. true a. gold b. false b. viaticals c. futures 13. A certificate of deposit is the best place to d. all of the above keep an emergency fund. a. true 20. Which statement is true about liquidity? b. false a. the less liquid the investment, the less return 14. Diversification lowers your risk with investing. b. the more liquid an investment, the a. true more return b. false c. the more liquid an investment, the less return 15. Commodities and futures are extremely d. both a and b speculative and carry a high risk. a. true 21. Which one is not a type of annuity: b. false a. variable b. stable 16. __% of any 10-year period in the stock c. fixed market has made money. d. none of the above a. 53 b. 97 22. A savings account with a certificate is a: c. 75 a. bond d. 100 b. annuity c. C.D. 17. Long-term investments properly d. viatical diversified include the following mutual funds: a. growth, growth and income, bond, aggressive growth Short Answer b. growth, balanced, international, bond c. international, bond, aggressive 23. Why do you look at the long-term track growth, growth record with a mutual fund? d. growth, growth and income, 24. What are some investments that don’t give international, aggressive growth you a high rate of return? 18. What is the KISS rule of investing? 25. List four types of investments that you a. Keep It Simple Stocks should always avoid. b. Keep It Simple Stupid c. Keep It Solo Situated 26. How do you go about finding the right d. Keep It Somewhere Safe person to help you invest? 27. What was the most important fact or idea about investing that you learned in this lesson? Chapter 2: Investment Options 29 28. Name one thing from this lesson that you could apply to your life right now. 29. Daniel just graduated from college and wants to invest 15% of his income into mutual funds. He earns an annual salary of $32,000 but is $21,000 in debt with his car and student loan. He has $500 in savings. What steps does Daniel need to take? 30. How are single stocks different from mutual funds and which is the better investment? Case Studies 31. John is 63 years old, owns his house and is a little bit anxious about whether he has enough money for retirement. He is considering borrowing $20,000 against his home to invest in a series of aggressive growth stock mutual funds. The track record for these funds over the last 3 years has been an average growth rate of 21.2%. The interest rate on the loan would only be 7.5%. Should John do this to help with his retirement? 32. Candace and Mike just inherited $25,000 from a relative and are really excited about investing it and watching it grow. However, they still have $10,000 worth of debt to pay from credit cards. Before Dave gives them financial advice, he asks them one question. What question does he ask them? What financial advice does he then give them? 33. Brooke’s friend has been bugging her to invest in gold. She says it has been trading really high and will only continue to go up in value. Brooke has $1,000 that she is ready to invest. She knows you listen to Dave’s show and wants to know what he would say. What would you tell her? 30 Foundations in Personal Finance WEALTH BUILDING and COLLEGE SAVINGS What do other high school students know about wealth building? Learning Outcomes We asked high school students what they would do with an extra $5,000. Explain what is meant by “tax- favored dollars.” List the different types of retirement I’d either buy a used car or put it in the plans. bank so it can grow. Differentiate Junior, Michigan between a traditional and Roth IRA. Illustrate how a 401(k)company match works and “I would put half in long term- “I’d put half in a mutual fund, prioritize money savings, $2,000 in a college $1,000 in savings, $1,000 in into various fund, and spend $500.” a money market, and buy a investments. Senior, Wyoming gaming system with the rest.” Senior, Missouri Describe how pre-tax and after-tax investments work. “I would save it until I was 18, “Save $3,500 and shop with then put a down payment on a the rest.” house and rent it for profit.” Junior, Alabama Key terms Senior, Texas 401(k) ESA IRA Pre-Tax Rollover Roth IRA Tax-Favored Dollars 31 before you begin What do you know about Wealth Building and College Savings? Before you watch the lesson on Wealth Building and College Savings, think about what you already know. The word bank below contains some of the bigger concepts that you will learn in this lesson. Complete the first two columns before watching Dave’s lesson as you work through the chapter. Fill in the last column with the details you learned. I think I know: I want to know: What I learned: 401(k) Roth IRA ESA UTMA/UGMA Before Tax After Tax Rule of 72 Pension 32 Foundations in Personal Finance Wealth Building and college savings Retirement and College Funding The Federal Once the emergency fund is in place, you should begin Deposit Insurance Corporation (FDIC) retirement and college funding, which falls within long- is responsible for insuring or term investing for ____________ _______________. guaranteeing deposits in banks and savings institutions Baby Step 1 is ____________ in the bank. up to $100,000. It was created in 1933 to restore Baby Step 2 is ____________ _______________. public confidence after thousands Baby Step 3 is ______ months of expenses in an of banks failed. emergency fund. The Federal Reserve—sometimes called “The Fed”—is the central banking Baby Step 4 is investing 15% of your household system of the United States and has income into Roth IRAs and pre-tax retirement plans. four main duties: 1. It carries out the nation’s monetary Invest _____% of your household income into Roth IRAs policies by managing the supply of money. and pre-tax retirement plans. 2. It supervises and regulates banking institutions. Tax-favored means that the investment is in a 3. It maintains ___________ __________ or has a special tax treatment. the stability of the financial system. 4. It provides financial services to banks. Chapter 3: Wealth Building and College Savings 33 Qualified Plans “I paid over $200 for a snowboard because  Individual Retirement Arrangement (_______) I loved the design. I never even used  Simplified Employee Pension Plan (________) it once because it turned out to be  401(k), 403(b), 457 too small.” Senior, Wyoming “I bought a guitar when I should have Individual Retirement Arrangements paid for my speeding ticket.” Senior, Florida When it comes to IRAs, everyone with an ____________ “I saved up to buy income is eligible. an expensive hair straightener only to find my old, cheap The maximum annual contribution for income earners is straightener worked way better.” $_____________ as of 2008. Junior, Missouri Remember: IRA is not a type of ____________ at a bank. It is the tax treatment on virtually any type of investment. Roth IRA The Roth IRA is an ______-tax IRA that grows tax _______. The Roth IRA is Why the Roth IRA? named for Senator William Roth of Dela- ware, who authored The Roth IRA has more _____________. this section of the Taxpayer Relief Act of 1997. Higher ____________ at retirement. 34 Foundations in Personal Finance Investing $5,000 pre-tax is different than investing $5,000 ______ tax. It takes more than $5,000 to get The average graduate of a four-year college home with $5,000 after tax. It would take $__________. has student loan debt of $19,237. There are no taxes when you cash it out, so it forces you Graduate students pile on even more student to ______________ more. loan debt, ranging up to $114,000. Miles To Go It has tons of ______________. Nearly half of all Americans (46%) have less than $10,000 saved for retirement. Who Is Eligible: Miles To Go 37% of teens notice their parents being  Singles—100% contribution with income less than concerned about retirement. $95,000. Phase out between $95,000-$110,000. Charles Schwab Survey Not eligible above $110,000. Only 13% of teens know what a 401 (k)  Married filed jointly—100% contribution with plan is. Charles Schwab Survey income less than $150,000. Phase out between $150,000-$160,000. Not eligible over $160,000. 29% of teens feel knowledgeable about knowing how to pay for college. Charles Schwab Survey Flexibility of a Roth IRA: 49% of teens say they’re concerned their parents/  Tax-free and penalty-free withdrawals at any time guardians will not be able to support them equal to contributions. After the emergency fund is financially if they attend college. depleted, you have a fall back. Charles Schwab Survey  After five years, you can make tax-free, penalty- free withdrawals for 100% under these conditions: 1. Over 59 and a half years old Chapter 3: Wealth Building and College Savings 35 2. Because of death or disability 3. First-time home purchase (max $10,000) END OF VIDEO PART 1 Simplified Employee Pension Plan (SEPP) A ________-employed person may deduct up to _____% of their net profit on the business by investing in a SEPP.  The maximum deductible amount is $45,000 (as of 2007) and all employees who have been with the firm more than three of the last five years must receive the same percentage of their pay into a retirement plan. William Post won $16.2 million from the Pennsylvania Lottery in 1988 Winning the lottery His former girlfriend sued him and won a share of his winnings. does not guarantee His brother was arrested for hiring a hit man to kill him, hoping to inherit peace of mind when the winnings. it comes to your His other siblings harassed him until he invested in a car business and restau- financial future. In rant, both of which failed. fact, Ellen Goodstein He was $1 million in debt just one year later. of bankrate.com Ultimately, he declared bankruptcy and now lives on food stamps. reported that just the opposite happened Willie Hurt won $3.1 million from the Michigan Lottery in 1989 to some lottery He spent his money on a divorce and crack cocaine. winners—they Two years later, he was broke and facing murder charges. went broke. Suzanne Mullins won $4.2 million from the Virginia Lottery in 1993 Saving and investing She borrowed $197,746, using her lottery winnings as collateral. have nothing to do She stopped making payments on the loan after she collected the rest of her with the amount of winnings in a lump sum. money you make or The company Suzanne borrowed the money from won a judgment against her get. It is about making for $154,147, but has never seen a dime. it a priority and Today, she has no assets. being smart with your money. 36 Foundations in Personal Finance 401(k), 403(b) & 457 Retirement Plans The Rule of 72 is Most companies have completely done away with a quick way to do compound interest traditional ________________ plans. problems in your head. It isn’t exact, but it will give you a It has been replaced by self-____________ and quick benchmark to see how long it will ___________ plans, like the 401(k). take to double your money at a given  The 401(k) is yours, unlike the pension plan which interest rate. was an asset of the company. If the company went The Rule of 72 says that by dividing the broke, you most likely lost your pension. interest rate into 72, it will tell you approximately how  If you don’t put money into a 401(k) there will be many years it will take to double nothing in the fund. A pension, however, is funded your money. automatically by your company. Example: How long will it take to double The 403(b) is found in non-profit organizations such as your money at 12%? 72/12 = 6 years churches, hospitals and schools. What interest rate The 457 is ______________ compensation, which means do I need to earn if I want my money to you are deferring or putting off compensation. Usually double in 7 years? 72/7=10.28% this is available for government employees. Do not use a ______________ Investment Contract (GIC) or bond funds to fund your plan.  This is like a C.D. inside of your 401(k). You will only make about 3-4% and it will not help you win long-term. You should be funding your plan whether your company ___________ or not. Chapter 3: Wealth Building and College Savings 37 Rollovers Imagine if a couple, who are both 30 years You should always _______ over retirement plans to an old, funds a Roth IRA ($500 per month) at _______ when you leave the company. 12% interest. At 70 years old they will have... Don’t bring the money home, instead, move it straight $5,882,386.26, tax free! into an IRA by a ___________ ____________. Imagine if that same couple made $40,000 and saved 15% in a 401 (k) (that’s $500 per month or $6,000 Roll to a Roth Only If: per year) at 12% interest. At 70 years old they will have... 1. You will have over $700,000 by age 65. $5,882,386.26, tax free! 2. You can afford to pay the _______ separately, not By the time they from the IRA. retire at age 65, that couple’s $1,000 per month savings in IRAs 3. You understand all ______will become due on the and 401(k)s will grow to: $11,764,772.51 rollover amount. END OF VIDEO PART 2 Retirement Loans Never ____________ on your retirement plan. NEVER! Federal Thrift Plan For federal government workers who have the standard thrift plan, we recommend 60% in the C fund, 20% in the S fund, and 20% in the I fund. 38 Foundations in Personal Finance Baby Step 4 Scholarships aren’t Invest 15% of household income into Roth IRAs and just for the highest scorers on the ACT pre-tax retirement. or SAT. Schools and foundations have 1. Fund 401(k) or other employer plan up to the broadened their cri- teria to include com- _____________. (If applicable) munity involvement, after-school work and financial status in 2. Above the match, fund __________IRAs. If there addition to the tradi- tional athletics and di- is no match, start with Roth IRAs. versity scholarships. Don’t avoid the schol- arship applications 3. Complete 15% of income by going back to your requiring essays. It is ______ or other company plans. END OF VIDEO PART 3 a good way to improve your writing skills while earning schol- There are no fill-in-the-blanks for Part 4. END OF VIDEO PART 4 arships. Here are some additional re- sources to look into. 1. Talk to your guidance counselor. College Funding 2. Explore your state’s website. 3. Many businesses Save for your children’s education using have scholarships for employee’s children. tax-favored plans. Ask your parents to check at their place of employment. First... 4. Explore the federal government’s website Save for college by first using Educational Savings at studentaid.ed.gov Accounts (ESA), nicknamed “Education _________.” 5. Check out the big college organizations for information You may save $2,000 (after tax) per year, per child, that (collegeboard.com, petersons.com). grows tax free! So, if you start when your child is born 6. Apply for and save $2,000 a year for 18 years, you would only scholarships with local organizations invest a total of $36,000. However, at 12% growth, your such as Rotary Clubs. child would have $126,000 for college—TAX FREE! Chapter 3: Wealth Building and College Savings 39 “I am 22 and I’ve been thinking about going back to school. My employer is willing to pay for nine credit hours per semester, but if I take more than nine hours they won’t pay anything. My parents think we should get student loans. What do you think?” DAVE’S ANSWER: I’m sure your parents are good people. And I know they don’t mean any real harm. They’re just being normal, but in to- day’s culture normal is broke. They’ve probably been around student loans, car payments and credit cards all their lives, and that’s sad. Go for it! You have a great opportunity staring at you. I mean, how many times does someone offer to pay for your degree with no financial strings attached? You couldn’t take much more than nine hours per semester and still work a full-time job anyway. Above that… If you want to save more or if you don’t meet the income limits for an ESA, use a certain type of ________ plan. Never buy a plan that: 1. ______________ your options. 2. Automatically changes your investments based on the _______ of the child. Only then… Move to an ______________ or _____________ plan.  While this is one way to save with reduced taxes, it is __________ as good as the other options.  UTMA/UGMA stands for Uniform ____________ / Gift to ____________ Act. 40 Foundations in Personal Finance  The account is ___________ in the child’s name and a __________ is named, usually the parent or You don’t have to get grandparent. This person is the manager until the a student loan to go to college. There are child reaches age 21. At age 21 (age 18 for UGMA),

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