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HSFPP Weekly Update # 146—How to Build Wealth

Message from Bob: Most people would like to be well-off financially, and attaining personal wealth is not as difficult as many think. Far too many wage earners, especially those with lower incomes, believe that buying lottery tickets is the most likely way they will get rich; but the odds of winning are so long that the vast majority of ticket buyers are wasting their money. Most millionaires will tell you that consistent investing of money over time is the way they became wealthy. It doesn’t take a lot of money if you begin early, as a teenager, and invest regularly in mutual funds, which help to diversify an investor’s portfolio. Many mutual funds only require $1000 to open a Roth IRA account. Another option is Broad Market Exchange-Traded Index Fund (ETFs), such as the Spider (SPR), which represents the Standard & Poor 500 Index.

Message from Chris: Those of you who have been receiving these updates know that I am a senior in the Department of Communications at the University of Kentucky. I’ve worked with Dr. Flashman on the HSFPP weekly updates since my freshman year, at first selecting topics from mass media stories and making sure the updates would be relevant and understandable to a teenage audience. I helped to update the Kentucky HSFPP Web site. Lately, in addition to helping select topics, I’ve been rewriting the stories from a teenager’s perspective. As I’ve only recently passed my teenage years, I still remember clearly enough what I knew and didn’t know about personal finance when I was in high school.

For one thing, I’ve learned the value of beginning to invest while still a teenager, even if it’s only $1,000 a year. The impact of compound interest, as discussed in Unit # 4 on Saving and Investing in the NEFE HSFPP student guide, favors those who invest over longer periods; they don’t have to invest as much money as those who begin later. As a result, I‘ve decided to do my communications internship with the University of Kentucky Agricultural Communication Service to help develop a new investment Web site (for more details, see the note to educators below).

 

Related Updates:

Update #135 - Saving Strategies - 3 October 2005
Update #116 - Saving and Investing - 7 February 2005
Update #111 - Lottery Winners and Financial Personality Types - 20 December 2004
Update #108 - Start Saving Now! - 29 November 2004

 

Web Site Pick of the Week:

http://www.csgnetwork.com/compoundint2calc.html

CSG Network’s Investment Compound Interest Calculator can help you figure the amount you need to save, and how early you need to begin investing, in order to have enough for a comfortable (and early?) retirement. What will it take for you to become a millionaire? Find out here. Also, if you scroll down the page, you will find other helpful calculators, as well as links to other Web sites of special interest.

 

Notes to Educators:

We are looking for educators and investment professionals who would like to test our new investment program and Web site, “Future 4-H Millionaire Club,” funded by the National Association of Security Dealers Foundation. The press release announcing the grant funding this project is available at http://www.ca.uky.edu/fcs/hsfp/new.htm, as the latest item under “What’s New.”

The Future 4-H Millionaire Club is an after-school or summer program for teens who have been involved with the HSFPP and/or the 4-H programs, “Consumer Savvy” and “Financial Champions.” The education program and Web site are currently in the developmental stage and we want input from teenagers and leaders as part of a focus group.

The goal of the program and Web site is to show teens how easy it is to learn to invest wisely. Educators and professionals from the financial field will provide the necessary guidance. We want to educate teens about investing and provide them the information and tools they need to open their own investment accounts (my preference is for teens to invest in mutual funds, which provide diversification even with a small amount of money). Teens and educators are needed to provide their input on the program’s ease of use, the quality of information (simulated investment games, investment quizzes, risk profile, and links, to name a few of the resources to be provided), and how to increase the program’s appeal to teenagers. Along with providing teens the know-how to invest, we want the program to be hands-on, interesting, and fun. If you are interested or would like more information, please contact Bob Flashman at (859) 257-7758 or rflashma@uky.edu.

 

Discussion Questions:

1.) Why do many people still believe the lottery is the most effective and practical wealth accumulation strategy when so many media stories show otherwise?

 

2.) Why don’t more people know about the “magic” of compound interest and therefore begin investing their money in a mutual fund while they are still teenagers?

 

Follow-up Activity:

History / Social Studies class: Research the history of lotteries in the U.S. and write a short essay on the subject. Areas to be considered include: states’ intentions to increase revenue and reduce taxes; effect of lotteries on the public; and public attitudes toward lotteries. How have taxes changed in Kentucky over the years as a result of the lottery? How does this relate to tax fairness based on income generated by the lottery (regressive vs. progressive taxes)?

English class: Write a research paper on how lotteries have affected winners’ lives. Be sure to include various sides on all issues involved and weigh the evidence. The paper should be three pages plus endnotes and bibliography with at least three sources. Only one encyclopedia may be used, preferably Americana or Britannica. At least one source must be current (no more than one year old).

 

In the New$.... How to Build Wealth

By Chris Hart, Senior in Communications, University of Kentucky

The odds of winning the lottery are so low, it is like throwing money in the trash. Yet 16 percent of Americans surveyed recently by the Consumer Federation of America believe the lottery is the most effective and practical way to save several hundred thousand dollars. Level of education makes a significant difference in views about the lottery: 30 percent of Americans without high school diplomas said the most practical way to accumulate wealth was winning the lottery, as opposed to 8 percent of those with college degrees.

The CFA press release notes that financial planners are more optimistic about the average person’s ability to build wealth than is the average person. However, most people surveyed agreed with financial planners that saving, home ownership, and investing are the keys to building wealth. Although it requires patience and discipline, saving and investing a small amount each month is the best way to become wealthy; this is how most millionaires accumulate their wealth. Figure 4.1 on Page 49 of the High School Financial Planning student guide (http://www.nefe.org/hsfppportal/files/14510_Figure%204.1.pdf) demonstrates the time value of money and the power of compound interest. Saving and investing your money wisely is the most reliable way to become wealthy.

My parents opened an IRA for me with a Vanguard Mutual Fund about a year and a half ago, and I have contributed money to it. I wish I could have started investing earlier, however. I could have made a lot of money if I had started during my freshman year of high school or even earlier. I had the money to do it, but didn’t understand the payoff of investing in a mutual fund when I was sixteen, instead of spending my money on odds and ends.

It doesn’t take much money to invest, and it’s self-defeating to think you can either invest or have fun, but not both. So you can still buy CDs, go to movies, and eat out with friends; just don’t overdo it. Do you have a part-time job? If you make $50 a week, all you would need to save is 20% of your weekly paycheck ($10) to have $500 to invest each year. Web sites such as sharebuilder.com help you start an investing program for very little money. That $10 a week might not look like much now, but it will add up, and you will be glad later that you began investing early. For mutual funds, contribute money on a weekly or monthly basis. If, however, you do not have the $1000 to open up a Roth IRA account with a mutual fund, another option is Broad Market Exchange-Traded Index Fund (ETFs), such as the Spider (SPR), which represents the Standard & Poor 500 Index.

You can take advantage of something called dollar cost averaging. If, for example, you buy $500 worth of stock each year and the share price is $10, you’ve bought 50 shares. But stocks go up and down. If the price goes down to $5 a share the next year, but you still buy $500 worth, you’ve bought 100 shares for the year. If the price goes up to $8 the next year and you buy $500 worth, you’ve bought 62.5 shares for the year. You now have a total of 212.5 shares at $8 a share, which is worth $1700; and you have only paid $1500 for these shares. You’ve made $200 on your investment. Of course, this is oversimplified, but you get the idea.

According to the calculator at http://www.csgnetwork.com/compoundint2calc.html, if you invest $500 now and an additional $500 every year for another 45 years at 9% interest, you will have $310,756.65. Try the calculator yourself. The earlier you begin investing and the more you invest, the more you can make. I am 22 and I would like to retire a millionaire. I currently have about $1800 in my IRA. If I can invest $3000 a year for 40 years at 9% interest, I will have $1,161,412.55. $3000 a year is not unreasonable considering that I will start working after I graduate in May. However, if I did not already have $1800 invested in a mutual fund, I would have $56,537 less when I retire. That’s right, the $1800 now in my account will increase to $56,537 by the time I turn 62.

Source: Consumer Federation of America http://www.consumerfed.org/pdfs/Financial_Planners_Study011006.pdf

 

Kentucky High School Financial Planning Program
http://www.ca.uky.edu/fcs/hsfp
The purpose of the HSFPP weekly financial updates and Web site is to assist county Extension agents, credit union educators, high school teachers, and parents who home school their teenagers so that they may improve the economic well-being of our teenagers; and also to show educators how the HSFPP and the weekly updates meet Kentucky core concepts. The Web site and weekly updates are provided by the University of Kentucky Cooperative Extension Service, and are free to all educators. The list of core concepts and order form for free program materials including the student guide and instructors manual can be found on the Kentucky HSFPP home page.