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HSFPP Weekly Update # 160—Do You Like Free Money? Of Course You Do!

Message from Bob: The older you get, the more money you are likely to have coming in and going out. Teenagers tend to get more allowance money than younger siblings, and many of them get jobs after school. Many teens buy cars; it’s the cool thing to do, and it gains teens a level of independence that they wouldn’t have by continuing to borrow their parents’ vehicle.

Money might seem to be what makes the world go round, but it’s not everything. Still, whatever your age or walk of life, money can bring you independence and lack of it can be an extreme burden. Most of us would say that money counts for something. Most of us would like to have more. And those who have enough money for their needs do tend to enjoy life more.

Message from Chris: Investing, if done the right way, can be like getting free money for the future. The great thing about it is that it isn’t hard. Since my parents helped me start my first Roth IRA mutual fund, it has increased in value by 27.39 percent over the past year, as of 4/28/06, according to MSN Money! I wish I had started investing in high school, as high school students’ age is their biggest advantage when it comes to investing. The earlier you start the more you will have when you need it.

 

Note to Educators:

In previous updates, I’ve mentioned the Future 4-H Millionaire Club, which is being funded through a grant from the National Association of Securities Dealers, to go a step farther than the High School Financial Planning Program to expand teenagers’ knowledge of investing. We would like teacher and county agent volunteers to pilot test this program beginning in the fall. The intended audience is teenagers who have been involved with the HSFPP and who are ready to go to the next level. Question 5 should give you an idea how many of your teens would be interested in this program.

The updates for this week and the next two weeks should give you an idea of what we hope to pursue through this new program. You may e-mail me at rflashma@uky.edu or call me at (859) 257-7758 to volunteer or to discuss the new program with me.

 

Web Site Pick of the Week:

http://www.investing.rutgers.edu/

Rutgers Cooperative Extension’s Web-based investment course is a good information resource, but geared toward adults. You might, however, find it helpful in your work. This is the type of educational program that those of you who take my summer course, FAM 759, will have the opportunity to review.

 

In the New$... Money for Nothing (Much)

By Chris Hart, Senior in Telecommunications, University of Kentucky

For many high school students, working for a couple of years after graduation is their best option if they are not ready for college or other types of postsecondary education. It is also a great time to take advantage of your age and continue to live at home so you can sock away money for the future. The magic of compound interest needs time to make a difference. Right now you are 30 or more years away from retirement even if you want to retire young. If you start with $1000 now and invest $1000 every year for 30 years, you will have $161,842.90 in 30 years, assuming a very reasonable 9 percent interest rate. However, this will not be enough money to live on for the rest of your life. If you really want to retire young, you will need to invest at least 10 percent of your gross income each year; and a good way to begin is with a tax-sheltered Roth IRA.

The maximum you can invest in an IRA this year is $4000. If you open a Roth IRA mutual fund with a $1000 and invest $4000 a year, assuming the same conditions in the example above, you would have $607,568.55 in 30 years (age 48), $2,143,771.90 at age 62, and $3,324,552.13 at age 67. You can see from these calculations the real value of investing early; compound interest increases your money more and more the longer you invest. By investing at least 10 percent of your money in a tax shelter such as a Roth IRA every year, rather than consuming and investing nothing, you will have a retirement life that you can enjoy. I’m not saying you can’t have fun along the way, but you need to carefully evaluate nearly all expenses over $10.

I know most guys want an expensive, new sports car, but won’t a used vehicle get you where you want to go just as well, if not in the same style? Remember that your new sports car will lose 20 percent of its value the minute you drive it off the lot; that 20 percent is lost money that you don’t need to pay. One alternative is to buy a used vehicle instead and, with the money you would have spent on a new sports car, begin saving toward a condo or home so you can have your own space away from your parents. The condo or home will likely increase in value over the years and can actually be an investment: rent some rooms to your friends who bought expensive sports cars or trucks, and you might find your monthly mortgage payments offset entirely by the money your friends are paying you!

Advertisers’ underlying message is that, if you want to be cool, if you want to be happy, etc., you need to buy their products. They say not to worry that it costs so much, just charge it. They’re in business to make money, not to meet your real needs. But, if you want to save money, if you want to make money, don’t take their advice; save and invest, and you will have the last laugh.

My parents gave me a different message from the one you see in car commercials—buy a used car with your savings and begin investing young—and they helped me select a mid cap blend mutual fund from Vanguard that charges some of the lowest fees of all the thousands of mutual funds available. This type of fund is a combination of a growth and value fund and fits my risk tolerance for now. Over the last 12 months, the rate of return for this fund was 22.28 percent; 28.03 percent annually for last three years; and a 14.61 percent return for the last five years. The return over five years is less because the overall market lost money in 2000 and 2001, reducing the overall return. The average rate of return for this fund for the last 10 years was 12.19 percent. One should plan for a return of only around 9 percent on average over the long term, since some years will likely have a negative return and it’s better to expect less, rather than more; otherwise you will be disappointed and might begin making riskier investments than you should, which could result in your losing part or all of your money. Any investment in the stock market is a gamble, but reasonable investments will likely gain you money in the long run.

For more information on investing, contact your local county Cooperative Extension agent. They are a great resource for information about money management and investment options. Investing isn’t complicated, but you need to do your homework and understand what you’re investing in, so you won’t take unnecessary risks.

 

Discussion Questions:

1.) What are your thoughts about investing after reading this article?

 

2.) Do you plan to change your purchasing behavior? Yes___  No___. Explain why or why not.

 

3.) Have you begun investing? Yes___  No___. If you have, what types of investments have you chosen so far? Are you satisfied with these investments?

 

4.) If you answered “No” to Question 3, do you plan to begin investing now?
Yes___  No___. Explain why or why not.

 

5.) Would you be interested in additional educational programs about different types of investments and how to invest wisely to meet your future needs? Yes___  No___.

 

Activity for Students:

Talk with your parents about opening an investment account such as the ones mentioned above. Your county Cooperative Extension agent is a great resource for information about investing. Also check our links at http://www.ca.uky.edu/fcs/hsfp/lessonlinks.html and past updates at http://www.ca.uky.edu/fcs/hsfp/UPDATE.HTM.

Go to http://www.csgnetwork.com/compoundint2calc.html to figure out how much you could have if you invest regularly. This is the calculator I used for this update. Calculate for different amounts invested each year to get an idea how much you need to save and invest.

 

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.