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HSFPP Weekly Update # 168—Avoiding Bankruptcy

Message from Bob: This week’s update should reinforce what you have been teaching in Units 1 – 3 in the HSFPP student guide, and is a good lead into Unit 4, on saving and investing.

As part of the upcoming in-service training for the HSFPP, we will discuss a new program, Future 4-H Millionaire Club, which we will pilot test beginning in 2007. The final version should be ready for the beginning of next school year. By participating in this new program, which builds upon the HSFPP, teenagers entering the labor force will be more responsible for their retirement investments, such as their 401(k) plans. The program will include a Web site; case studies; interviews with famous people in the investment field, as well as ordinary people who became wealthy by using the principle of investing early and consistently throughout their lives; simulated investing activity; and much, much more. We are excited about this program and I think you will be, too.

 

Update on in-service training:

Because of another meeting in Princeton on September 26, 2006, we have consolidated the Western regional in-service training. We are asking those who planned to go to the Princeton session to go instead to Elizabethtown on September 27; the meeting will take place at their county Extension office. If you plan to come, please make a check for $10 to University of Kentucky for registration. Mail your registration form and check to Alex Lesueur, Jr., 304 Funkhouser Bldg., University of Kentucky, Lexington, KY 40506-0054. All registrations are due in his office by September 20.

Web Site Pick of the Week:

Bankrate.com’s Web calculator helps you estimate how much you will have for retirement by investing in a 401(k) plan such as those that most companies provide for their employees. This is a good example of the type of calculators that will be included in new Future 4-H Millionaire program.

http://www.bankrate.com/brm/calc/401k.asp

 

Note to Educators:

The correct answer to discussion Question # 4 is Yes. The total will be more than $1.75 million. The monthly contribution would be $166.66. Use the calculator to get the total.

Answers to activity for teens:

Problem # 1:
Currently save = 0
Monthly salary = $1,000
Percent of salary plan to contribute monthly = 10%
Employee contribution = 0
Rate of return each year on investment = 9
Years to retirement = 49 (67 retirement - 18 now = 49)
Total = $1,065,690.32

Problem # 2:
Change return on investment from 9% to 10%, but leave everything else the same.
Total = $1,567,087.94

Problem # 3:
Change years to retirement from 49 to 46, which reflects a person starting at age 21, rather than 18; but leave everything else the same as Problem # 2.
Total = $1,159,272.22

Problem # 4:
Change the rate of return to 7% to account for an annual rate of inflation of 3%; but leave everything else the same as Problem # 3.
Total = $407,915.42

Problem # 5:
Change the monthly salary to $4,000 a month, to reflect the average salary a college graduate will make over the course of his or her career; but leave everything else the same as Problem # 4.
Total = $1,631,661.70

Problem # 6:
Now add a 50 cent contribution for every dollar you contribute, which would equal $600 per month. You contribute $400 and your employer contributes $200; leave everything else the same as Problem # 5.

Two ways to get answer:
All you need to do is change your contribution from 10% to 15% of your gross salary: your 10% plus your employer’s 5% = 15%. The choices provided by Bankrate for your employer’s contribution are only 0, 1, 3, 6%, not 5 %.

This question is to show teenagers the value of matching contributions, as well as helping them learn critical thinking (not just plugging in the numbers). The other way is to divide $1,631,661.70 by 2 = $815,830.85; then add to $1,631,661.70 = 2,447,492.54, which is equal to the 50 cent on the dollar match. $1,631,661.70 is the answer to Problem # 5 and 2,447,492.54 is the answer to Problem # 6.

 

In the New$... Avoiding Bankruptcy

Does Anyone Starting Out Really Think They Will Need to File for Bankruptcy? Of Course Not! Then Why Do So Many People Have to File for Bankruptcy, and Why Should Teenagers Be Concerned?

By Robert H. Flashman, Ph.D., & Alex Lesueur, Jr., M.S.L.S., University of Kentucky Cooperative Extension

As teenagers, the possibility of having to file for bankruptcy is not on your radar. At the beginning of a new school year, things like playing sports, hanging out with friends, and planning to buy your first car or truck are much more likely in your thoughts than the possibility of financial meltdown; unless, of course, your family has recently filed for bankruptcy and told you about it, which is highly unlikely, as most parents do not share bad news like this with their children if they can help it.

Today few teenagers pay for basic necessities since their parents provide them free shelter, food, and clothing, as well as TV, computer, and possibly even high speed Internet connection; it is also not unusual for parents to pay cell phone bills for their teenagers. As a result, most teens have a lot of money to spend on whatever they want; and few of them develop financial goals, have a budget, save for financial emergencies, or save and invest for the future. So what’s wrong with this? Don’t kids need to be kids? Don’t they have plenty of time to develop these skills later? Unfortunately, the poor financial habits that you develop as teenagers will likely be your habits as an adult; and those poor habits make you more likely to be among the next generation to file for bankruptcy.

Unfortunately, far too many of us spend more than we make, and only a few can afford to be big spenders. Many of us see people who are better off than we are, or who pretend to be well off, and we might want to emulate their lifestyle; but spending like a rich person will not make you rich; it will only make you broke. If you want to be bankrupt, go spend money; it’s a sure way to reach that goal. You’ll find yourself in good company, as the bankruptcy rates have surged in this country in recent years. It’s an alarming trend that has implications for our country’s economy as a whole.

Congress has tried to rein in bankruptcy with tough legislation designed to make debtors pay back more of their debts. The new law passed last year has had mixed results, however. As this law was about to take effect, many who were in financial trouble declared bankruptcy sooner than they might have, and even though they might have been able to avoid it, given more time; and this raised bankruptcy rates even more. Then, when the law took effect, rates dropped sharply, but only for a little while. According to Liz Pulliam Weston, “Credit counselors are already reporting an increase in the number of debtors seeking help because of high gas prices and adjustable-rate mortgages that have reset at higher rates [meaning that many homeowners must now pay much more for their home loans]. These debtors may well enter the bankruptcy pipeline in the next year or so.”

So bankruptcy rates are rising again, and the new law may only have increased the hassles associated with bankruptcy. For one thing, those who declare bankruptcy must take credit counseling, and their lack of ability to pay for counseling sessions is causing credit counselors to lose money and is preventing them from helping those who are able to pay back their debts; this is surely an unintended consequence. How many lawmakers do you think really wanted to hurt credit counselors? None of them did.

In addition, the cost of filing for Chapter 7 bankruptcy has doubled and Chapter 13 has risen by about 50%. According to David Skeel of the American Bankruptcy Institute, who is quoted in Weston’s article, “One of the great ironies (of bankruptcy) is that you can be too poor to file ... and there could be more people” who don’t have enough money to file for bankruptcy.

The new bankruptcy law does not prevent lenders from extending credit to consumers who might not be able to repay their credit card debt or other loans, and it probably doesn’t help those who are in debt because of medical bills, divorce, or loss of their job. Unfortunately, there are far too many ways for people to go broke through no fault of their own. According to Weston’s article, “A large segment of the public [is] financially illiterate. Only one-third of adults in a recent poll had a good understanding of basic economic and personal-finance concepts, according to a Harris Interactive study prepared for the National Council on Economic Education.” And far too many people are not saving enough for retirement or for an emergency. If they lose their job, how long will they last without going into debt?

None of us is likely to get rich overnight. The best wealth is built slowly and steadily by working toward your goals and avoiding common pitfalls such as unnecessary expenses. This method of accumulating wealth is available to most Americans, regardless of their occupation: barbers and hairdressers, as well as plumbers, have the ability to save a million dollars or more, but they have to begin early.

Saving and investing might not seem glamorous or exciting to most people, but it’s the way to go to become rich, or at least comfortable financially. First, decide what you want in life and develop a financial plan to achieve your goals. Always be sure to spend less than you make. Avoid impulse buying, limit your use of credit cards, and save for emergencies. If you’d like a philosophical statement, how about this: A person who hasn’t had an emergency hasn’t really lived. That’s not saying much, though, as we can’t think of anyone who has lived very long without experiencing some kind of emergency. Emergencies happen and they usually cost money, so let’s just say that all of us should expect emergencies. It’s not pessimistic; actually, it’s optimistic, as a person who expects emergencies can take action ahead of time to make them less painful. And one thing we all need to do is to save more money!

Source: “The Bankruptcy Boom Is Back,” by Liz Pulliam Weston, MSN Money.
http://articles.moneycentral.msn.com/Banking/BankruptcyGuide/TheBankruptcyBoomIsBack.aspx

 

Class Discussion Questions:

1.) Those of you who have kept to the budget that you developed, stand on the right side of the room. Those who have not, stand on the left.

 

2.) Those who have revised their budget after tracking expenses, stand on the right side of the room. Those who have not, stand on the left.

 

3.) Those of you who save or invest at least 10% of your allowance or from your summer (or current) job, stand on the right side of the room. Those who do not, stand on the left.

 

4.) Those of you who are saving for an upcoming event or purchase, stand on the right side of the room. Those who are not, stand on the left.

 

5.) Those of you who are putting away money for a financial emergency such as replacing a flat tire, stand on the right side of the room. Those who are not, stand on the left.

 

6.) Do you think you can become a millionaire by age 67 if you begin saving $2,000 a year at 9% compound interest at Age 18? (The total amount invested would be $98,000 = $2,000 x 49 years.)

 

Activity for Teenagers:

Go to http://www.bankrate.com/brm/calc/401k.asp to calculate how much money you would have at age 67 by investing in a Roth IRA retirement tax sheltered account or in a 401(k) plan such as those that most companies provide for their employees. Some companies will provide a match your contribution. A typical match is 50 cents for every dollar you invest. However, many companies provide no match.

Following are examples:

Problem # 1: Begin investing at age 18.
Currently save = 0
Monthly salary = $1,000
Percent of salary plan to contribute monthly = 10%
Employee contribution = 0
Rate of return each year on investment = 9%
Years to retirement = 49 (67 retirement - 18 now = 49)
Total value of your investments at age 67 = $­­­_____________

Problem # 2: Begin investing at 18 and your investment earns 10%, not 9%.
Currently save = 0
Monthly salary = $1,000
Percent of salary plan to contribute monthly = 10%
Employee contribution = 0
Rate of return each year on investment = 10%
Years to retirement = 49 (67 retirement - 18 now = 49)
Total value of your investments at age 67 = $­­­_____________

Problem # 3: Begin investing at age 21 and your investment earns 10%.
Currently save = 0
Monthly salary = $1,000
Percent of salary plan to contribute monthly = 10%
Employee contribution = 0
Rate of return each year on investment = 10%
Years to retirement = 46 (67 retirement - 21 now = 46)
Total value of your investments at age 67 = $­­­_____________

Problem # 4: Begin investing at age 21 and your investment earns 7%.
This is to account for an annual rate of inflation of 3% (which lets you know how much your money is worth in today’s dollars.)
Currently save = 0
Monthly salary = $1,000
Percent of salary plan to contribute monthly = 10%
Employee contribution = 0
Rate of return each year on investment = 7%
Years to retirement = 46 (67 retirement - 21 now = 46)
Total value of your investments at age 67 = $­­­_____________

Problem # 5: Begin investing at age 21 and your investment earns 7%; also raise monthly salary to $4,000.
This shows the impact of earning more money and reflects your salary over the years, thus giving you a better picture of your potential worth at retirement.
Currently save = 0
Monthly salary = $4,000
Percent of salary plan to contribute monthly = 10%
Employee contribution = 0
Rate of return each year on investment = 7%
Years to retirement = 46 (67 retirement - 21 now = 46)
Total value of your investments at age 67 = $­­­_____________

Bonus question:

Problem # 6: Begin investing at age 21 and you’re making $4,000 a month. You save 10% a month and your employer provides a 50% match. And inflation is 3%. How much will your retirement account be worth in 46 years?
Currently save = 0
Monthly salary = $4,000
Percent of salary plan to contribute monthly = 10%
Employer contribution = 5%
Rate of inflation = 3%
Rate of return each year on investment = 10% -3 % inflation = 7%
Years to retirement = 46 (67 retirement - 21 now = 46)
Total value of your investments at age 67 = $­­­_____________

 

Kentucky High School Financial Planning Program
http://www.ca.uky.edu/fcs/hsfp
The purpose of this Web site is to assist county Extension agents, credit union educators, and high school teachers in improving the economic well-being of our constituency, beginning with today’s students; and also, to assist teachers in Kentucky in meeting KERA’s goal that all students become technologically literate. Weekly Updates are provided by the University of Kentucky Cooperative Extension Service, and are free to all educators.