Financial Fitness for Life

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Financial Fitness for Life

• Tawni Ferrarini Abdollah Ferdowsi Asst.
  Professor Professor of Economics
• Northern Michigan Ferris State University
• University Ferdowsa_at_ferris.edu
• ceee_at_nmu.edu

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Themes of Financial Fitness

• There are four themes
• Income
• Saving and Investment
• Spending and Credit
• Financial Planning

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Theme One Income

• Sources of Income
• Compensation of Employees (labor)
• Wages and salaries
• Business Interest and Government Interest Income
  (capital)
• Rent (land and other natural resources)
• Profits (entrepreneurial talent)

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Why some people earn more income than others?

• Ability
• Motivation
• Discipline
• Ambitious
• And the most important one
• Investment in Human Capital
• Investment in education, on-the-job training,
  health, and nutrition to increase productivity

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Costs and Benefits of Investment in Human Capital

• Investment in human capital is investment in
  education, on-the-job training, health, and
  nutrition to increase productivity. Can you
  provide examples of the benefits and costs?
• Benefits
• Costs

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http//www.themint.org/
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Income and Education

• Learning boosts earning
• The more school you complete, the higher your
  potential earnings. Look at the average earnings
  in this chart. They tell the story.
• Higher Income Boosts
• Consumption possibilities (Present Consumption)
• Savings possibilities (Future Consumption)

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Theme Two Saving and Investment

• Reasons for saving
• To consume in the future
• College
• Retirement
• Vacation
• Time Preference. Most people prefer present
  consumption to future consumption because of the
  future uncertainties.

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Theme Two Saving and Investment

• Opportunity costs of saving
• The current consumption is sacrificed with the
  hope of consuming more goods and services in the
  future.
• Benefits from Saving Higher level of future
  security and consumption.
• Saving is subject to Interest Compounding.

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How the Savings grow?A tale of Two Savers

• Ana, age 22, right out of college
• 2000 a year saving starting at age 22
• After 12 years, at age 34, she stopped saving,
  but did not touch her savings until age 65
• Total savings 24,000

• Shawn, age 22, right out of college
• He did not save until he was 34
• At age 34, started to put 2000 a year for the
  next 32 years until he retired
• Total savings 64,000

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How the Savings grow?A tale of Two Savers

• Ana
• Total savings at age 65 999,306.59

• Shawn
• Total savings at age 65 442,503.09

• Anas gain b/c she permitted interest to be paid
  on interest through savings!!! 556,803.50

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When Will You Be A Millionaire?

• Now you know that savings is important. Lets
  determine what it will take to make you a
  millionaire
• When Will You Be A Millionaire?
• Do you want to know how long it will take to
  become a millionaire? Try different savings
  plans.
• What do you need to do become a millionaire?
  SAVE!!!!

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Are You a Saver or Spender?

• Lets determine who you are and your propensity
  to save or consume
• What kind of spender are you?
• Are you a spender and avoid savings?
• Are you spend thrifty and a saver?
• Which type of person will most likely become a
  millionaire?

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Can you save and invest?

• Remember opportunity costs? If you choose to
  spend you sacrifice the opportunity to save!!!
  Hence, think of ways you can begin saving by
  reducing what you buy
• Using the savings calculator, determine how much
  you can save if you choose to reallocate your
  income away from the following uses and toward a
  savings or money market account earning 3 percent
  over a 4 year period.
• Cigarettes
• Weekend entertainment
• Cable

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Investment Strategy and Risks

• The return on savings or investment is often
  risky. Some times your returns are positive and
  other times, negative.
• There are four types of Risk
• Financial Risk
• Market Price Risk
• Liquidity Risk
• Inflation Risk
• Fraud Risk

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Investment Strategy

• Types of Investment
• Mattress
• Regular Savings Account
• Certificate of deposit
• U.S. Government Savings Bonds
• Money Market Mutual Funds
• Stocks
• Stock Mutual Funds
• Real Estate

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Stock Market Game
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Theme Three Spending and Credit

• Current Consumption
• Unlimited Material Wants
• Limited Financial Resources (Income)
• Scarcity requires you to make choices

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What Is Credit

• Definition Obtaining the use of money that you
  do not have in return for a promise to pay it
  back in the future with an additional charge
  called interest.

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What Is Credit

• Advantage to using credit To buy and use a good
  and service today and pay for it later.
• Disadvantage to using credit
• Allocating income earned in the future to finance
  spending in the past
• Loans have to be repaid with interest
• People sometimes use too much credit. These
  people use a lot of their current income to pay
  their loans.
• Bankruptcy

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Common Types of Credit

• Home Mortgage
• Car Loans
• College Loans
• Personal Loans
• Credit Cards Loans

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The Amazing Maze of Interest Rates

• Many different types of interest rates.
• Look for Annual Percentage Rate, APR.
• Go to www.bankrate.com

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Shopping for a Credit Cards

• Not all credit cards are created equally
• Go to www.federalreserve.gov and
  www.cardratings.com for a comprehensive coverage.

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Shopping for a Car
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Theme Four Financial Planning for Life

• The crucial part of the financial planning for
  life is to develop a comprehensive budget to keep
  track of your income and expenses.
• Recognizing the unlimited material wants and
  limited financial resources.
• Expenses
• Fixed expenses
• Variable expenses

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Theme Four Financial Planning for Life

• Pay yourself first
• Short term goals
• Long term goals