A Teaching Guide

An Introduction to...

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Financial Literacy Defined

Financial literacy refers to the basic skills people need to manage money and make financial decisions.

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A Financial Literacy Crisis

61% of people age 24-64 have no retirement savings account of any kind.

Average credit card debt among college students is over $2,300.

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2002 Personal Finance Survey

4,024 High School Seniors

Average Score 50.2% -- a failing grade

Yet, 65% of students said they felt very or somewhat sure about their ability to manage money

Where They Learned About Money

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Home Friends Self

Home

School

Friends

Media

Self

Jump$tart Coalition for Personal Financial Literacy Study

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The Good News

As little as 10 hours of classroom instruction can affect how teens handle their money

58% of students improved their spending habits

56% of students improved their savings habits

NEFE Financial Literacy Study

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What makes this Program Different?

It contains a sound basic instruction on general personal finance PLUS

It gives solid information on the basics of investing showing alternatives to savings

It is free and we are not selling anythingNot commercial / State sponsored Local resources

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Concepts Addressed

Teach how to think critically and make sound decisions

Financial Choices & DecisionsPersonal values, goals, needs, wantsFinancial decision making processFinancial marketsFinancial products and servicesResources of financial information

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Concepts Addressed

Students have money but few management skills

Money Management Financial planning and record keeping Personal economic resources Spending patterns Consumer credit management Saving and investing and Insurance

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Concepts Addressed

Investor ProtectionRights and responsibilitiesLaws and agenciesFraud and redress

Concepts, teaching strategies and materials are compatible with the Voluntary National Standards in Economics and the Jump$tart Coalition Guidelines

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Concepts Addressed

Young people who fail to begin saving and investing in their youth lose out on potentially substantial retirement income

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Financial Foundation

High Risk

Medium Risk

Lower Risk

Options futures

Stocks, Bonds

Real estate, Mutual funds

Financial Foundation

Income, Insurance, Financial Goals/Budget,

Controlled Spending and Manageable Debt

CDs, MM, Bank, CU, EE

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FL2010 web site

Unique community of personal finance instructors/ chat area

Recognizes frequent visitorsSpecial version can be made for youOnline version of training guideNewsletterFinancial news/ Hot sites

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Web Site

Local training opportunities Local trainers are listed Local unbiased investor education experts/

Dept. of Securities/ SEC/ NASDRelevant state curriculum standardsTries to be the start page on the Web for

finance instructors everywhere

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Workshop Objectives

Promote the importance of teaching personal finance in schools.

Encourage teachers to incorporate personal finance concepts into their classrooms.

Provide an overview of “Personal Finance for the Economic Classroom Teaching Guide.”

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TEACHING GUIDE

5 Units Lesson outline

Estimate time of presentationObjectives, sources of materials, proceduresWorksheets, graphics, overheads

Tests and answer keysAppendix and Glossary

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Five, Self-contained Units

Understanding financial marketsMaking financial decisions Investment choices and finding and using

sources of informationRecognizing & victim-proofing against

fraudDeveloping a personal financial plan

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Unit 1 - Objectives

How markets workRecognizing public companiesWhat makes stock prices fluctuate Role of government in securities regulation

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Why teach this Unit?

Events in financial markets affect all of uscost of credit, prices, eliminate or add jobsstudent’s every-day lives; mall spending

money, part-time jobs; car purchaseSoon the students will be required to

participate by employer-based retirement plans or individual investing

De-mystify financial markets

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Capitalism

Our economic system in which:private ownership of property existsownership of capital provides income free competition for getting capitalprofit motive is basic to economic life

Laissez-faire, private enterprise, free-price

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How markets work

Define marketsMarket economy v. command economy

markets in which students participatesupply and demand - football tickets ex

Financial marketsexchanges - stock markets

Internet - ebay etc.

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Recognizing public companies

Free enterprise systemEntrepreneursDefine private companiesDefine public companiesStudents identify companies they deal with

as public or private

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What makes stock prices fluctuate

Investor Actions: Buying/Selling

Business Conditions: Profits / Losses

Government Actions: Taxes, Interest Rates

Economic Indicators: Personal Income, Consumer Spending, Employment,

Inflation

International Events: War, Natural Disaster

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Role of government in securities regulation

Caveat EmptorRole of the States Roles of the federal governmentSelf regulatory agencies

NASDExchangesAccountants & Lawyers

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Regulation of Financial Markets

Organizations with the purpose of assuring professional and ethical

investing practices...

Securities and Exchange Commission (SEC)

State Securities Agencies

National Association of Securities Dealers (NASD)

Commodity Futures Trading Commission (CFTC)

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Unit 1 - Summary

Definition of economic concepts specifically free enterprise and markets as well as other basic terms

Student participation in marketsFinancial markets, how they work, how

they affect us and their regulationEntrepreneurship: public & private

business

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Unit 2 - Objectives

Simulated step-by-step decision making: car purchase model

Demonstrate the time value of moneyThe power of compoundingThe costs of creditSteps in getting financial advice

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Why teach this Unit?

Students have money but few know how to manage it

Students who understand and practice sound financial decision making are on the road to success

Young people who fail to begin saving and investing lose out on creating adequate retirement income

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Financial Tasks of Young Adults

train for a career Starting a family establish a good credit record develop a financial plan consider insurance protection save and invest for future goals

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Financial decision making model

Define issue or problem - buying a car (p 2.4)

Gather informationAlternatives and consequencesMake a decision and take actionModify as needed

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Weighing trade-offs and opportunity costs

Delayed v. instant gratificationNeeds v. Wants (p. 2.5)ChoiceCostsBenefitsTrade-offs: job or college Opportunity costs: job income v college cost

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The Time Value of Money

The time value of money is the growth of money over time as a result of investment earnings.

Investments made earlier in life have a greater pay-off than those made later in life.

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Worksheet

See “How Time Affects the Value of

Money” Student Worksheet, Unit 2,

Page 2-19 and 2-20.See

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How Long to Double your Money

Earnings Rate2%

3%

6%

12%

18%

36%

Years to Double36 years

24 years

12 years

6 years

4 years

2 years

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Rule of 72 Double Your Money

72 divided by the % rate of return

equals the number of years

to double your money

At 10% it takes 7.2 years

(7210=7.2)

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Dollar-Cost Averaging

Dollar-cost averaging is the technique of investing the same fixed dollar amount in an investment, such as a mutual fund, at regular intervals over

a long period of time.

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Credit Cards

Less than 40% of card holders pay entire balance each month

If interest is 12% APR

adds 12% to price of items purchased

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If You Owe...

A Minimum Means a Payment of Debt Lasting

2%……………..…..32 years3%…………………12 years4%………………… 8 years5%………………… 6 years

$2,000 on a 19.8% APR Credit Card

assuming no new charges

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If a 21 year old college student

owes . . . . $2,300 on 18% APR credit card

Makes minimum monthly payment

Will take 33 years to pay off debt, assuming no new purchases.

Total Interest Payments$5,831

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A What if Question

What if you could earn 18% on your money instead of paying interest charges?

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From Debt to Earnings

If you pay off your credit cards you have done the precise equivalent of earning 18%.

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Your Credit Report

Credit inquiries - 2 yr. Payment patterns - 7yrs. Bankruptcy - 10 years. For employment and mortgages over $75,000

information can be kept for a lifetime.

How long information stays on your record?

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Unit 2 - Summary

Financial decision making for studentsTime value of moneyUnderstanding trade-offs and opportunity

cost ( delayed v instant gratification)Smart decisions about credit

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Unit 3 - Objectives

Analyze the differences between saving and investing

Identify common investment options using pyramid of risk

What is a prospectus Interpret mutual fund and stock quotes

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Why teach this unit?

Understanding “risk and return” is critical to financial decision making

Young people who don’t know about saving and investing alternatives are at risk of being too conservative or too risky

Students will develop critical thinking skills by examining the credibility of sources and content of information

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Savings and investment products

Savings products:

Savings accounts

Money-market funds

CDs

Investment products

Stocks represent ownership

Bonds are a type of loan

Mutual Funds

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Selecting Savings & Investments

Liquidity: the speed and ease with which an asset can be converted into cashHow quickly will you need your moneyHighly liquid: savings accounts & money

marketsLess liquid: stocks, bonds, CDs

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Selecting Savings and Investments

When choosing investments consider…

risk = potential return or risk = potential return

Inflation risk Political risk Fraud risk

Interest rate risk Business failure risk Market price risk

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Other factors in selecting investments

Return (historically inflation rate+3%) comes from earnings,growth or tax benefits

Inflation (rise in price of goods & services)Diversification (spreading risk)Taxes (exempting or deferring)

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How Securities Are Bought and Sold

New issues registered with SEC and, in some cases, the state securities agencies.

A prospectus, giving details about a company's operation and the stock to be issued, is printed and distributed to interested parties.

Stocks can be purchased though a broker, directly from the company, via the internet or through mutual funds

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Financial Foundation

High Risk

Medium Risk

Lower Risk

Options futures

Stocks, Bonds

Real estate, Mutual funds

Financial Foundation

Income, Insurance, Financial Goals/Budget,

Controlled Spending and Manageable Debt

CDs, MM, Bank, CU, EE

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Financial Information

Prospectus - a legal document describing an investment offered for sale contains:

The goal of the company or mutual fund

Financial statement showing assets and liabilities

Performance (profit and loss) over a period of years

Any fees the investor must pay

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Understanding Price Quotations

Stocks are quoted in $ and ¢.

Bonds are...sold in $1,000 units but are quoted as 100ssold by face value, discount, and premium

Mutual funds quote a Net Asset Value (NAV) NAV = Market value of all the fund’s securities - liabilities /

number of shares

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Understanding Stock Price Quotations

High (52 Week)= Highest price paid in the last 52 weeks

Low (52 Week)= Lowest price paid in the last 52 weeks

Stock = Name of the stock

Div = Yearly dividend the stock pays

Yield = Percentage return based on every $100

P-E = Price-to-earnings ratio (stock price/12 mo. Earnings per share)

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Understanding Stock Price Quotations

Volume =

# of share of that stock that changed hands

High, Low Close and Net Change =The high, low, close and net change in the price of the stock for the previous day

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Understanding Bond Price Quotations

Bond/Coupon Rate/Date of Maturity - percentage rate paid annually on the bond’s $1,000 face value and

year the bond ends

Current Yield - the annual interest divided by the closing price

Volume - number of bonds of this kind sold that day (multiplied by 10,000)

Close/Net Change - The final closing price of the bond and the change in price for the

day before.

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What To Look For In a Financial Advisor?

Credentials - CFA, ChFC, CPA, RIA, Reg. Rep.,

member IAFP, NAPFA, etc.

Services provided

Costs and fees How the Financial Advisor is paid -

Fee-only, commission or combination

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Costs of Investing

High costs are an often overlooked drag on long-term performance.

Money-saving tips• be skeptical of load funds• look for low expense ratios

Industry Average: 1.11%

• pass up 12b-1 plans

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Unit 3 - Summary

Unit 3 discusses investment choices, reasons to invest savings and investment choices; the decisions made relating to investment choices and the true value of money. Remember that the purpose of investment diversification is to reduce risk. Also, let us emphasize to young people how understanding investment choices and investing at a young age can help them achieve their life-long goals.

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Unit 4 - Objectives

Examine types of investment fraud

Analyze fraud cases for warning signs

Role-play a fraud sales pitch

Examine ethics of fraud and how to report to authorities

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Investment Fraud

Estimates are that unwary investors lose $10 billion a year --

about

$1 million every hour

to investment fraud

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Role play a fraudulent sales pitch

Call comes from a distant city.

Salesperson counters every objection.

Offers no risk, high returns and secret tips.

Demands immediate action.

Script - page 4-19

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Popular Types of Investment Scams

Pyramid schemes Precious metals fraud International investing Stock swindles and insider trading Franchise/business opportunities Ponzi schemes Affinity fraud

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Investor Protections

The Securities Act of 1933

The Securities Exchange Act of 1934

State and federal securities agencies

Self-Regulatory Organizations (SROs)

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Unit 5 - Objectives

Identify short and long term goalsDetermine net worthEstimate income & expensesDesign a personal financial plan Make asset allocation for retirement

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Myths

I don’t earn enough money to plan.

Investing is for people with lots of money.

Young people don’t need to think about saving for retirement.

Social security is a

business-funded program for old, poor people.

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Why Make a Financial Plan?

Planning is a tool to help you:

• live within your income• know your goals and priorities• meet your expenses• face emergencies• limit credit use• reduce conflict• save and invest for future• gain independence and control

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A Financial Plan

identify goals figure net worth estimate income

and expenses

save - pay yourself Asset Allocation implement the plan review and modify

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Live Within Your Income

Financial Records

Net Worth

Income/Expenses

(Worksheets in Unit 5)

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Employee Savings Plans

25% of the eligible people do not participate

They lose

• power of compounding

• tax deferral

• employer match

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Diversification

Select different categories of investments among various industries

to reduce risk.

Stocks

CashReserv

es

Bonds

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Inflation

3.1% 3.8%

5.3% 5.8%

10.7%12%

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8

6

4

2

0Long-TermCorporate

Bonds

U.S. Treasury

Bills

CommonStocks

Long-TermGovernment

Bonds

Source: Ibbotson Associates, Inc.Past performance is not indicative of future returns.

Average Annual Total Returns (1926-2001)

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Which Investment Mix* in employer-sponsored plan

Aggressive Growth Conservative Growth

‘Aggressive Growth Growth

Moderate Growth

Conservative Growth

Bonds

StocksBonds

Stocks

Bonds

StocksStocks

100% Stocks 80% Stocks 20% Bonds

60% Stocks 40% Bonds

40% Stocks 40% Bonds 20% Cash

*Asset Allocation

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Worksheet

See “Employer-Sponsored Retirement Plans” worksheet,

Unit 5, pages 5-28 and 5-29.

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Tips for Financial Success

Get started early Invest for the long term Continue to study and

learn Participate in employer-

sponsored plans Know when to seek advice

Financial

Success

Award