Ten Rules of Wealth Building Ten Rules of Wealth Building All Teachers Should KnowAll Teachers Should Know

Justus MorganJustus MorganFinancial Planner, CFPFinancial Planner, CFP®®, EA, EA

Financial Service Group, Inc.Financial Service Group, Inc.

Money Smart Week Wisconsin

Lambeau Field October 10, 2007Dr. Norman CloutierDr. Norman Cloutier

Professor of EconomicsProfessor of EconomicsDirector, UW-Parkside Center for Director, UW-Parkside Center for Economic EducationEconomic Education

• Impact of Compound InterestImpact of Compound Interest• 10% return on $100 = $10 in Period One10% return on $100 = $10 in Period One• 10% return on $100 + $10 = $11 in Period Two10% return on $100 + $10 = $11 in Period Two• 10% return on $110 + $11 = $12.10 in Period 10% return on $110 + $11 = $12.10 in Period

ThreeThree

• Rule of 72Rule of 72 to double your money to double your money

Rule 1Start Saving Now

The Tale of Pat and Terry . . The Tale of Pat and Terry . . ..

• Pat and Terry are 22-year-old first Pat and Terry are 22-year-old first year teachers, each earning $30,000 year teachers, each earning $30,000 per year in the same school districtper year in the same school district

• Terry begins saving immediately, Terry begins saving immediately, placing $40 per week in a diversified placing $40 per week in a diversified stock mutual fundstock mutual fund

• Pat waits 10 years before she Pat waits 10 years before she decides to invest in the same waydecides to invest in the same way

Terry’s 1Terry’s 1stst 10 years . . . 10 years . . .

Beginning Addition to EndingYear Balance Principal Return Balance

0 $0.00 $2,080.00 $88.40 $2,168.401 $2,168.40 $2,080.00 $272.71 $4,521.112 $4,521.11 $2,080.00 $472.69 $7,073.813 $7,073.81 $2,080.00 $689.67 $9,843.484 $9,843.48 $2,080.00 $925.10 $12,848.585 $12,848.58 $2,080.00 $1,180.53 $16,109.116 $16,109.11 $2,080.00 $1,457.67 $19,646.787 $19,646.78 $2,080.00 $1,758.38 $23,485.168 $23,485.16 $2,080.00 $2,084.64 $27,649.809 $27,649.80 $2,080.00 $2,438.63 $32,168.43

Pat’s 1Pat’s 1stst 10 years . . . 10 years . . .

Beginning Addition to EndingYear Balance Principal Return Balance

0 $0 $0 $01 $0 $0 $02 $0 $0 $03 $0 $0 $04 $0 $0 $05 $0 $0 $06 $0 $0 $07 $0 $0 $08 $0 $0 $09 $0 $0 $0

10 $0.00 $2,080.00 $88.40 $2,168.40

After 45 years in the school After 45 years in the school district . . .district . . .

• Procrastinating Pat’s portfolio is Procrastinating Pat’s portfolio is worth $455,540worth $455,540

• Early-saver Terry’s portfolio is worth Early-saver Terry’s portfolio is worth $1,062,137$1,062,137

Learning, Earning and Investing

#1 Why Save? #15 Why Don’t People Save?National Standards in Economics

Marginal costs and benefitsScarcity IncentivesEconomic institutions Interest rates

•Continue contributions during Continue contributions during “good” and “bad” markets“good” and “bad” markets

•Trying to “time” the market is a Trying to “time” the market is a loser’s gameloser’s game

Rule 2 Keep a Steady Course

Buy and hold . . .Buy and hold . . .

If you buy and hold, over the long-term If you buy and hold, over the long-term the ups are greater than the downsthe ups are greater than the downs

Does anyone know when Does anyone know when the next market surge will the next market surge will be?be?

S&P 500 1996-2005

Source: Schwab Center for Investment Research

Learning, Earning and Investing

#12 Building Wealth Over the Long Term#21 Lessons From History: Stock Market

CrashesNational Standards in Economics

Marginal costs and benefitsEconomic institutions Interest rates

Rule 3Rule 3Know Your Risk ToleranceKnow Your Risk Tolerance

Historical Historical ReturnsReturns

Range of Range of ReturnsReturns

CashCash 3-4%3-4% -1% to 9%-1% to 9%

BondsBonds 5-6%5-6% -5% to 15%-5% to 15%

StocksStocks 10-12%10-12% -27% to -27% to 52%52%

Stock volatility declines Stock volatility declines with longer holding periodswith longer holding periods

Source: Schwab Center for Investment Research

Range of S&P 500 Returns 1926-2005

Learning, Earning and Investing

#4 What’s a Stock?#6 What’s a Bond?National Standards in Economics

Gains from tradeEconomic institutions Interest rates

Rule 4Rule 4Diversity Reduces AdversityDiversity Reduces Adversity

• Modern Portfolio Theory – Harry Modern Portfolio Theory – Harry Markowitz, 1990 Nobel LaureateMarkowitz, 1990 Nobel Laureate

• Don’t put all your eggs in one basketDon’t put all your eggs in one basket

• Mutual funds pool investors’ savings Mutual funds pool investors’ savings

• Dollar cost averagingDollar cost averaging

Learning, Earning and Investing

#7 What Are Mutual Funds? #12 Building Wealth Over the Long TermNational Standards in Economics

Marginal costs and benefitsEconomic institutions Interest rates

Rule 5Rule 5The Market is Smart . . .The Market is Smart . . .

• Not only is the market smarter than Not only is the market smarter than we are, it is likely smarter than Wall we are, it is likely smarter than Wall Street analysts.Street analysts.

• Time in the market is more important Time in the market is more important than timing the market!than timing the market!

We Are Not.We Are Not.

Implication of Implication of Rule 5Rule 5 . . . . . .

• Use Index FundsUse Index Funds

• Reasons to use index funds:Reasons to use index funds:– Simplify investingSimplify investing– Cost-efficientCost-efficient– Returns outperform average mutual Returns outperform average mutual

fundsfunds– Predictable managementPredictable management– Tax-efficientTax-efficient

Don’t take our word for it…Don’t take our word for it…

– ““The best way to own common stocks is The best way to own common stocks is through index funds” – Warren Buffet, through index funds” – Warren Buffet, Berkshire Hathaway Inc. 1996 Shareholder Berkshire Hathaway Inc. 1996 Shareholder Letter Letter

– "Most individual investors would be better "Most individual investors would be better off in an index mutual fund.“ - Peter Lynchoff in an index mutual fund.“ - Peter Lynch

– "Most of my investments are in equity "Most of my investments are in equity index funds." – Bill Sharpe, 1990 Nobel index funds." – Bill Sharpe, 1990 Nobel LaureateLaureate

Learning, Earning and Investing

#7 What Are Mutual Funds? National Standards in Economics

Marginal costs and benefits

Rule 6Rule 6Be Prepared for Life’s Be Prepared for Life’s

UncertaintiesUncertainties

• Emergency cash reservesEmergency cash reserves

• Have adequate insuranceHave adequate insurance– AutomobileAutomobile– Renters / HomeownersRenters / Homeowners– LifeLife

Learning, Earning and Investing

#1 Why Save? #15 Why Don’t People Save?National Standards in Economics

Marginal costs and benefitsScarcity IncentivesEconomic institutions Interest rates

Roth IRARoth IRA vs. vs. Regular IRARegular IRA• Pay with after-tax Pay with after-tax

dollarsdollars• Distributions & Distributions &

earnings are tax-earnings are tax-freefree

• Use if expect Use if expect higher taxes in higher taxes in futurefuture

• Pay with pre-tax Pay with pre-tax dollarsdollars

• Distributions & Distributions & earnings are taxableearnings are taxable

• Use if expect lower Use if expect lower taxes in futuretaxes in future

• 401(k) & 403(b) 401(k) & 403(b) have similar tax have similar tax benefitsbenefits

Use both for tax diversification

Rule 7Rule 7Minimize Investment TaxesMinimize Investment Taxes

Learning, Earning and Investing

#7 What Are Mutual Funds? #12 Building Wealth Over the Long TermNational Standards in Economics

Marginal costs and benefitsEconomic institutions Interest rates

Learning, Earning and Investing

#7 What Are Mutual Funds? #12 Building Wealth Over the Long TermNational Standards in Economics

Marginal costs and benefitsEconomic institutions Interest rates

Rule 8Rule 8Minimize Investment CostsMinimize Investment Costs

• Pay off credit cardsPay off credit cards– Where else can you get a guaranteed Where else can you get a guaranteed

17% return on your investment?17% return on your investment?

• Use low-cost investment productsUse low-cost investment products– 0.50% vs. 1.50% expenses over 20 0.50% vs. 1.50% expenses over 20

years at 8% saves $7,200 on $10,000 years at 8% saves $7,200 on $10,000 investmentinvestment

– www.morningstar.comwww.morningstar.com

Learning, Earning and Investing

#7 What Are Mutual Funds? #14 Credit: Your Best friend or Your

Worst Enemy? National Standards in Economics

Marginal costs and benefits

Impact of Earning Master’s DegreeImpact of Earning Master’s Degree

• Increased wage earningsIncreased wage earnings– 16% more with 5 years of service16% more with 5 years of service– 26% more with 14 years of service26% more with 14 years of service

• Increased pension benefitsIncreased pension benefits– $5,600 more per year with MA+24 vs. BA$5,600 more per year with MA+24 vs. BA– Increased benefit lasts for rest of your lifeIncreased benefit lasts for rest of your life

Rule 9Rule 9Invest in YourselfInvest in Yourself

Rule 9Rule 9Invest in YourselfInvest in Yourself

Yearly Earnings and Unemployment, Full-Yearly Earnings and Unemployment, Full-Time Wage and Salary Worker, Age 25 and Time Wage and Salary Worker, Age 25 and

over, 2005over, 2005 DegreeDegree Earnings Earnings UnemploymentUnemployment

Doctoral Doctoral $71,050$71,050 1.6%1.6%

Master’sMaster’s $56,450$56,450 2.1%2.1%

Bachelor’sBachelor’s $46,850$46,850 2.6%2.6%

AssociateAssociate $34,950$34,950 3.3%3.3%

Some collegeSome college $32,650$32,650 4.2%4.2%

High SchoolHigh School $29,150$29,150 4.7%4.7%

High School Drop High School Drop OutOut

$20,450$20,450 7.6%7.6%

Source: Bureau of Labor Statistics, Source: Bureau of Labor Statistics, http://www.bls.gov/emp/emptab7.htmhttp://www.bls.gov/emp/emptab7.htm

Learning, Earning and Investing

#3 Invest in Yourself National Standards in Economics

ScarcityRole of moneyGrowth

Rule 10Rule 10Avoid Stupid Investor TrapsAvoid Stupid Investor Traps

• OverconfidenceOverconfidence

• HerdingHerding

• Illusion of ControlIllusion of Control

• Loss AversionLoss Aversion

• Ignoring CostsIgnoring Costs

• Getting Entranced by New IssuesGetting Entranced by New Issues

Questions?Questions?

justus@toyourwealth.comjustus@toyourwealth.com

(262) 554-4500 x1(262) 554-4500 x1

cloutier@uwp.edu

(262) 595-2572(262) 595-2572