What I Wish I Knew about Personal Finance in College
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Transcript of What I Wish I Knew about Personal Finance in College
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What I Wish I Knew about Personal Finance in College
R.J. WeissCERTIFIED FINANCIAL PLANNER®
www.GenYwealth.com
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"The most powerful force in the universe is compound interest" - Albert Einstein
Photo via Flickr: Mansionwb
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The Magic of Compound Interest
• Invest $5,000 a year into 401K or IRA• From the ages of 22-70• Earn 9%• At 70, you’ll have $3,729,328
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Northwestern Nick vs. Fighting Illini Fred
Northwestern Nick
• Invests $5,000 a year from the ages of 22-35
• Total Investment of $65,000
• Does nothing for 35 years• Continues to earn 9%• At 70, he has $2,553,706
Fighting Illini Fred
• Invests $5,000 a year from the ages of 35-70
• Total Investment of $175,000
• Earns 9%• At 70, he has $1,175,624
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The Downside of Compound Interest
Q: What will $3,729,328 be worth in 48 years?
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The Downside of Compound Interest
A: $715,309 in 48 years
• 4% Withdrawal Rate = $28,612 a year or $2,384 a month
• NOT MUCH!!!
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"Focusing on the things that matter and the things we can control will go a long way to avoiding investor overconfidence." - Carl Richards CFP®, Founder of BehaviorGap.com
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Controllable
• How much you spend, save, and invest
• Career (how much you make)
• Education• Debt• Asset Allocation, Asset
Location, and Investment Expenses
Uncontrollable
• Stock market returns• Inflation• Real estate prices• What others say• Financial upbringing• Previous mistakes• Tax hikes
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Credit Score 101
Applying for Mortgage with Excellent Credit
• Mortgage Amount = $250,000• Mortgage Term = 30 years• Interest Rate = 5%• Monthly Payment = $1,342• Total payments over 30 years =
$483,138
Applying for Mortgage with Average Credit
• Mortgage Amount = $250,000• Mortgage Term = 30 years• Interest Rate = 6%• Monthly Payment = $1,499• Total payments over 30 years =
$539,597
• Difference of $56,459
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The 5 Credit Score Factors
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How Much Does That TV Really Cost?The Downside of Compound Interest
Q: How much does it cost to buy a TV on your credit card, if you make minimum payments?
• $1,200• Interest Rate of 18%• Minimum payment = Interest +
1% of balance OR $30Photo via Flickr from ebmorse
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How Much Does That TV Really Cost?The Downside of Compound Interest
Q: How much does it cost to buy a TV on your credit card, if you make minimum payments?
• $1,200• Interest Rate of 18%• Minimum payment = Interest +
1% of balance OR $30Photo via Flickr from ebmorse
A: $2,423
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The Three Minute Guide to Getting Out of Debt
# 1 - Build emergency fund of $1,000
# 2 - Pick one expense category each month to reduce
# 3 - Set goal to cut expenses in that category by X amount
# 4 - List all debts in order of highest to lowest interest rate
# 5 - Apply the amount saved in step # 2 to pay extra principal on debt with highest interest rate
# 6 - Maintain minimum payments on all other debt
# 7 - Once you pay off the debt with the highest interest rate, move on to the next listed debt
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The 2nd Best Investment You'll Ever Make - Paying Off High-Interest Debt
• Guaranteed rate of return - Pay off 18% credit card, return 18% after-tax return
• Stock Market only returns 8-9% on average, not guaranteed
• Break Even Point = 6%o Pay off all debts above 6%o Start investing before paying off debts with interest rate
below 6%
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The 3rd Best Investment You'll Ever Make - 401(k) Match
• $50,000 annual salary
• Your contribution = 10% of your income
• Employer matches 50% of contribution
• Annual increase in salary of 5%
• Annual rate of return of 9%
• In 40 years, you'll have $5,226,366
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The 4th Best Investment You'll Ever Make - Roth IRA
“For all long-term investors, there is only one objective — maximum total return after taxes.” – Sir John Templeton
Roth IRA
• Invest $5,000 a year from 22 to 70
• Earn 9%• Accumulate $3,729,328
Taxable Account
• Invest $5,000 a year from 22 to 70
• Earn 9%• Marginal tax rate of 15% • Accumulate $2,350,649
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The Best Investment You'll Ever Make - Investing in Yourself
Books
• Read These First:o The Richest Man in Babylono Get a Financial Lifeo I Will Teach You To Be Richo The Millionaire Next Door
• Read These Second:o The Boglehead's Guide to
Investingo Your Money or Your Lifeo Random Walk Down Wall St.
Blogs
• Gen Y Wealth
• The Simple Dollar
• The Finance Buff
• Get Rich Slowly
• I Will Teach You To Be Rich
• The Oblivious Investor
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Any Questions?
Get slides at www.genywealth.com/nu-slides