BMATWT 353 - Business of Building
Course Syllabus
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1. Debt and Trouble
2. Tips for Managing Credit Card Debt
3. Housing and Mortgages
4. Why Save?
5. What do Millionaires look like?
6. Schwab's 10 Principles of Investing
7. Financial Investing - Risk and Return
8. Compounding
1. Debt and Trouble
The Motley Fool has a nice article on Consumer Debt, "Scorched by Consumer Debt" by Bill Mann, Oct. 9, 2003.
US Household consumer debt
Total = $1,956,000,000,000.00
Almost 2 Trillion Dollars!
Average per household = $18,600
Of which 62% is "non-revolving" debt - auto loans for example = $11,500
and 38% is "revolving" credit card debt = $7,100 (a 29% INCREASE from 1998)
Remember from Macroeconomics that our Gross National (or Domestic) Product (Y) is made up of
Consumption (C) + Investment (I) + Government Expenditures (G) + Net Exports (X = Exports - Imports)
Y = C + I + G + X
Consumption makes up 70% of our GDP and we make heavy use of Consumer Debt to pay for this.
Mann notes that "what is missing here is discipline." and goes further "...a populace that is propping up its standard of living using money it doesn't yet have in the form of easy credit is one that is at greater and greater risk."
2. Tips for Managing Credit Card Debt
From a 10/23/1995 article in the Springfield Union News (p. C1-2) by Marla A. Goldberg
"The average person who visits the Springfield branch of the Consumer Credit Counseling Ceter of Massachusetts, Inc., owes aobut $20,000 on their credit cards..."
- Destroy credit cards if debt level is out of control
- Contact credit card issuers early to develop payment plan
- Look for low rate card and transfer balances
- Pay credit card bills when they arrive to reduce interest fees
- Pay more than the minimum payment each month
- Increase payments on your highest interest rate card
- Use checks or cash for major purchases whenever possible
- Carry enough cash to cover daily food and transporation expenses
- Don't shop as a recreational activity
I'll add one more. Swap your Credit Card for a Debit Card. This REQUIRES you to have the funds IN ADVANCE of purchase.
3. Housing and Mortgages
Tradeoffs in the Rent vs. Buy choice:
Lifestyle - Kids, time spent on "homeowner" stuff (lawns, washing windows, painting, fixing, maintaining)
How close to work - tradeoff on commute (time & auto costs)
Interest lost from Savings on down payment for a house (opportunity cost of investing in housing)
Loss of tax advantages if you choose to rent vs buy (deduction of mortgage interest)
Note: Home value appreciation has been great over the long term, but our average "tenure" is shrinking. What are the "transactions" cost in buying and selling a home?
4. Why Save?
What is the difference between "Income" and "Wealth"?
Becoming wealthy is a discipline, a belief.
Why Save? - Buy a house, College costs (your kids), Retirement
Retirement - The Social Security Administration (2001) says for people with retirement income of $38K and over sources are:
Source Percentage Other 2% Social Security 18%
Pensions and workplace savings 20% Other Savings, investments and post retirement employment 59%
5. What do Millionaires look like?
Source: The Millionaire Next Door by Thomas J. Stanley and William D. Danko
There are lots of millionaire households, an estimated 5 million households in the US by 2005, about 1 in every 20 households.
2005 CNN Survey shows 8.9 Million US Households (7.7% of all Households) are Millionaire.
There is a difference between WEALTH and INCOME.
How good are you at accumulating wealth relative to your age and income?
Prodigious Accumulators of Wealth - PAW Top Quartile of Wealth Accumulation
Under Accumulators of Wealth - UAW Bottom Quartile of Wealth Accumulation
PAW's -When it comes to the allocation of time, place the management of their own assets before other activities - UAWs do not.
7 Characteristics of Millionaires
1) They live well below their means - frugality is a virtue
2) Allocate time, energy and money efficiently - in ways conducive to building wealth
3) Believe that financial independence is more important than displaying high social status.
4) Their parents did not provide economic outpatient care.
5) Their adult children are economically self-sufficient.
6) They target the right market opportunities - their customers have money
7) They most likely own their own business.
6. Schwab's 10 Principles of Investing
1.) Start with the basics for long-term investing.
- emergency fund - 2 - 6 Months
- Employer retirement
- IRA that will be available in the event of emergency
2.) Get started now.
Every five years you wait, you may need to double your monthly investing3.) Know yourself.
What is your personal tolerance for risk?
4.) Invest for growth.
Stocks, either individually or in mutual funds, for long-term growth.
5.) Take a long-term view.
The only people "guaranteed" to make money on "day trading" are brokers.6.) Build a diversified portfolio.
- Stocks
- Bonds
- cash-equivalents
7.) Consider bonds and cash for diversification and income.
8.) Minimize your expenses.
- Buy and hold .
- Infrequent trading = lower costs.
9.) Stay on track.
10.) Become a lifelong investor.
More investing advice:
http://www.better-investing.org/
7. Financial Investing - Risk and Return
What is your tolerance for risk?
Do you have to see your balance go up each quarter? or can you live with +/- 20% returns?
For long periods of time (20 years)
Stocks - 12%
Bonds - 7%
Cash/Treasurys - 3%
Inflation - 3%
Higher rates of return are accompanied by higher volatility (risk).
8. Compounding
Pay your Wealth accumulation account first! Then save for purchases (cars, house down payment etc.)
You need to leave it alone! Save and "sock it away" and DO NOT TOUCH!
Start Age 21 - Save $2,000 every year - earn 9% interest
Produced and maintained by David
T. Damery
Building Materials and Wood Technology
Department of Natural Resources Conservation
College of Natural Resources and the Environment
University of Massachusetts, Amherst.