Matthew in the middle | Financial Literacy – Times-Standard
This week I had the honor of joining my Tri Counties Bank Branch Manager at Fortuna High School Zero Period (8:10am) to educate seniors on financial literacy. I find it sad that we teach our children sex education, but then drop them into the real world with almost no financial knowledge when they graduate from high school. Most high school students don’t know the difference between a checking account and a savings account, let alone what a certificate of deposit is. They don’t know the difference between a debit card and a credit card. They don’t know the difference between leasing and buying a car. They don’t know what a FICO score is, let alone how it affects your mortgage and car loan rates. Forget retirement accounts, because at 17 or 18 it’s the last thing you think about.
This should be a permanent subject reviewed annually with the adults. The number one cause of divorce isn’t infidelity, it’s financial stress, because the average American lives paycheck to paycheck. Let’s go over some basics… you should have a rough idea of your monthly budget. What is your “juice” – the net dollar amount you bring in each month? How much of your paycheck do you keep after deductions for 401k, taxes, insurance, etc. ? Now what is your “nut” – the dollar amount you have to pay each month for your mortgage/rent, car (car loan/lease, gas, insurance, repairs), utilities, debt service (credit cards ), food, restaurants/bars, clothing, education and if you have children you know these additional costs. Bottom line: your juice better be bigger than your nut. We told high school students, “Don’t spend more money than you make. Additionally, you should have at least three months of your paycheck in an emergency savings account.
The power of 72. There is an investment rule that your money will double in value if you divide 72 by your annualized rate of return. So, in other words, if you get a 12% rate of return, your money will double every six years (72/12 = 6). If you get a 6% rate of return, it will take 12 years for your money to double (72/6 = 12). You can turn this simple rule into rocket fuel by adding to your investments each month (average dollar cost) and letting that compound over decades. If you started investing in your company’s 401k retirement account at age 21 by contributing 6% of your salary (pre-tax) and your company matched 3% (typical in most 401k plans), you’ve just earn 50% on your investment. (6% + 3% = 9%). You would invest 9% of your salary and let it grow over 40 years. Over the past 50 years (1972-2021), the average annualized return on the S&P 500 is 11.17%, so your money would double every 6.4 years. You should be able to retire at age 62 with a minimum retirement portfolio of $1 million. The sad truth is that the average American in his 60s has a 401k portfolio of only $182,100. They didn’t start saving very early. They were unemployed or self-employed and stopped contributing to their retirement account. Or worse, they didn’t contribute 6% to their 401k because they thought they couldn’t afford it.
FICO stands for “Fair Isaac Corporation”. It was the original credit algorithm for calculating a borrower’s credit score. Now, each of the three credit repositories (Equifax, Experian, and TransUnion) has its own proprietary FICO algorithms. So each week you can have three different FICO scores. FICO is a major factor in the interest rates for your mortgages and auto loans. The lowest auto loan rate you can get is 0% when a manufacturer makes a special offer to move certain cars. However, if you have bad credit and go to one of the used car parks, expect to pay 24.99%. Yes, you read that right.
Credit cards are the heroine of the middle class. It’s easy to get into credit card debt and get away with it in hell. There is currently over $1 trillion in outstanding credit card debt. Credit card companies hate me. I pay no interest because I pay my balances in full each month. I also use their rewards perks to travel for free. If you did that, you would own the credit card company, not your own.
Matthew Owen resides in Eureka and believes the First Amendment allows for free speech.