LESSON 9 BUILDING WEALTH OVER THE LONG TERM LEARNING, EARNING, AND INVESTING FOR A NEW GENERATION © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY 137 LESSON 9 BUILDING WEALTH OVER THE LONG TERM LESSON DESCRIPTION OBJECTIVES The students are introduced to the case of Students will be able to: Charlayne, a woman who becomes, acciden- • Explain why an early start in saving tally, a millionaire. Charlayne’s success, the and investing increases a household’s students learn, was unexpected, but not a capacity to build wealth. miracle. It can be explained by three widely understood rules for building wealth over • Compare the strategy of buying and the long term: saving early, buying and holding fi nancial assets as opposed to holding, and diversifying. The lesson uses trading assets frequently. Charlayne’s decisions to illustrate each of • Explain the benefi ts of diversifi cation. these rules. It also addresses the risks and rewards associated with different forms of • Identify different forms of saving and saving and investing. investing; discuss the costs and benefi ts of each. INTRODUCTION Making use of compound interest, holding CONTENT STANDARDS for the long term, and diversifi cation are Voluntary National Content Standards widely regarded as successful strategies for in Economics, 2nd Edition building wealth. Albert Einstein once called • Standard 2: Effective decision mak- compounding “the greatest mathematical ing requires comparing the additional discovery of all time.” Time is critical: start- costs of alternatives with the additional ing to save early allows savings to earn in- benefi ts. Many choices involve doing a terest on the interest earned previously. Al- little more or a little less of something: lowing savings to grow over many years is few choices are “all or nothing” deci- also an important strategy for success. This sions. means that to build wealth over time, you have to hold on to your long-term savings. • Standard 10: Institutions evolve and You can’t be dipping into them frequently, are created to help individuals and or they won’t compound over time in the groups accomplish their goals. Banks, same way. Finally, don’t put all your eggs labor unions, markets, corporations, in one basket. To diversify means to hold a legal systems, and not-for-profi t orga- variety of fi nancial assets rather than just nizations are examples of important one. To diversify is to take on many small institutions. A different kind of insti- risks rather than one large risk. tution, clearly defi ned and enforced property rights, is essential to a market CONCEPTS economy. Compound interest • Standard 12: Interest rates, adjusted Diversifi cation for infl ation, rise and fall to balance the amount saved with the amount bor- Forms of saving and investing rowed, which affects the allocation of Reward scarce resources between present and future uses. Risk 138 LEARNING, EARNING, AND INVESTING FOR A NEW GENERATION © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY BUILDING WEALTH OVER THE LONG TERM LESSON 9 National Standards in K-12 Personal 2. Buy and hold Finance Education, 3rd edition 3. Diversify • Financial Responsibility and De- 2. Explain that it is possible to become cision Making Standard 1: Take a millionaire by saving regularly. The responsibility for personal fi nancial lesson will show how an ordinary wage decisions. earner named Charlayne did just that. • Financial Responsibility and De- Display the fi rst line of Slide 9.2. cision Making Standard 4: Make Mask the other lines on the slide. Ex- fi nancial decisions by systematically plain that savings of $25 per week, considering alternatives and conse- matched by an employer’s contribution quences. of $25 per week, comes to $2,600 per year. Show how that sum of money can • Planning and Money Management grow to $2,704 at the end of the year. Standard 6: Develop a personal fi nan- Then reveal the next line of Slide cial plan. 9.2 and indicate that the second-year • Saving and Investing Standard 1: total would be $5,624.32. Note that Discuss how saving contributes to fi - because all her earnings stay in her nancial well-being. account, Charlayne is now receiving earnings on earnings. • Saving and Investing Standard 2: Explain how investing builds wealth 3. Move down to year 9 of Slide 9.2 and and helps meet fi nancial goals. show that Charlayne’s account at that point was worth $39,171.66. Point out • Saving and Investing Standard 3: that in this year, Charlayne continued Evaluate investment alternatives. to save. And because she had started early and kept at it, she did amazingly TIME REQUIRED well. Display Slides 9.3 through 9.5 90 minutes to show that by the time Charlayne reached retirement age, the value of MATERIALS her account had grown to more than $1 • Slides 9.1 to 9.17 million. • One copy of Activities 9.1, 9.2, and 9.3 4. Display Slide 9.6. Explain that when for each student you leave money in an account to earn • Duplicated copies of Floor Markers 1 a return for a long time, it’s not just through 5 listing alternative assets: your original money that’s working for Savings Accounts, Certifi cates of De- you. Instead, you earn interest on inter- posit, Bonds, Stocks, Real Estate est, or earnings on earnings. 5. Display Slide 9.7. Explain that Char- PROCEDURE layne’s co-worker Marcus had the same 1. Tell the students that the purpose of opportunity that Charlayne had. But this lesson is to explain how individu- Marcus didn’t get an early start. He als can build wealth over the long term. tried to make up for his later start by Display Slide 9.1; introduce, briefl y, saving diligently for 36 years. Display the three rules of saving and investing Slides 9.8 through 9.10. Note that to be emphasized in the lesson: while Marcus accumulated an impres- sive $500,000 plus, he never caught up 1. Start early with Charlayne. LEARNING, EARNING, AND INVESTING FOR A NEW GENERATION © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY 139 LESSON 9 BUILDING WEALTH OVER THE LONG TERM 6. Display Slide 9.11. Explain that in over the long term. Ask the students addition to starting early, individuals to read Activity 9.1 and complete the also can help themselves to be fi nan- Questions for Discussion. Ask: cially successful if they buy and hold A. What are the three rules of wealth for the long run. To buy and hold for building? the long run, people should do the fol- lowing: (Start early, buy and hold, and di- versify.) • Spend less than they receive. B. Explain how Charlayne, the ac- • Become connected to fi nancial in- cidental millionaire, followed all stitutions. three rules. • Manage credit responsibly. (Charlayne began saving regularly 7. Develop the idea of buying and hold- when she started her fi rst job. She ing stocks, bonds, and mutual funds left her savings alone even when for the long run. Display Slide 9.12. she encountered fi nancial diffi cul- Explain that Charlayne held on to her ties. Her savings therefore grew, investments over the years as fi nancial enhanced by compound interest. markets went up and down. Emphasize Her savings plan provided for these points: diversifi cation; she was able to own many different fi nancial assets at • It’s easy to get pessimistic when the same time.) fi nancial assets go down, but that’s a bad time to sell. 10. Distribute a copy of Activity 9.2 to each student; ask the students to read • It’s easy to get optimistic when the Activity and then follow along as fi nancial assets go up, but that’s a you explain several of its key points. bad time to buy. Display Slide 9.14 and discuss the • Historically, the stock-market advantages and disadvantages of dif- roller coaster ends up higher than ferent forms of saving and investing. it started out. Over long periods 11. Place Floor Markers 1 through 5 on the of time, people have done well by fl oor at the edges of the room. Tell the leaving their money in the stock students that each of them has $5,000 market. to invest. Ask them to show where they 8. Introduce the topic of diversifi cation. would put their money. For example, Display Slide 9.13. Explain that those who prefer stocks will walk over people have long known it is unwise to to the fl oor marker that says Stocks. concentrate risk. For investors, reduc- 12. When all the students have chosen a ing risk involves holding various assets position, ask them to explain their deci- instead of concentrating wealth on a sions. Then have them sit down again. single asset. Diversifying is taking on In their explanations, the students many small risks rather than one large usually mention both risk and return. risk. Some will insist they need more infor- 9. Distribute a copy of Activity 9.1 mation to make a decision. to each student. Explain that Activity 13. Display Slide 9.15. Explain that the 9.1 reviews the saving experiences of students may be able to make better Charlayne and Marcus and explains decisions if they learn more about the the other two rules for building wealth 140 LEARNING, EARNING, AND INVESTING FOR A NEW GENERATION © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY BUILDING WEALTH OVER THE LONG TERM LESSON 9 situation. The fi rst item on Slide 9.15 • Bonds: Buying bonds is in effect is the $5,000 decision the students just lending money to a corporation or made in procedure 11.