Hey Learner

Glad you made it

We want to provide you with the money tools so you can better survive in the financial jungle out there ...

Here's a quick glossary that will take you there

Student Loans

What’s interest? (review)

Let’s say you lend money to your good friend Kael. Let’s say you lend him $1000, and tell him to pay it back in 12 months. Now what if you want to make a little extra money off of Kael, and tell him that you want 10% extra since you’re generous enough to lend the money. That 10% part is the interest. It lets the lender make some extra money to spend on things like video games. 

A student loan is when you borrow money for learning stuff in school. The key thing to know is that when you borrow money, you pay it back with a little interest. 

Misunderstanding...

To go to college, you usually need to get loans with interest. That’s common knowledge. Buttt…. There’s a misconception. The following statement is a common misconception. “I got into Boston college, and it looks like I’ll be getting $20,000 in loans with 5% interest. So that means… 20,000x0.05… so that equals $1000 in total interest. Not too bad.” 

Wrong! That’s not how it works with loans. The lenders want to make more money than that.

So this is what they do...

When they say 5%, that means it’s going to be 5% every year until you’re done paying it all off. So let’s do the math with the example above. $20,000x0.05 is $1000. So yes, for that first year that’s the total you’ll be paying back. But hey, you aren’t going to be able to pay off $20,000 in one year right? It’s going to take more like 10 years. So you pay the bank interest on the 1st year, 2nd year, 3rd year, and so on….

This is the link... enjoy!   

Example1:

Following up with the $20,000 example above… The cold hard truth with getting a $20,000 loan with 5% interest over 10 years is that 5% isn’t really a friendly number, and it only tells you a story for one year. The reality is this… If you get a $20,000 loan with 5% interest over 10 years, the total you pay the lender in interest when you’re done is $5455.72, which is 27.28%. Yup, loans suck… and that’s how much money you give to the lender “for the great honor of letting you borrow money to get an education”. But hey, We're not here to complain about our system, we're just trying to prepare you. 

Now how it really works…

We don’t want to take up space to explain in super detail how an amortization schedule (special money word for loans) works, so we’ll provide a super useful link, as well as some examples as a guide. 

Example2:

We know people that have $100,000 in student loans, so let’s go ahead and do damage assessment. $100,000 with 5% over 20 years is………….. $58,389.38 which is 58.39%. Isn’t it crazy? You end up paying the bank more than half of what you originally borrowed. Remember, you can do your own calculations with the link we provided. 

Reality:

So we know that college is expensive, especially with loans. So let’s do some real life assessments. There’s a bunch of data and research out there that says, “hey kids, on average you end up making more money if you go to college”. Which is great, but we also need to be cautious of how many loans you take out, and how much debt you will be in. Remember, in the real world you have monthly expenses like apartment costs ($600), food ($200), fun ($1million), insurance ($100), and a bunch of other things like the phone bill and electric ($150). If you need to pay off a lot of loans it can be pretty crappy so be cautious, that’s all. 

So what can I do to reduce the damage from debt...

There are many things you can do like applying for scholarships, becoming an RA at your school, work a lot…. But in terms of reducing the damage in interest payments, go to the “car loan” or "house loan" chapter and take a look at the “pay it off super quickly” example.

Assessment:

You need to be able to make smart money decisions so you don’t hurt yourself in the future. For example, you might not want to major in Art or general Psychology and rack up $100,000+ in loans because unless you go for a masters or doctorate degree, it’s going to take forever to pay it back (The banks will like you though). We're not saying it’s wrong to major in art or psychology (we did), it’s crucial that you follow your passion… But just try to be aware of your future financial situation because it might do some unexpected damage.

So a lot of this is about making a decision that’s appropriate to you. If you’re going to major in petroleum engineering, computer science, or aerospace engineering, then yeah, $100,000 isn’t a big deal because you’ll probably be making $100,000 a year in the future. Think about how much it’s going to cost to live, how much you will make, and contemplate what’s realistic for you.

If I could go back in time...(reflection of a staff member)

"I went to a 4 year undergrad (psychology major), and it was a phenomenal experience. Made friends, worked hard, played hard, etc. But then again, I racked up $20,000 in student loans and $50,000 to my parents. So in total I have to pay back $70,000 for my education. Now what if…. What if I went to a local community college for the first two years and completed all the basic courses that are required for undergrad? My education would have been cut by about $24,000. Would I rather owe $46,000 compared to $70,000? I think so… But then again I made amazing friends that stayed with me from freshmen year to senior year... All in all, you make the decision and figure out what seems right for you." 

Colleges can be tricky

So you get into your dream school and it looks like you will be paying $3,000 a year out of pocket and with loans. Good for you. But on your second year the university decides to increase tuition by 5%. The second year will now cost your parents overtime, and harder work. On your 3rd year the university razes tuition by 7%, now your parents might have to take a “parent plus loans” in order to pay for you. 4th year is another 5% increase… you get the idea. Keep a close eye on what your university is doing, or has done in the past. 

Frank will be watching

When you realize how much debt you have...

 
 
 

Credit Score

Ahhh, the credit score. This score can be your best friend helping you save thousands and thousands, or it can be your worst enemy costing you thousands upon thousands. 

Let's pretend...

Let’s pretend that you’re in a room with 3 "beings" that need to borrow money. Spike, Yabi, and Woody. You’re a rich person so lending out money isn’t a problem, but you want to make sure you get it back. You’ve heard that Spike likes to borrow money, but doesn't pay it back in time and sometimes doesn’t pay at all. Yabi is alright. Yabi usually pays on time, but once in a while slips up because of memory problems. Woody is a frickin star when it comes to paying back money. Woody never misses a payment, and always pays in full. What would you do about this nifty situation as a lender? 

We'll tell you what the banks do...

The banks would charge Spike a high interest rate, so when Spike misses a payment, the bank is like “eh whatever, we’re getting him with high rates anyway”.

The banks would charge Yabi a medium interest rate because “Yabi's alright, she usually pays on time”

The banks would charge Woody a super low interest rate because “I like Woody, he’s pretty cool and always pays us back”. 

Spike

Yabi

Woody

What's interest?

Let’s say you lend money to your good friend Kael. Let’s say you lend him $1000, and tell him to pay it back in 12 months. Now what if you want to make a little extra money off of Kael, and tell him that you want 10% extra since you’re generous enough to lend the money. That 10% part is the interest. It lets the lender make some extra money to spend on things like video games. 

Do you see this blown out of proportion logic? The banks charge you higher interest rates when you are a higher risk. (This doesn’t apply to student loans from the government.).

Then comes along this Fico guy...

This Fico guy that comes along sees an opportunity to create a system. He says something like “Hey bank, I’m going to make your life a lot easier by collecting data and assigning scores to everybody on this planet. I’m going to give people like Woody an 850 credit score which is like the highest, people like Spike the worst score like 300, and people like Yabi a 650 which is fair. This way, you can easily figure out what kinds of interest rates you wanna give out.”

That’s our story of a credit score. 

The impact...

So how big of an impact can a credit score make? A lot. As you will see under the “car loan” chapter, when you’re buying a car and have an awesome credit score, the savings can be $700+ which is decent. The mind blowing fact is that when you’re buying a house the savings can be up to $80,000+.  Not convincing enough? If you have a super low credit score, banks might not even lend you money because they see you as super high risk. 

Fico Headquarters

So how do I get a super credit score?

There's a bunch behind it, but we'll list the basics here.

  1. The history of your credit. For example, how long have you had a credit card? Woody has had a credit card for 20 years so he’s pretty awesome according to the banks. Spike's had a credit card for like 2 months. 

  2. You don’t spend above 30% of your total credit. Woody can borrow up to $10,000 but he only uses up to $3,000 because he likes to prove that he doesn’t go on a spending frenzy. Spike can borrow up to 10,000, and tries to spend $8000.

  3. How many credit cards and loans do you have? Woody has 2 credit cards, while Spike has 8 credit cards, 2 student loans, 1 auto loan, and 1 payday loan.

  4. How frequently do you apply for stuff? Woody doesn’t really apply for many credit cards or multiple loans. Spike is taking grabs at every new credit card offer that comes along.

  5. You always pay it off on time, and in full. Woody always pays off his credit cards every month on the first available payment date. He’s a frickin star. Spike misses payments a lot.

  6. How bad have you been messed up in the past? Woody has never filed for bankruptcy, and he has never foreclosed on a home or failed on a car loan. Spike started like 2 weird businesses and failed both of them. He also failed to make car payments, and home payments too. 

Note: Keep in mind that the bank doesn’t really look at who Spike, Yabi, or Woody really are. Spike could be a goofy dude that makes weird decisions… but then again Spike could be a single mother of 2 children with two jobs, not being able to make basic payments. Most banks don’t really give a sh*t, so just be weary of this. Try to shoot for Woody, because Woody is able to take advantage of the system. 

What's the catch?

The catch is that credit cards can destroy your finances if you screw up. This screw up can also result in a big profit for the credit card company. Let’s do an example….So let’s say Spike puts $10,000 on the credit card, and isn’t able to make the full payment at the end of the month. Spike decides to pay the minimum payment, which is $25. This let’s Spike worry about this big bill next month. However, next month Spike will have to pay the high interest rate the credit card company charges which is 30% per year. That means it’s 2.5% per month. What’s 2.5% of 10,000? It’s $250. So Spike ends up having to pay $250 just in interest. What if Spike get’s laid off? What if Spike gets in a car accident within the next 2 years? How will he make a payment of $559.13? Don’t be like Spike, that’s a scary path to go down. Oh and another thing... if Spike isn’t able to make the next payment it will destroy his credit score. 

Woody and Spike Comparison...

Woody

Gets 1 credit card for starters that gives him “miles”or "cash back"(this really doesn't matter), and follows the rules of credit scores so his score keeps going up. After his credit score is high, he researches other offers (they will send you plenty). He might sign up with one company, take advantage of their promotion, then close up the credit card after he takes advantage of the offer. 1 point for Woody, 0.5 points for the credit card company. 

Spike

Gets 1 credit card for starters because he wants to spend money he doesn’t have. Spike spends too much money and ends up not being able to make the payments on it. He decides to get more credit cards in order to pay off the debt, which results in more debt. Spike ends up paying 30% interest on all the payments he couldn’t pay in full. His credit score got destroyed, and he wasn’t able to make payments for his apartment. Don’t be like Spike.  

Tell me how to use a credit card

Okay… Credit cards have a weird system but we'll do the best explaining.

So let’s say you get a card from Bank of Potatoes or something. They give you $1000 in total credit (total loan), and 30% interest if you don’t pay the full amount.  You go to a few stores to get groceries (swipe), go get video games (swipe), and buy some toilet paper (swipe). So you just put about $150 on your credit card. This means that you have $850 total credit left ($1000 - $150). Let’s say you don’t spend any money for the rest of the month… then you’ll get a bill at the end of the month saying you owe $150. They usually give you a few weeks to pay this back. ALWAYS pay it back in full. Don’t let them profit off of you. 

Super simplification

Think of a credit card as a glass with "water" filled to the top. Keep in mind this is borrowed water. You pour some water out throughout the month, and at the end of the month you replenish the glass to keep the bankers happy. Butttt! Keep in mind that the Fico guy watches how you use that water. If you use up more than 30% of it, he might dock points. If you completely empty out the glass (max out card), then the Fico guy will really take away points from you. So be careful that’s all. 

Frank the debt collector

Mmmm. Water

Swipe!

Swipe!

Swipe!

 Bill

Payment Due!

Warning!

You know how we said "credit history" is important? Well it turns out that if you cancel a credit card it clears your credit history for that card (such a stupid system). So basically what we're saying is "don't cancel that first credit card because that's going to be your longest credit history. That's all.

Credit Card

 

Why credit cards?

We used to be anti credit card because we've heard horror stories of people that got stuck in a cycle of debt. We used to ask questions like: “Why would you borrow money if you don’t really need to?”, “There’s studies that say people are more likely to spend money on a card than cash… so why do people use credit cards?” So why credit cards? 

Why Credit Cards Part 1: 

So in the previous chapter we talked about how important credit scores are. Credit cards let you build your credit score, so that’s one of the reasons on why they’re important. Remember the criteria that was listed in the chapter? You need history, and you need to show off your financial skills to increase your credit score. Credit cards are a good way of doing that. 

Why Credit Cards Part 2: 

Credit cards give you points, and we all like points. For example, some credit card companies do things like “1% cash back”. That means that if you spend $1000, you get $10 back. It’s like you get rewarded for spending money (what a system). "I (RLMS staff) have a credit card that gives me air miles”. This means that I can use the points to cover flights and other traveling costs. As I write this, I’ve saved about $500 worth of points since I opened my credit card." This is why people get hooked. It can be handy when you build points. 

Why Credit Cards Part 3: 

Credit card companies compete with each other, so they do special bonus offers to get you to join. Recently one of our staff was offered a 50,000 bonus mile ($500) offer, if they signed up with a certain brand. The catch is that you have to spend $3,000 within the first 3 months of opening the card. Sometimes you can use your points for things like Target gift cards too. See how it’s a system that gets you to spend money? 

Why Credit Cards Part 4:

Credit cards have added benefits like “rental car insurance” so you don’t have to buy insurance every time you rent a car. If you have a credit card with airlines, they might give you benefits like “priority boarding”, “1st checked bag free” and “special lounge access” all that fancy stuff. 

Car Loan

Congrats, you’re about to buy a new car! It can be costly, and there’s a lot of factors you should consider (keep in mind we will only talk about the financial part, taxes and fees aren’t included in the info below). 

You find out your payment will be $349.45 a month. You also find out that by the time you’re done paying for that car, you give them (lender) an extra $2160.73 which is 8.59% of the original amount. Ouch. 

I don’t want them to profit in interest… 

Okay, so you don’t want them to make that extra $2100 or so, then what could you do? You could save $23,000 in your savings account, walk into the store, and drive away with a car. Tadaaaaa.  Oh right, most of us don’t have $23,000 saved up because we pay for things like rent, education, and food. Below are some other options.

I might get a… 

Toyota Cabbage.  They’re reliable, and if you want to sell it I’ll get decent money back for it. Let’s say it costs $23,000 brand new and because you have a good credit score you get an annual percentage rate of 3%. You decide that you want to pay it off in 6 years (72months). By going to this site you figure out what the details look like: 

Other option No.1 =  Have a super credit score: 

Let’s say you’re a financial ninja, and you have a killer credit score of 810. Then the lenders totally trust you so they reward you with a lower interest rate. Let’s do the example above with a 2% interest rate…. Your monthly payments will be $339.26. Your total interest you give the lender will be $1426.73 which is 6.2% of the original amount. Let’s do a comparison of you with a super credit score versus not a super credit score. It would be $2160.73 - $1426.73 which is $734. Boom! So you can save a decent chunk just by having an awesome credit score. Check below for an easy visual.

Other option No.2  =  Super down payment:  

Okay, so you’ve been wanting this car for a while now so you’ve saved up $8000 to use as a down payment (a down payment is when you put a chunk of money down to reduce the huge burden).  So now you only have to get a $15,000 loan instead of the $23,000 because you can put $8000 down. Let’s do a comparison with the original example. Your monthly payment will be $227.91. Your total interest you give to the lender will be $1409.73 which is 6.12% of the original amount. Let’s do the comparison of you with a super down payment versus not a super down payment. It would be $2160.73 - $1409.73 which is $751. Boom! Again, save chunk of money by putting down a big down payment. 

Interest without super credit score: $2160.73

Interest with super credit score: $1426.73

Savings: $734

Interest without large down payment: $2160.73

Interest with large down payment: $1409.73

Savings: $751

Other option No.3  =  Pay it off super quickly:  

This is a game changer so pay close attention. If you still remember the first example, you’ll know that you took 6 years to pay off the $23,000. Now what if you decide to pay it off in 2 years. If you do this, your monthly payment will be $988.57 which is a lot, but the total interest you give to the lender will be $725.63. Let’s do the comparison of you with a super quick payoff versus not a super quick payoff. It would be $2160.73 - $725.63 which is $1435.1. Boom! Do you see that? You sacrifice a higher monthly payment but you give way less money to the lender. 

Interest on 6 year : $2160.73

Interest on 2 year: $725.63

Savings: $1435.1

The way of the ninja:  

This is what a financial ninja would do. Super credit score, super down payment, and super quick payoff. Let’s do the comparison with the original example of $23,000 with 3% and 6 years. The ninja would do a $8000 down payment so it would look something like $15,000 with 2% in 2 years. The ninjas monthly payment would be $638.10. Your total interest you pay to the lender will be $314.49 which is 1.39% of the original amount. So yeah the comparison would be $2160.73 - $314.49 which is $1846.24. Pow! A financial ninja can save $1846.24, no big deal.

Not the way of the ninja: $2160.73

Way of the ninja: $314.49

Savings: $1846.24

Here's a savings comparison table 

Super Credit Score

Way of the Ninja

Super Down Payment

Super-Fast Payoff

Savings: $1846.24

Savings: $1435.1

Savings: $751

Savings: $734

You don’t have to get a new car ya knoww…  

Don’t forget the possibility of buying a used car. Yeah having a brand new car with warrantees and services is nice, but you can save thousands by getting a used car as well. Just know what you need (reliability, 4wd, etc) and start doing your research on what’s a good fit. Also, it would be wise to stay away from $1000 ~ $3000 cars because you don’t know how long it will be with you. If you are scraping by, need to drive to work, you can’t afford to do a transmission repair or a motor repair. We understand that many people are in a tough position to buy a car, but know that it can hurt you sometimes as well. 

Note:

1. Car dealerships usually ask for a down payment.

2. Be cautious at car dealerships because the sales people get commission on selling cars, this can put you in sticky situations like paying more for a car, or getting sucked into some plan that you can get cheaper elsewhere. 

House Loan

So it’s time to buy a house… Congratulations! You’re about to make the biggest financial investment ever (for the common person). Buying a house is kinda similar to buying a car. The main difference is that the stakes are…. much…..much….. bigger. 

(keep in mind we will only talk about the financial part, taxes and fees aren’t included in the info below)

I might get a… 

$300,000 house. You’re thinking that it’s in a good location, good school for the kids, and plenty of property. Let’s say you plan to pay it off in 30 years, and you get a 5% interest rate. So again, $300,000 house, 5%, 30years. Use this site to play around with numbers and pictures: 

You find out your payment will be $1610.46 a month. You also find out that by the time you’re done paying for that house, you give them (bank) an extra $279,767.35 which is 93.26% of the original amount.  Let’s go over that one more time. If you buy a $300,000 house, and pay it off in 30 years with a 5% rate. By the time you’re done paying for it, you give the bank an extra $279,767.35. Like…What the *$* !@#!?.................Welcome to house buying. 

I don’t want them to profit in interest… 

Okay, so you don’t want them to make that extra $279,767.35 or so, then what could you do? You could save $300,000 in your savings account…. Mmmmm nope, not a chance, most of us don’t have $300,000 saved up because… oh that’s right we aren’t born with a million dollars.  

Other option No.1 =  Have a super credit score: 

Let’s say you’re a financial ninja, and you have a killer credit score of 810. Then the lenders totally trust you so they reward you with a lower interest rate. Let’s do the example above with a 4% interest rate…. Your monthly payments will be $1432.25. Your total interest you give the lender will be $215,608.52 which is 71.2% of the original amount. Let’s do a comparison of you with a super credit score versus not a super credit score. It would be $279,767.35 - $215,608.52 which is $64,158.83. Boom! So you can save a crazy chunk just by having an awesome credit score. Let’s say that again, having a good credit score can save you $64,158.83 when buying a house. Check below for an easy visual.

Interest on average credit score: $279,767.35

Interest on super credit score: $215,608.52

Savings: $64,158.83

Interest without large down payment: $279,767.35

Interest with large down payment: $186,511.57

Savings: $93,255.78

Other option No.2  =  Super down payment:  

Okay, so you’ve been wanting this house for a while now so you’ve saved up $100,000 to use as a down payment. So now you only have to get a $200,000 loan instead of the $300,000 because you can put $100,000 down. (Keep in mind that they normally ask for a 20% down payment). Now…. Let’s do a comparison with the original example (30 year, 5% interest). Your monthly payment will be $1073.64. Your total interest you give to the lender will be $186,511.57 which is 62.2% of the original amount. Let’s do the comparison of you with a super down payment versus not a super down payment. It would be $279,767.35 - $186,511.57 which is $93,255.78. Boom! Again, you can save chunk of money by putting down a big down payment. We repeat, you can save close to $100,000.

Other option No.3  =  Pay it off super quickly:  

This is a game changer so pay close attention. If you still remember the first example, you’ll know that you took 30 years to pay off the $300,000 loan with 5% interest. Now what if you decide to pay it off in 15 years? If you do this, your monthly payment will be $2,372.38 which is a lot, but the total interest you give to the lender will be $127,028.56. Let’s do the comparison of you with a super quick payoff versus not a super quick payoff. It would be $279,767.35 - $127,028.56 which is $152,738.79. Boom! Do you see that!? You sacrifice a higher monthly payment but you didn’t have to give the bank $152,738.79 of extra money.  

Savings: $152,738.79

Interest on 15 year: $127,028.56

Interest on 30 year: $279,767.35

The way of the ninja:  

This is what a financial ninja would do. Super credit score, super down payment, and super quick payoff. Let’s do the comparison with the original example of $300,000 with 5% and 30 years. The ninja would do a $100,000 down payment so it would look something like $200,000 with 4% in 15 years. The ninjas monthly payment would be $1479.38. Your total interest you pay to the lender will be $66,287.38 which is 22.1% of the original amount. So yeah the comparison would be $279,767.35  - $66,287.38 which is $213,479.97.  Do you see how crazy this is? The difference in being a financial ninja and not being a financial ninja is $200,000+ when buying a house.

Not the way of the ninja: $279,767.35  

Way of the ninja: $66,287.38

Savings: $213,479.97

Savings: $64,158.00

Super Credit Score

Savings: $93,255.00

Savings: $152,738.00

Way of the Ninja

Savings: $213,479.00

Savings comparison table!

Super Down Payment

Super-Fast Payoff

Super Simplification...

This chapter might have been information overload… so I’ll simplify it here. When you’re going to buy a house, if you have a big down payment, high credit score, and shorter time to pay it off…. You’re going to save a lot of money. That’s it. 

Note:

Buying a house is super complex, and a lot of it wasn't mentioned in this chapter because it only focused on the big financial picture. You should do your own research and master the details before buying a house, that's all.

Watch out...

Watch out for the variable loans because they can do some serious unexpected damage. A variable loan means that the interest rate can change over time. So you might initially think “hell yeah just got a 2% loan” but this rate can change, and 5 years later it might be up to 7%. Imagine paying 7% a year on a $50,000 loan … no thanks. 

Stocks

Okay, think of stocks as something really easy… because it is. A stock is just a line that either goes up, or down. If it goes up, you make money. If it goes down, you lose money. That’s it (in super simple terms). 

Practice

Let’s start with a company that you know like Facebook. If you google “facebook stock” it might look something like this…

Try to go on there and take a look for yourself (make sure you click on 5 years). What’s the line doing? Overall, it’s going up. Now if we zoom in to take a look from January 18th 2013 to May 27th 2016 (click and drag that time period if you have a computer) the line (stock) goes up 300%.   What does that mean? It means that if you bought a stock in 2013 and sold in 2016, you would have gained 300% on it. 

How much money to be exact?

Let’s say you have a time machine in the garage and you get to go back in time to buy stocks (investor fantasy)… So on January 18th 2013 the price of the stock (point on the line) is $29.66, in May 27th 2016 it’s  $119.38. That means the line went up from $29.66 to $119.38. So if you bought one stock in 2013 and sold in 2016 you made 119.38 - 29.66=$89.72 (minus like 12 bucks for trading fees). Not bad right? Now what if you owned 333 stocks of Facebook in 2013? That would be around $10,000 worth of stock. As it goes up 300%, your account would have $30,000 in it. 

Think of it like this...

You’re a surfer, and a stock is a wave that you want ride. Whatever percent change that happens while you’re on the wave, is what you’ll gain or lose. That’s it.

Gain

Loss

Give 1 minute to ...

Play around looking up companies on Google. For example “Apple stock”. Click and drag to see percent change. Doing this will help you understand what is happening with companies you are familiar with. For example, Chipotle has a stock titled CMG. If you click and drag under “5 years” you will see it go up, up, and up, then it smashes down. Why do you think this happened? The answer is…E.coli ! People started getting sick from eating chipotle so that’s why the stock dropped. A stock usually tells a story when it dramatically goes up or down. Do some research and look up companies that you know of.  

There's super simple math involved...

In calculating how much money you gained or lost, and it’s pretty easy. Let’s do a few examples below.

 

  • $1000 worth of Chipotle stock, and it drops 50% because of e coli. You lose $500.  

  • $1000 worth of Facebook stock, and it goes up 100%. You gain $1000.

  • $1000 worth of Apple stock, and it goes up 5%. You gain $50.

Very easy right? You just multiply the $ amount to the percentage ($1000x0.05=$50).

Mind blowing fact

This is partially how rich people stay rich. They invest $1million into something, and when it goes up 10%, they make $100,000 just by sitting on their butt. The saying “you need money to make money” is pretty true when it comes to investing.  

How you could save $1million

Okay, This…. This is the holy grail of being a financial master. We might even say that this could be the most important topic in this book. Why? Because this can be a way of saving a million dollars. 

So you know how we talked about...

The stock market, and how if the line goes up you make money and if the line goes down you lose money. This is kind of related to that. 

So that line you see above is called the S&P 500. It’s a basket of stocks combined together (Apple, AT&T, eBay, and 497 more companies). The important thing to know is that on average, the S&P 500 does about 7% per year. 

Where am I going with this? 

So let’s say you open a retirement account in 1990 and started with $1,000 to invest. After one year, it goes up 10%. Now you have $1,100 right? Let’s say the year after that it goes up another 10%, then it becomes $1,210 ($1100x10% = $110… So add $110 to $1,100). You might think okay big deal… Well it’s not.

Going forward in the time machine

Let’s time travel to 25 years in the future. You now have $100,000 because you got back 10% on average every year. You also contributed more when you made more money. So let’s do the play by play again. It goes up 10% but now it’s $10,000 that you gained (100,000*0.1). So you stand at $110,000. Good for you, you made $10,000 just by sitting on your butt. Fast forward to the next year and it goes up another 10%. Then it would be ($110,000*0.1) a total of 11,000. So let’s add it to the $110,000 and now you have $121,000. If it went up the next year by 10% the total would become $133,100. So you were able to add $33,100 to your account within 3 years just by sitting on your butt. Now you might be seeing the power of retirement accounts (compound interest). 

Start:   $1,000

Year 1: $1,100

Year 2: $1,210

Increase in 2 years = $210

Start:    $100,000

Year 1: $110,000

Year 2: $121,000

Year 3: $133,100

Increase in 3 years = $33,100

Time machine round 2

Now you’re 35 years into the future and you have $500,000 in the account. It goes up 10% the next year. After you complete your happy dance you would have $50,000 extra in the account. So now you have $550,000. So it goes up 10% again the year after, and now you have $605,000. The next year?...$665,500. Do you see the craziness? The speed the money grows gets faster and faster as you have more money in the account.

Start:   $500,000

Year 1: $550,000

Year 2: $605,000

Year 3: $665,000

Increase in 3 years = $165,000

That's it...

Now that you know the very basics, you can play around with real or fake money. 

  • To play with fake money: Google “Wallstreet Survivor” and play around with fake money to buy stocks (there are others out there too).

  • To play with real money: There are many companies out there that will let you invest. For example, E-Trade, Capital one investing, robinhood (free) and Merril Edge are just some of them. Open up an account and go from there. 

Note:

When playing with real money, always keep in mind that you can lose all that money if a company tanks. Also, stay away from “stock options” or “shorting” because that’s high-level stuff. Investing in the stock market is like legal gambling, don’t do crazy things like borrow money to invest or use up all your savings.

Time machine round 3

So you’re 65 years old now and you have $900,000. Let’s say it goes up 10%. You do your dance with aches and pains but you see $990,000 in your bank account now… So close. Next year it goes up another 10% and boom, you just hit $1,089,000. Congratulations, you just proved yourself to be a financial ninja master. 

Start:   $900,000

Year 1: $990,000

Year 2: $1,089,000

Increase in 2 years = $189,000

Start

Retire

35yrs

25yrs

1 yr gain=

$100

$10,000

$50,000

$90,000

Time  =

Money   =

$1,000's

$100,000's

$500,000's

$1million

Here's a visual on the 10% example

Note:

What we mentioned above is a simplification so keep that in mind. When you have money in the market, it might do 20% one year, but do 3% the next year. It might even drop 10% one year. We used 10% as an example because it makes it easier to understand. We hope you use this as a segue to do more research on your own

So how do I open one?

Great question. In order to open a retirement account, you usually need your ID, social security, proof of income, and some money to put in (this depends on what company you go with) You also need to go to a place that lets you open retirement accounts (there’s plenty out there so pick what you think is right). I provided some examples below.

  • I have Bank of America = Merril Edge

  • I have TD bank = TD Ameritrade

  • I want it separate from my bank = Vanguard, E-trade, Wealthfront, Scottrade, and many more. 

There's types of retirement accounts?

Yup, sorry to break it to you but there are options to pick from.

  • OptionA=Roth IRA (tax deferred)

  • OptionB= IRA (normal retirement account)

  • OptionC=401K (through your job)

  • OptionD=403b (usually a government job)

And blah blah blah the list goes on. 

Roth IRA

Yup, so this one is the tax deferred one. What does that mean? It basically means that you can keep growing the money without getting taxed by the government. It’s the government’s way of saying “hey poor people and middle class people, we’re going to help you save for retirement by not taxing you as much”.  This is the one I (writer) have. Keep in mind that you can only contribute about $5500 a year max. Super rich people can’t really contribute to Roth IRA’s because… Well they’re rich and don’t need the tax incentives. So keep in mind that if you make above $184,000 you won’t be able to have a Roth IRA.

IRA

This one is also a retirement account but there aren’t as many tax benefits as the Roth IRA. 

401K

This is an interesting one. This is a retirement account through your employer that has a cool perk. The employer usually “matches” a certain amount of what you contribute. So if they say “we match up to 5%!”  Then you might be like “hell yeah” because if you make $50,000 a year and contribute 5% ($2500) of your salary to the 401k plan, the company will give you an extra $2500 (5%) to add into the plan. Pretty awesome right? Oh, and you can contribute $18,000 a year to your retirement usually.  

403B

This one is super similar to the 401k. It’s mainly used for people with government jobs like teachers. 

So what types of investments do I put it in?

This is kind of a rabbit hole but I’ll list off the basic things.

There’s basically 3 levels. Aggressive, Moderate, and Conservative.

Aggressive = Stocks. High risk, high potential.

Moderate = Mix of stocks and bonds. (Bonds are like super safe investments with small returns)

Conservative = Bonds mostly.

What people tend to say is “when you’re young, go aggressive” “When you’re old, go conservative”

What do you do Kael? (staff investor)

I’m young (ish) so I pick investments more on the aggressive side. For example, I own a thing called an ETF that copies what the S&P 500 does. The ticker (you can search on google) is called “SPY”, go ahead and look it up to do your own research. 

Do your own research!

It’s important that you do your own search and figure out what situation applies to you, and what will benefit you the most. Retirement accounts are simple on the surface but it can turn into a rabbit hole if you try to get it all. 

We want to warn you of the dangers...

High fees

Let’s say you buy into a mutual fund (mutual fund = they do the research and pick stocks and bonds for you). Sometimes they charge like a 2% annual fee.  That means there will be less growth for you because they are taking that fee. You can always call the investment firm you are a part of and say “hey, I want to make sure I have low fees, can you help me find something?” 

Give me a step by step for opening one dude

Let’s do it.

Step 1: You need to pick an investment firm to go with. They are all pretty similar, and you can always transfer it in the future so this shouldn’t be stressful. If you have a bank account with somebody, you might want to check if they have any partnerships. For example, Bank of America is affiliated to Merril Edge. Here, use this link for looking at different options:

High fees

Step 2: You click on “open account” on their website and follow the step by step. It might take a few minutes and you will need your employer information, social security number, etc.

Step 3: That’s it really… Now you just have to wait a few days for everything to process, and you should be all set up.

Step 4: A company employee usually calls within a few days of opening an account and asks if you have any questions. This might be a good time to say something like “Hi, I’m __ years old and I’m interested in investing aggressively, what options do I have?” They will be able to show you some options.

Note:

If you are starting with $50 or so, it might be better to stay away from trades until you have like $500+ in that account. Why might this be? It’s because they charge like $6 per trade. So instead of clicking “buy” every month with $50 and paying a $6 fee, it would be better to save up some money and click “buy” when you have a larger sum you are satisfied with. 

Your retirement account can suddenly crash… 

Yup, I hate to say this but go ahead and search “S&P 500” on Google and click “max”. Do you see how it drops like 40% in 2008?. A lot of people lost close to half of their savings at this point because they were aggressive in the market. Watch The Great Short if you want to get a hint on what happened. You might think “oh man I don’t want to lose that much money” which is understandable, but look at what happens after 2008… It goes back up right? This is why so many people talk about “long term investments” and say that what really matters is the “average growth”. 

Don’t touch it… 

If you try to take money out of your retirement account the government will slap you in the face with a super tax. They basically say “no no no, that account is for retirement only. If you touch that sucker we’re going to take out a chunk”. So please, please don’t touch your retirement account until retirement age. Not only do they tax you, it’s going to evaporate your future savings.

 
 
 
 

That's it!

Well... The surface anyway. Click on the button below to see how Ninja you are

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