Personal Finance/Advise

This Personal Finance/Advise is very basic, because it is intended for High school students.

What is the difference between USA and other countries? USA gives you OPPORTUNITIES FOR FREE.

Why is there poverty? Multiple reasons. The way out of it: EDUCATION

In Latin America, Asia, Africa, Russia, certain countries in Europe not so much, the opportunities to get out of poverty are not there. If you were born poor, most likely you stay poor all your life.

Why there is so much inequality? Think Serfdom vs Land owners. No opportunities to get ahead for thousands of years.

This has changed a lot in the last 100 to 150 years and the country that has brought the most people out of poverty is…the USA, because of CAPITALISM. The Soviet Union, Cuba, N. Korea have tried and failed, now Venezuela is trying with socialism/communism with horrible results. Vietnam, China, Russia have changed and now have a mixed type of economy that has helped.

CAPITALISM means YOU must do it yourself and you can succeed wildly, think Microsoft and Bill Gates, Google, Apple and Steve Jobs, Facebook etc. In the 19^th and early 20^th century Rockefeller, Carnegie, Mellon etc. but at the same time you can fail badly, think of Nicola TESLA who was a genius but died poor after developing electricity as we know it. He was a very bad businessman.

But CAPITALISM gives you the opportunity to start again.

USA: free schooling, breakfast, lunch, books, library, computers, unbelievable sports campuses.

Are there good and bad schools? Some are more prestigious than others but the problem is there are good and bad students. If you are a good student, you will get a good education that will allow you to get ahead no matter which school district you go to.

Look at Orosi High School, what have they achieved being one of the poorest school districts.  (See Fresno Bee, April 14 2019 article), they won the speech and debate competition,  Madera High won the International Robotics competition, Coalinga Middle school has been State Chess Champions 12 years.

Good students apply themselves. They are the NERDS. Behave well, stay out of trouble, participate in school activities and become successful in life.

Bad students have high rate of absenteeism, do drugs, drink alcohol heavily, join gangs, if they do not change, most likely they will have poor paying jobs, will possibly end up in jail, with drug addiction and possible homeless.

So, take the correct path. As you have the opportunity to SUCCEED, you also have the CHOICE TO FAIL.

A FEW TIPS:

After you have a job, you need to know what to do with your money.

So, a few tips that will help. First, make sure you TAKE A SEMESTER PERSONAL FINANCE or ECONOMIC 101 while you are in college. They will teach you a lot about the economy.

Meanwhile a couple of things to know and remember.

SAVING MONEY:

If you have $1,000 to put in a savings account and the bank gives you 7% interest per year, how soon do you double your money? It will take 10 years.

If the bank gives you 10% interest a year it will take… 7 years.

Those were the good old days when interest rates were high. Now the banks give you about 1 to 2 % at the most.

One way to get a lot more, is to get compound interest on your money.

(See Robert and Sally’s savings history, taken from Porter Stansberry book “The American Jubilee” 2017 edition. The savings have to be made in a non taxable account such an IRA or 401K)

TAXES:

Delay paying taxes by opening a retirement account. IRA (Individual Retirement Account). You paytaxes on the annual required minimum distribution starting at age 70.5 years old.

A variation of the IRA is a ROTH IRA. In this situation you pay taxes first and then open the ROTH (after taxes) and all the earnings within it do not pay taxes. Also, there are no minimum required distributions.

If you are an employee, contribute to the 401(K)-retirement account that your employer should have. Make sure you contribute at least enough to get the employer matched funds if available, as this is free money for you (100% return). You pay taxes when you are 70.5 years old and you have mandatory distributions of that money. Again, this can be converted into a ROTH 401 K account  and this is similar to the ROTH IRA but you can put more money in it and  has the same advantage of the ROTH IRA except that you will have mandatory distribution at age 70 and half.

If you have children, open a 529 account that will allow you to save money for your children’s college. You pay taxes when using the money.

INVESTING: The stock market gives you better returns than a savings account but also has greater risk. Usually it gives you a return of about 7 to 10% a year on average, but it must be a LONG TERM INVESTMENT, so the sooner you start, the better.       See Robert and Sally’s table.

INFLATION: This gives you less purchasing power, it is 2% to 4% per year so you need to make at least that amount with your savings to stay even and more to stay ahead.

Let me give you an example of what inflation is. When I came to this country in 1972, we bought an entry home in Denver, CO, for $12,000 and my first used car, for $250!!! A Cadillac was the most luxurious car then and it cost $2,900 new. Think how much a home and a car cost today.

If there is 5% inflation a year, in 40 years you will have lost about 90% of purchasing power of 1 dollar. This means that your 1 dollar will be worth 10 cents in 40 years.

BORROWING MONEY:

CREDIT SCORE: Your credit score based on your credit history is very important. A good credit score will allow you to borrow money with lower interest rates which will save you money that can ultimately be invested.

CREDIT CARD:

If you have a credit card and you have 18% to 22% interest/year or more and if you DO NOT pay your purchases in total every month, you will be paying the bank a lot of money for a very long time!!! For example, if you have $1,000 balance, add no more purchases and make only the minimum payment every month, it will take about 3 to 5 years or more to pay off the balance,  depending on how much you pay every month.

When you have a credit card, you borrow money every time you use it. If you pay in full at the end of the month, you are BORROWING MONEY FOR FREE because you do not pay the interest. Do not spend money you don’t have.

MORTGAGE: If you are buying a home and you borrow $200,000 and the interest is at 4.5% per year for 30 years, you will be paying about $165,000 of interest on the loan. (This is not a bad thing, because you will end up owning the home).

How can you decrease the total amount of interest you pay? Buy the home with cash. Of course, that is usually not possible because we do not have that much money in cash, so we borrow it (the mortgage). However, a larger down payment in cash will also lower the total amount you pay by reducing the interest cost.

Refinance the mortgage (The MORTGAGE is the amount of money you have borrowed to buy your house). If you can lower the interest rate to 3.5% you will save a ton of interest at the end of 30 years.

Pay the loan in 15 or 20 years if you can afford it.

Make the monthly payment twice a month and make sure the second one goes to pay the PRINCIPAL and NOT THE INTEREST, if you have enough extra money.

and finally…Pay one half of your monthly payment twice a month, let’s say on the 1^st and the 15^th. If your monthly payment is $500, you can pay $250 every 2 weeks and that will save 1 to 2 years of your mortgage. You need to make sure that the bank you have the loan with, allows that. That is because for the first few years, almost all the money you pay goes to pay the interest. If the bank doesn’t allow this, refinance with a bank that will allow it.

CAR:

What is better, to buy or lease a car? If you lease, you do not own the car, so usually after 3 years you have to either buy the car or give it back to the company that leased to you.

If you own the car, you can keep it for as long as you want, so in the long range it is cheaper to buy the car from the very beginning.

SMOKING:

It is expensive and doesn’t do any good for your health. Don’t start because it is very addictive, and it is difficult to kick the habit.

MARIJUANA:

Although this now it is being legalized, my experience with it is that you do not need it. I have seen too many patients and some of my own employees using it with bad results.

Expensive, creates dependency, makes people lazy and takes away your ambition and drive to succeed.

Recently in Colorado there have been a number of patients with acute psychotic and schizophrenia episodes due to eating Marijuana sweets. This is because the absorption is slower than when it is smoked and people tend to have too much and overdose.

Additionally, Marijuana is considered a gateway drug to many other harder and more addictive drugs.

NARCOTICS:

Create habituation, dependency and eventually addiction, which means that after a while you need higher doses to get the same result. Are expensive. If you buy on the streets it may be laced with Fentanyl, a very powerful drug that causes overdoses and if not treated, DEATH.

DRUGS

Cocaine, Heroin, Methamphetamines (meth) etc. causes addiction, expensive habit. No one needs these. Be careful with the “friends” that offer to try them for “free”.  After a few tries you get hooked and there is no more free samples and you can’t quit cold turkey, so you need to buy them. Becomes more expensive with time, leads to crime to get the money to buy them, jail, and homelessness.

HURDLES TO SUCCEED:

For girls, unwanted pregnancy.

Having a baby is a full-time job and unless there is someone in the family that can help, it makes difficult to continue and finish your studies, even if the school has a nursery. Usually at this stage in your life, there is no help from the baby’s father.

For boys and girls:

Alcoholism, drug use, joining gangs, not finishing high school for whatever reason and not continuing your education. A high school degree is not enough these days to get a good paying job. A college/university degree may not be for everyone but at a minimum a technical degree should be obtained.

HOW TO CONTINUE AFTER HIGH SCHOOL:

The cheapest way is to get a scholarship that will pay for college. There are all kinds of scholarships, you need to research them and see which ones apply to your situation. If you play a sport and are good at it you may be given a scholarship.

There are 4 different college systems.

City colleges (Fresno City College, Reedley City College, etc.)

State Colleges (Fresno State, San Diego State, San Francisco State etc.)

University of California colleges (UC MERCED, UCLA, UC Irvine, UC San Diego, UC Berkley etc.)

And then you have the private colleges and Universities (USC, Stanford, Fresno Pacific, etc.)

City Colleges are cheaper than State and UC colleges (UCLA, UC Berkley, Irvine, Santa Cruz etc.)

UC Merced is closer to home, newer and more focused on helping Central Valley students, and seems to be cheaper that the other ones. Private Universities are the most expensive of them all (USC, Stanford).

Out of state colleges are more expensive than in state ones.

If you go to City College for 2 years and do well, you will be accepted to the UC college system with no problems and it will be easier to get a scholarship.

If you want to be a NURSE, you can apply to a program in a hospital such as CRMC. Under some circumstances, they will train you for free, if you commit to work for them after graduation for several years. What’s not to like about that? You get trained and get a job at the same time!!!

Finally, if you think EDUCATION IS EXPENSIVE, what about IGNORANCE?

If you make an average of $100,000 a year for 40 years = $4,000,000 minus Education $250,000= $3,750,000.  (Your starting salary may be $50,000 but 40 years later probably will be $150,000). See above paragraph about inflation.

If you make $30,000 a year for 40 years = $1,200,000 minus Education $00.00 = $1,200,000

Of course, you have the expenses of daily living, so the savings are going to be less, unless the money is well invested, so make sure you take a personal finance class while in college.

As someone said: Don’t say “I can’t afford it”. Instead think and ask yourself “How can I afford it or what can I do, so I can afford it”. (Robert Kiyosaki  in “Rich Dad Poor Dad” book)

Sergio D. Ilic, M.D. Orthopedic Surgeon

Fresno, 2/11/19

Disclosure:

I am a medical doctor, not a financial advisor. What I wrote above is based in my own experience, after making many mistakes, reading many books and articles and what I think is right.

The numbers may not be 100% accurate. You need to educate yourself in these matters before investing and look for professional advice.

If you are interested in knowing more about how the stock market works, how to open an account etc. you can contact me and I will refer you to a Financial Advisor.