The Student's Guide To Financial Literacy

The Student’s Guide to Financial Literacy This page intentionally left blank The Student’s Guide to Financial Literacy Robert E. Lawless Copyright 2010 by Robert E. Lawless All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, except for the inclusion of brief quotations in a review, without prior permission in writing from the publisher. Library of Congress Cataloging-in-Publication Data Lawless, Robert E., 1966– The student’s guide to fi nancial literacy / Robert E. Lawless. p. cm. Includes bibliographical references and index. ISBN 978-0-313-37718-1 (hard copy : alk. paper) — ISBN 978-0-313-37719-8 (ebook) 1. Finance, Personal. 2. Teenagers—Finance, Personal. 3. College students—Finance, Personal. I. Title HG179.L3378 2010 332.02400835—dc22 2009050449 ISBN: 978-0-313-37718-1 EISBN: 978-0-313-37719-8 14 13 12 11 10 1 2 3 4 5 This book is also available on the World Wide Web as an eBook. Visit www.abc-clio.com for details. Greenwood An Imprint of ABC-CLIO, LLC ABC-CLIO, LLC 130 Cremona Drive, P.O. Box 1911 Santa Barbara, California 93116-1911 This book is printed on acid-free paper Manufactured in the United States of America This book is dedicated to my children, Kaymin and Robert, the two treasures within my life that serve as sources of truth recognition, joy, and inspiration. They unknowingly teach me more about myself and the value of true existence than they will ever know, for which I will remain forever grateful. Each person’s path in life is not destined, nor predetermined. The triumphs, defeats, woes, and delights of being are all important steps needing to be openly experienced. I wish them well on their individual quests toward living fruitful and fulfi lling lives. I hope that they achieve everything in life that they desire while serving others and making every aspect they intentionally or unintentionally touch better for those that follow. This page intentionally left blank Contents Introduction 1. The Value of an Education xi 1 Targeting the Right Career 1 Educational Costs Versus Benefits 2 Paying for College 4 Enhancing Your Marketability 6 2. The Importance of Savings 13 The Wonders of Compounding 13 Inflation 16 Budgeting 17 Automatic Savings Plans 17 Buying Your First Home 19 The Goal of Retirement 24 3. Investments 25 Benchmarks and Indexes 25 Bank Products 28 Fixed Income 29 vii viii Contents Equities 37 Mutual Funds 47 Exchange Traded Funds 53 Real Estate 54 Alternative Investments 62 Avoiding Investment Scams 72 4. Principals of Investing 77 Risk Versus Return 77 Diversification 80 Active and Passive Investing 87 Personal Investment Objectives 91 Portfolio Allocation Examples 94 Portfolio Rebalancing 96 5. Debt 99 Good Debt Versus Bad Debt 100 Other People’s Money 102 The Importance of Your Credit Score 103 Preventing Identity Theft 105 Credit Cards 106 Key Financing Terms 111 Consumer Product Loans 117 Financing Your First Home 119