Financial Management

Why have a section on financial management in a course for new teachers? The answer is simple. While surveys show that money ranks high on everyone's list of worries, many instructors pay scant attention to such mundane matters and most have never taken a class in financial management. This frequently leads to poor financial decisions that can create stresses affecting your professional and personal life. Yet understanding and applying just a few basic concepts can enable you to make better decisions on loans, investments, and retirement.

Part 1: Learning how to use the magic of compounding

Let's start with the concept that Albert Einstein called one of the most amazing discoveries of all time: compound interest. Compound interest is the earnings on savings that includes previously earned interest. Through compound interest, your money can grow at a rapid rate. 

Economics teachers have a lot of examples that show students the magic of compound interest. Here's one: 

When you started a new teaching job, the college offered to pay you either

  • $11,000 per month (yeah, right!) or
  • $1 the first day and then double the amount each day for 30 days.

Which is the better deal? It would be the dollar a day by far, because after 30 doubles a dollar becomes over $500 million! The magic of compound interest is that once interest is added, it becomes part of the base so that the next time interest is applied to a larger amount. This is the reason for the phenomenal increases of compound interest.

You can learn how compound interest works by playing with the calculator below. See what happens as you change the variables. 

Enter the amount you want to save each year: $

Enter interest rate you wish to earn:
(The rates of return are historical averages for these investments.)

Enter how many years you would like to save:
Then click the "Start Saving" button:

Three variables work in the calculator to determine how much you wind up with:
  1. The annual amount you save.
  2. The interest rate you receive.
  3. The length of time you save.

In order to better understand the relationships between these values, let's examine each variable more closely.

Factors influencing the amount you save:

  • Your income. It is a principle of economics that the major factor determining saving is income. However, the base amount of your income is pretty much beyond your control since teachers are paid according to a negotiated contract. But you can increase the amount of your disposable income by following the tips in the next two items:
  • Your taxes. The easiest way for a teacher to reduce taxes and increase the total amount saved is by using tax sheltered annuitities (TSA's).  This is a government approved investment program that  lets you defer taxes on fixed amounts that are saved each month. Taxes are paid when the money is withdrawn. The main advantage of TSAs is that you accumulate interest on the pre-taxed amount which can mean a significant difference in the total amount saved over a period of time. Also, money is usually withdrawn after retirement when an individual's income tax rate is typically lower. Be aware that there are strict rules governing the withdrawal of these funds prior to retirement. Most campuses have one or more approved TSA representatives who can provide more information on these investments. Or you can check with your professional organization such as the CTA, CFT or FACCC.
  • Your spending. OK, now we've hit a critical factor and one that you have most control over. A complete budgeting lesson is beyond the scope of this course, but a simple traditional accounting practice can help you avoid going into the red: "Underestimate your income and overestimate your spending."  In Part 2 of this section, we'll provide help in making important spending questions about things like buying a car, evaluating loans, re-financing your house, etc. Bookmark that page and use it as a reference. Nothing in this course will save you more money than the resources on that page.

Factors influencing the interest rate you receive:

Interest rate is directly related to risk, as indicated by the following diagram. 

interest rate diagram

Generally, the safer the investment the lower the interest rate; higher rates of return come only at greater risk. (Of course, assuming a greater risk doesn't assure receiving a higher return, just the chance for it!) Several financial strategies enable one to reduce financial risk while maximizing their return.

More explanation about each of these investment options can be found in the resources in Part 2.

How time affects your savings:

Time is a the key element in the equation. The longer you save, the more you take advantage of the miracle of compound interest. The above calculator can show the dramatic difference that savings for longer time periods can make. However, if you're late to starting a savings program, don't despair. Many of us are in the same boat, and there are steps that you can take to make up for lost time.

Time also affects the balance of risk in your investments. The longer you have before you need to pull out your investment the greater risk you can assume in your portfolio. If you have a short time frame, then you need to look at safer investments. Once you retire, you should once again change the allocations in your investments.

Use these concepts to create an investment strategy

  1. Control your debt. Once again this is a major issue with most people. Besides improving your consumer skills with the activities on the next page, you can start with a different attitude about the cost of an item. Instead of measuring the cost of something in terms of its price tag, consider its value in terms of what else you could have done with that money. This is what  economists call "opportunity cost."
  2. Think long-term. Your investments should be aimed at a longer rather than short time frame. The shorter your time frame, the more likely it is that you will have to pull your money out when prices are down. 
  3. Diversify. The old saying, "don't put your eggs in one basket," is also a basic principle of investment. Diversification means to spread your investments across the risk pyramid. It also means that within one category, like stocks, you should have diversified investments. One of the easiest ways to diversify is to use mutual funds, which invest in a wide variety of corporations.
  4. Use "dollar-cost averaging". This is an easy way that any investor can buy stocks over a period of time for less than the average price per share. All you have to do is to invest a fixed amount of money each month in stocks, preferably mutual funds. When prices go up, that amount buys fewer shares. When prices go down your fixed amount buys more shares. The end result is that you actually pay a lower price per share than the average price per year.

Part 2: Making better financial decisions

Here are financial resources that can provide quick and easy advice on making better financial decisions.  (NOTE: most of the calculators on this page are taken from two outstanding online financial sites: The Motley Fool, Kiplinger's. I would trust their advice on any money matter.)

Buying a Car

  • First you should start with an understanding of how car dealers operate., a terrific online resource, published an very useful guide, "The Games Dealers Play", that should be required reading for anyone considering purchasing a car.
  • Edmunds also developed the 10 Steps to Buying a New Car. Pay particular attention to their concept of the "True Market Value". The TMV calculator can be used to determine how the forces of supply and demand affect the "sticker price" of a car. Very helpful.
  • Here's a set of useful calculators to help make decisions about buying a car:

Buying a Home

There is a tremendous amount of information available on the web on purchasing, financing, and refinancing a home.

Credit and Budget

Retirement and Saving

Planning is one of the keys for a successful and happy retirement. California teachers are covered by a state program, the State Teachers Retirement System (STRS). Its website contains a wealth of information about your retirement benefits and options. The STRS also holds workshops that are very helpful in understanding retirement issues. 

Some California employees are also covered by Social Security. For more information, contact your local campus Human Resources or Personnel Department. Additional information can be found at the Social Security website.

Finally, here's a set of calculators to help plan for retirement: