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
with the concept that Albert Einstein called one of the most
amazing discoveries of all time: compound interest.
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
When you started a new
teaching job, the college offered to pay you either
- $11,000 per month (yeah,
- $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
You can learn how compound interest works
by playing with the calculator below. See what happens as
you change the variables.
Three variables work in the
calculator to determine how much you wind up with:
- The annual amount you
- The interest rate you
- The length of time
In order to better understand
the relationships between these values, let's examine each
variable more closely.
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is withdrawn.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.
the interest rate you receive:
Interest rate is directly related to risk, as
indicated by the following 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
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
Use these concepts to create
an investment strategy
- 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."
- 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.
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.
- 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
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.)
- First you should start with
an understanding of how car dealers operate. Edmunds.com, a terrific
online resource, published an very useful guide, "The
Games Dealers Play", that should be required reading
for anyone considering purchasing a car.
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:
There is a tremendous amount of information
available on the web on purchasing, financing, and refinancing a
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
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
Finally, here's a set of calculators
to help plan for retirement: