Who wants to be RICH?

by: Paul Paprocki MG, MPD, SM, RFS




April 1, 2014

15
   In The Loop Extended Articles

Do you know the fundamental principles of finance? Well, if you have a basic understanding of the International Judging System, then you’re in luck! Here is a simple way to apply your knowledge of the IJS to understand finance.

Let’s use a Senior Lady competing in a four minute long program. Here are the new rules:

  1. Unlimited jumps are encouraged
  2. Jump bonus points are awarded as follows:
    • a. First 30 seconds of the program - 800% bonus
      b. Second 30 seconds- 700% bonus
      c. Third 30 seconds- 600% bonus
      d. Fourth 30 seconds- 500% bonus
      e. Fifth 30 seconds- 375% bonus
      f. Sixth 30 seconds- 250% bonus
      g. Seventh 30 seconds- 125% bonus
      h. Last 30 seconds- no bonus awarded

Who made up these rules … probably the ISU? Yes, your program can have unlimited jumps with mega bonus points for performing elements early in the program. GOE points have been excluded in order to make the example as easy to understand as possible.

Let’s look at two skaters’ competition results:

Skater A:        All elements were performed in the first 30 seconds of the program.

Element         Value +Bonus                       TOTAL         
Salchow        .4 x 800%=                               3.2
Toe Loop      .4 x 800%=                               3.2
Loop              .5 x 800%=                               4.0
Flip                 .5 x 800%=                               4.0
Lutz                .6 x 800%=                               4.8
Axel                1.2 x 800%=                             9.6
Skater A’s score:                                         29.2                

Skater B:         All elements were performed in the last 30 seconds of the program.

Element
         Value +Bonus                       TOTAL         
Triple Flip     5.3 no bonus                            5.3
Triple Lutz    6.0 no bonus                            6.0
Triple Axel    8.5 no bonus                            8.5
Skater B’s score:                                         17.8


Therefore, the skater who performs single jumps early in the program annihilates the skater who performs triples late in the program. In skating, bonus points are awarded when a skater is tired. In finance, an investor is rewarded for giving up use of their money early and for many years.

Here is another example. There are two coaches who each invest $2,000 per year. The first coach, Alice Axel, invests $2,000 each year for eight years from ages 19 through 26 and never invests again. She earns a 12% return every year until retirement at age 65. Coach two, Sally Swizzle, invests $2,000 each year from age 27-65 also at a 12% interest rate. Alice invested a total of $16,000, and Sally invested a total of $76,000. At age 65, Alice would retire with $2,289,000 and Sally with $1,532,000. Yes, it is difficult to earn a 12% interest rate, but it helps to demonstrate the three powerhouse principles of finance: time, rate of return (interest rate), and using an annuity. An annuity is simply finance speak for saving (investing) money at regular intervals over time, for example, investing $50 per week or $250 per month for 20 years. In summary, if you want to get rich, start investing early (when you’re young), ensure a good rate of return, and consistently invest money for a long period of time.

Below is a list of tools you can use to manage your money to have sufficient money to consistently invest:

  1. Live below your income level
  2. Prepare a budget
  3. Set up an emergency fund (a savings account with six months’ worth of income)
  4. Avoid debt, especially credit cards
  5. Pay only low commissions on stock trades or low management fees on mutual funds
  6. Always contribute enough to receive any employer match on retirement accounts
  7. Avoid taxes. IRA, HSA, 529, ROTH IRA, SEP 401k, OR 4O3b (7).
  8. Use Apps such as: Mint.com, Shoebox.com, Morningstar.com, Bankrate.com

If you know absolutely nothing about finance, then this is your paragraph, the “Investing for Dummies” paragraph. First, call a big, low cost, mutual fund company such as:

Vanguard                 

https://investor.vanguard.com 

T. Rowe Price

https://individual.troweprice.com  

Fidelity

https://www.fidelity.com

Charles Schwab   

https://www.schwab.com

Then set up a Roth IRA account (note: most have a concierge service to help you with the rules and paperwork). Invest as much as you can, as early as you can in a Target Retirement Mutual Fund. These funds are named with a date to approximate your retirement year. For example, if you are 40 years old and plan to retire at age 65, then you have 25 years left to work. Add the current year 2014 plus 25 years and you will retire in 2040 (rounded). So you would choose the company’s fund for that target year- Vanguard’s fund is called the Target Retirement 2040 fund. Fidelity’s fund is called the Freedom 2040. These funds automatically change the mix of investments for you, to slowly reduce risk of a loss as you approach age 65.

At the annual conference in Palm Springs, a personal finance class for coaches with little or no knowledge of the subject will be offered by Paul Paprocki. For the past ten years, he has studied personal finance and investing by reading over 30 books and Money Magazine cover to cover, and has used this knowledge to establish and administrate the Rochester Figure Skating Club’s coaches 403b (7) retirement account. Paul promises to make the class informative, fun, and easy to understand! See you in Palm Springs!

Paul is a master rated coach with the Rochester FSC and holds a Bachelor’s Degree in Business Administration (a double major in accounting and finance with a minor in economics).