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Investigate Before You Invest: Financial program teaches power of compound interest, investing

By Robert Goetz | Wingspread staff writer | March 7, 2008

RANDOLPH AIR FORCE BASE, Texas — Participants in a financial program here Feb. 27 received 90 minutes' worth of advice ranging from how compound interest can work for and against you and how to resist the allure of investment scams. 

"Investigate Before You Invest," presented by a former Texas State Securities Board deputy commissioner at the Airman and Family Readiness Center, was one of the special events during Military Saves Week, a Department of Defense campaign that promotes personal financial readiness among Airmen. 

Don Raschke, who served as the TSSB deputy securities commissioner for more than three years until he retired last year, focused on financial planning, especially saving and investing, during the first hour of the presentation. A video, "What Con Artists Don't Want You to Know," and a brief discussion rounded out the program. 

Using the TSSB's Texas Family Guide to Personal Money Manage-ment, Mr. Raschke urged participants to first take inventory of their situation and organize their records, including personal information, bank and savings accounts, credit card information, insurance policies, retirement records and a cash-flow statement. 

"The first thing you want to do is sit down and make a list of your goals," he said. "Then find a centralized place to keep your records." 

Mr. Raschke called the cash-flow statement a budget. He said money left after adding up income and subtracting expenses should be applied to savings. 

"I suggest that you treat savings like your car payment or any other payment," he said. "Put your name on it. This is the old 'pay yourself first' rule." 

Mr. Raschke said the only way to get rich quick is to win in Las Vegas; he recommended that people adopt a systematic plan to "get rich slowly" by saving and wisely investing their money so they can take advantage of the "power of compound interest."
"For younger people, this is really important," he said. 

Mr. Raschke said the "Rule of 72" - 72 divided by the rate of return - determines how long it takes to double an investment. 

"The sooner you start saving, the better off you are," he said. But compound interest can be a double-edged sword. 

"With credit cards, the same concept can work against you," Mr. Raschke said. "What you have to do is use it wisely and not keep a balance. Some rates can go up to 26 percent."
He said a person who has a $2,000 balance at 19.8 percent interest and makes the 2 percent minimum payment will take 32 years to pay it off. 

"The lesson here is you want to manage your expenses," Mr. Raschke said. "This is very expensive debt." 

He urged seminar participants to pay off their high-interest credit card debt, then "leave it at zero." 

Mr. Raschke also discussed investment options ranging from low-risk treasury bills to stocks and mutual funds. 

He said investing in stocks requires "a lot of experience, knowledge and time." Diversification is also important, but it may call for more capital. 

"If you have less than $25,000, it's tough to diversify," Mr. Raschke said. 

Mutual funds, which are professionally managed and offer a broad array of stocks, require less money, but, like stocks, are a long-term investment, he said. 

Mr. Raschke advised participants to look at the fund's prospectus "and see if it is good for you." He also urged them to take care in hiring a financial planner and said the most important thing to ask is how the planner will be paid. Planners who work by commission are paid better if the product is higher-risk, so some may recommend those products. 

The video on fraud presented information on pyramid schemes and other investment scams. Warning signs that consumers should watch out for are the promise of sky-high returns, claims of inside information or new technology, the need for little or no risk and pressure tactics. 

"Once you're the victim of fraud, your money's gone forever," Mr. Raschke said. "If it sounds too good to be true, it is."


The Power of Compound Interest

"The Rule of 72"
72 divided by the rate of return determines how long it takes to double an investment. An 18-year-old who invests $5,000 will have double that amount at age 24 based on a 12 percent rate of return, and the money will continue to double every six years (72 divided by 12). The result is a millionaire at age 66.

How time affects money
A person who invests $2,000 a year for 10 years starting at age 25 will have more than $500,000 at age 65, assuming a 9 percent fixed rate of return. A person who waits until age 35 would have to invest $2,000 a year for 31 years to make $352,427, assuming the same return.

How it works against you
A person who has a credit-card balance of $2,000 at 19.8 percent interest and makes the 2 percent minimum payment will take 32 years to pay it off.

Don Raschke, former deputy commissioner,
Texas State Securities Board
From the presentation "Investigate Before You Invest"