Transcript Financial Self Reliance: It's Not As Hard As You Think

Personal and Family Financial
Management
15 Suggestions
OPAC Conference
November 2009
Ned C. Hill
National Advisory Council Professor and
Academic Director, H. Taylor Peery Institute of Financial Services
Marriott School of Management
Brigham Young University
President Gordon B. Hinckley
Priesthood Meeting, October 3rd, 1998
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Story of Pharaoh’s dream of the seven fat cattle and the
seven lean cattle
“…I want to make it very clear
that I am not prophesying, that
I am not predicting years of famine
in the future. But I am suggesting
that the time has come to get our
houses in order. There is a portent
of stormy weather ahead to which
we had better give heed.”
“So many of our people are living
on the very edge of their incomes.
In fact, some are living on borrowings.”
President Gordon B. Hinckley (cont.)
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“I urge you, brethren, to look to the condition of
your finances.”
“I urge you to be modest in your expenditures;
discipline yourselves in your purchases to avoid
debt to the extent possible.”
“Pay off debt as quickly as you can, and free
yourselves from bondage.”
“That’s all I have to say about it, but I wish to say
it with all the emphasis of which I am capable.”
President Gordon B. Hinckley
General Conference, October 7th, 2001
“The economy is particularly vulnerable. We have
been counseled again and again concerning selfreliance, concerning debt, concerning thrift. So
many of our people are heavily in debt for things
that are not entirely necessary.”
 “I urge you as members of this Church to get free
of debt where possible and to have a little laid
aside against a rainy day.”
President Gordon B. Hinckley
“I am satisfied that money is the root of
more trouble in marriage than all
other causes combined.”
“There would be fewer rash decisions,
fewer unwise investments, fewer
consequent losses, fewer bankruptcies
if husbands and wives would counsel
together on such matters and unitedly
seek counsel from each other.”
Cornerstones of a Happy Home [pamphlet, 1984]
New Dollar Bill Released by the
Treasury Last Week
Elder Joseph B. Wirthlin
April Conference, 2004
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“Remember this: debt is a form of bondage. It is a
financial termite. When we make purchases on
credit, they give us only an illusion of prosperity.
We think we own things, but the reality is, our
things own us.”
“Some debt—such as for a modest home,
expenses for education, perhaps for a needed first
car—may be necessary. But never should we enter
into financial bondage through consumer debt
without carefully weighing the costs.”
Net Worth—Helps You Think About Debt
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Net worth = Assets - Liabilities
Assets
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Liabilities
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Market value (not purchase price)
Real and financial
Credit card and other consumer debt
Mortgages
Why do this?
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Net worth helps you do stuff in the future
Track over time--should be growing
Identifies assets that could be used to reduce debt
Net Worth—A Picture
Liabilities
Assets
Net Worth
Impact of Credit Card Purchase
Flat Screen TV
Credit Card Debt
Liabilities
Assets
Net Worth
Impact of Credit Card Purchase
Flat Screen TV
Credit Card Debt
Liabilities
Assets
Net Worth
How do you balance this?
What Adds to Net Worth?
Flat Screen TV
Assets
Credit Card Debt
Liabilities
Net Worth
Net Worth Must Shrink!
Suggestion 1 Avoid Unproductive Debt
It Makes Net Worth Shrink
Productive debt
Unproductive debt
Home
Consumer goods
Education
Vacations
Minimum
transportation
Business
Car
Be careful—any debt here
can become unproductive
Most credit card debt
Some Facts about Debt & Credit Cards
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Average household has 13 credit cards
65% of card holders do not pay off total balance each month
People tend to spend 12% more when they use their credit cards
(compared to cash).
Over 40% of US families spend more than they earn (Federal
Reserve)
Origin of Most Debt Problems?
Spending Problems
Debt
Income
Expenditures
Suggestion 2 Control Your Spending
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Step 1: Write down your cash flows
 2-3
months back
 Find all expenditures—including cash purchases
 Determine total assets and liabilities
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Step 2: Agree on goals
 What
do we want to accomplish?
 Agree on a budget for future cash flows
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Step 3: Track cash flows--compare budget to actual
 Use
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computer or any other method (envelopes)
Step 4: Review monthly—talk it over!
Step 5: Make adjustments
B U D G E T for _____________, 2 0 0 9
INCOME
Wages/Salaries (after taxes)
Other income
Educational Loans
Total income
EXPENDITURES
Church donations
Savings
Food
Tuition, books, etc.
Mortgage or rent
Utilities
Transportation
Debt payments
Insurance
Medical
Clothing
Other
Total expenditures
PLANNED
ACTUAL
PLANNED
ACTUAL
Why You Should Have a Spending Plan
Communicate with spouse and family
 Find out what you are spending
 Extract more money for saving and
investing
 Get out of debt
 Prepare for the future
 Keep money from slipping through your
fingers

500+%
If You Must Borrow,
Suggestion 3
Be Careful Where!
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Finance companies
Credit cards
Banks
Credit unions
“Pay Day Lenders”
30
25
20
15
10
5
0
FC CC
B
CU PD
S
Suggestion 4 Reduce Unproductive Debt
 Plastic
surgery
 Reduce spending
 Use assets to pay off
debt
 Make a plan -- stick
to it
 Talk to a credit
counselor if needed
Suggestion 5
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Protect Your Family
Insurance
 Life
 Health
 Car
 Disability
 Home
owners/renters
Emergency cash
 Food storage
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Term Life -- Pure Death Benefit
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No savings component
About 1/10th to 1/5th the cost of permanent
Expires at age 65 (usually)
Many employers offer term insurance as part
of its benefits package
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Base amount
Can purchase additional if desired
Two types
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Decreasing Term (premiums stay same)
Constant Term (premiums increase over time)
Permanent Life -- Death Benefit Plus
Savings Component
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Part of premiums go to building “cash value”
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Can borrow against it
The other part goes to death benefit
Premiums stay constant over time
Does not expire
Most policies give fixed rate of return on the
cash value
More expensive per $ of insurance coverage
Often used for estate tax purposes
Variants: universal life, variable life
Insurance--Makes Up for Low Net
Worth Problems
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If you have low or negative net worth?
 Heirs
may have difficulties
 Severe cash flow problems
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Insurance creates an instant estate--it becomes an
asset if you die
Assets
Liabilities
Net Worth
Cash from
Insurance
Added Net
Worth
What Kind and How Much?
Start with term insurance (6-10 times
annual income)
 Group is least costly but what if you leave?
 Have some for non-employed spouse
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Corollary
Your net worth should build up over time
 As it does, you may need less and less life
insurance
 However, life insurance can be used as a
tool to pass part of the estate on to heirs
(this is where permanent insurance comes
in).
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Suggestion 6
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Yes, Even When You Are Young!
Some Retirement Myths
“I’ll live on Social Security benefits”
 SS
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Prepare for Retirement
will replace only 24% of your income
“Someone else will take care of me”
“Better be safe and invest conservatively”
Biggest regrets for retirees
 Didn’t
take full advantage of tax deferred
investments
 Didn’t start earlier to save for retirement
Why Start Saving Early?
Remember: Social Security provides only
about 24% of a typical family’s preretirement income.
 Can you live on just 24%?
 You’ll need other sources of income
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Retirement plan from employer
Personal retirement savings
Equity in a home
Example
Bill starts saving for retirement at age 20
Joe starts saving for retirement at age 40
($2,000 per year at 8%)
1000000
900000
800000
700000
600000
500000
400000
300000
200000
100000
0
$903,800
20 Start
40 Start
$172,702
20
25
30
35
40
45
50
55
60
65
Bill has accumulated over 5 times what Joe did by 65!
How Does This Work?
Compound interest
 Bill started earlier--compound interest has
more time to work its miracle
 If someone had put $1 in an account back in
1776 at 8% interest how much would the
account have in it today?
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$61,339,000 !!
Suggestion 7
Save Wisely
Every time you get paid:
• Pay the Lord first (10%)
• Then pay your future self (10%)
• Live on the rest (80%)
Saving Builds Net Worth Over Your Lifetime
Life Cycle Savings
(000’s)
700
Suggestion 7A
600
500
Retirement
Save 20%
400
300
Save 10%
200
100
Borrowing
To Heirs
0
-100 20
25
30
40
50
60
65
70
80 Age
What Should I Invest In?
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Principle: risk-return trade-off
 High
risk--high return
 Low risk--low return
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What?
 Stocks
-- ownership in a company (risky)
 Bonds -- loan to a company/government (less
risky)
 Deposit accounts -- (insured, no risk)
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How?
 Mutual
funds
 Tax-deferred investing
Best and Worst Total Returns
54%
(since 1926)
Stocks: S&P 500
U.S. T-bills
20%
17%
15%
9%
0%
One year
holding
period
-43%
0%
-1%
10-year
holding
period
8%
3% 0.4%
20-year
holding
period
Chances of Beating Inflation
%
100
90
80
70
60
50
40
30
20
10
0
S&P500
Bonds
T-bills
One-year
5 Years
10 Years
Holding Period
20 Years
Chances of Loss
30
25
20
15
S&P 500
Bonds
T-bills
10
5
0
One
year
5
years
10
years
20
years
Invest
to
Match
Your
Time
Suggestion 8
Horizon
Short period (5 years or less)—put your
money in less risky investments like savings
accounts and secure bonds
 Longer period (10-20 or more years)—put
your money in stocks
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Two Forms of Retirement Plans
1. DEFINED BENEFIT PLAN
 Employer
defines how retirement benefit is
computed
 Example: Years worked x 1.5% x Last 5 years
ave. salary
 Example:
 Must
20 yrs x .015 x $70,000 = $21,000/yr
qualify (minimum number of years worked)
 Employer responsible for funding the plan,
investing the money and making sure the funds are
there for retiring employees
 Many employers are dropping these plans
Two Forms of Retirement Plans
2. DEFINED CONTRIBUTION PLAN (401k)
 Employee
puts X% of monthly salary into the plan
 Employer may match some portion of the
contribution (THIS IS FREE MONEY!)
 Example: You put in 8%, employer adds 4%
 What do you actually invest in? Examples:
 Short-term
government securities (MMMF)
 Relatively safe bonds
 Index fund
 Growth fund
 International fund
Use Tax-Advantaged Investing
Wherever Possible
401(k)--retirement plans
 Employer may participate
 Loan provisions
 Various investment options
IRAs
Roth IRAs (not tax-deductible—but no taxes when
you take money out in retirement)
Keogh Plan (various types, up to 30% of self-emp
inc)
SEP Plan (up to 25% of self-empl income)
403(b)--retirement (employees of govts, ed, relig.)
Suggestion 9
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 Virtually
same as 401(k)
Mutual Fund, or
other investment
How It Works
Value Fund
Growth Fund
10%
Employer Match
$ (if 401k)
Money Market Fund
Tax-adv.
“Vehicle”
Your $
Plan
Set up through
401(k)
SEP
Roth IRA
IRA
Etc.
Employer
Broker
Broker
Broker
10% Corp. Bond Fund
20% Govt. Bond Fund
Internl. Equity Fund
60%
Real Estate Fund
S&P Index Fund
May be 1000’s of possibilities
The Taxes in Tax-advantaged
Investing
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Say your income is $50,000 one year.
You put $5,000 that year into your firm’s 401(k).
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Your $5,000 automatically comes out of your salary each month
and goes—at your direction—into whatever mutual funds are
available through the plan.
You leave it there until you retire.
Your taxable income that year is $45,000—not $50,000.
The $5,000 grows for many years.
You will pay ordinary income taxes when you take out the
($5,000 + the increase).
If your employer matches 1:1, you’d be putting your
$5,000 + employer’s $5,000 into the fund!
Suggestion 10 Diversify!
Never put all or even most of your
eggs in one basket!
Diversifying
Mutual funds help you do this
 Index funds do this at lowest cost
 Be cautious about employer stock or
partnership plans where you are locked
into the fortunes of your company for the
bulk of your retirement (e.g., Arthur
Andersen, Enron)
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Suggestion 11 Do Your Legal Planning
As a start: provide for guardianship of minor
children
Some states (UT) allow holographic wills
 All
in your own handwriting
 Date at top, signature at bottom
 Name a guardian, alternates, disposition of assets
 No notary or witnesses
 Caution: Consult attorney about language
 Caution: Use only if you don’t have significant assets
or a complicated family situation
Avoid
“Get
Rich
Quick”
Suggestion 12
Schemes
Case Study: the Ponzi Scheme
End of January, 2006
Student reports finding this
card in the Tanner Building
Reverse side claims:
Invest $6 to $6,000
Earn 44% over 12
days
New economic
paradigm!
What is the Annual Return?
(1 +
365/12
.44)
–1=
6,600,000%!
Ponzi Scheme—How it Works
Etc., etc.
KEY: Return comes from new investors
and not from any real economic activity.
Impact on Investors
 At
least 300,000 investors
 At least $500M invested
 Personal tragedies for many families
Mission
savings
Some mortgaged homes
 In
a typical Ponzi scheme—80-90% of
investors lose everything!
 Criminal processes underway
How to Recognize a Scam
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Is promised return unusually high?
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Remember the risk-return trade-off:
High return = high risk
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No one can promise more than an FDIC insured rate!
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Do the facts check out?
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Does the investment make sense to you?
Is the person registered, are references OK?
Is product significantly above (or below!) reasonable
market price?
Does sale require pressure tactics?
Does seller emphasize “affinity”, e.g., BYU or Church
connections?
Is most of the product purchased by end users or by other
distributors?
Top 10 Scams to Avoid
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Easy business opportunities
Ponzi schemes
Many work-at-home plans
Health, diet and gasoline saving products
Corrupt sales schemes
Many investment seminars
Phishing/pharming
Windfall scams
Commodity and foreign currency scams
Some multi-level plans
Multi-Level Marketing Tests
Is the product sold primarily to other
distributors or to actual customers?
 Is the product really of value in the
marketplace?
 Is the price reasonable for the product?
 Are the real risks fully disclosed?
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Life Insurance
Protection
Other Insurance
Steps against Identity Theft
Budgeting/Planning
Garbage
Debt Management
Managing Taxes
Home Buying
Rainy Day Fund Tax-advantaged
(Safe, liquid)
Retirement Fund
Tithes and
Offerings
SelfSufficiency
Food Storage
Consumer debt
Gambling
Derivatives
Start-ups
Scams
Other Investments
(Index Funds)
Spiritual Understanding:
Stewardship and Faith
Read a Good Personal Finance
Suggestion 13
Book—or Two
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Tyson, Personal Finance for Dummies, 4th Edition
Benna, Bucci, Caher, et al, Managing Your Money
All-in-one for Dummies
Engel and Hecht, How to Buy Stocks, 8th Edition
Lynch and Rothchild, Learn to Earn
Stanley and Danko, The Millionaire Next Door
Check Out These Websites
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http://providentliving.org/media/training
/peaceheart/main.html (lds.org > Home
and Family > Family Finances)
http://personalfinance.byu.edu/ (lds.org
> Home and Family > Family Finances
> Other resources > Personal Finance
Suggestion 14 Keep Track of Your Finances
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Organize and know how to read your financial
documents (insurance, retirement, bank and
investment statements)
Create financial reports for your family (assets and
liabilities)
Know your monthly cash inflows and outflows
Learn to use the Web for financial information
Develop a plan to get you to where you’d like to
be financially in 5 years, 10 years
Computers and the Internet Can Help
Internet
Excel
Online Banking
Suggestion 15
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Protect Your Identity
Identity theft is on the rise
 Shred
financial documents
 Don’t give out account #’s, CC #’s, PINs, etc. over
phone (unless you originated the call to known party)
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Be aware of phishing
Don’t fall for “awards” or any other gimmick in
which you have to send in a check
Protect your computer with anti-virus/antispyware programs
Don’t give out SSNs
Keep informed—new scams are created every
day!
Conclusions
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Make decisions that build net worth over time
 Avoid
unproductive debt
 Develop an attitude of saving not spending
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Wise financial management empowers you to
serve more capably: family, community, church
Read a good book or two on personal finance
Surely we will be held accountable for how we
manage our resources