Transcript BobD`sCUBIC `14 Personal Finance Section 1x

CUBIC 2014
Section 1: Topics 1-4
Personal Finance
Bob Donchez
MAYMESTER 2014
The Financial Planning Process
Personal Finance Topics
1)
2)
3)
4)
5)
6)
7)
8)
Financial planning process
Assessing financial position
Managing personal debt
Setting and achieving goals
Retirement topics
Investment topics
Insurance
Putting it all together
MAYMESTER 2014
The Financial Planning Process
What are your issues and questions?
• What one thing do you want to learn?
• What one question do you want answered?
MAYMESTER 2014
(1.1.0)
Describe your level of knowledge of
personal finance?
A.
B.
C.
D.
E.
Very low
Low—very little knowledge
Medium—some knowledge
High—know quite a bit
Very high
MAYMESTER 2014
Describe your feeling/opinion:
A.
B.
C.
D.
E.
financial wealth is very important to happiness
financial wealth is only one factor to happiness
wealth has nothing to do with happiness
wealth usually detracts from happiness
really couldn’t say
MAYMESTER 2014
“Money is not the most important thing….but
it makes important things possible.”
-Ben Stein, 2004
MAYMESTER 2014
M.C. Hammer:
Even $33,000,000 doesn’t
ensure financial success!
http://www.youtube.com/watch?v=otCpCn0l4Wo
MAYMESTER 2014
The Financial Planning Process
1-1 The Case for Learning Personal Finance
• Knowledge of personal planning concepts is low
• Creates poor planning decisions
– Savings rates are low
– Use of debt very high
– Basic investment mistakes common
• Knowledge is power
– TONS of financial data, but hard to get knowledge
– Who to trust to obtain knowledge and make good decisions?
– Personal finance very private matter
MAYMESTER 2014
The Financial Planning Process
1-2 A Basic Approach to Personal Finance
• Learn basic concepts—knowledge is power
• Spend within income; follow a budget
• Save regularly “off the top”—pay yourself first
• Use debt wisely—not to support lifestyle, but for key needs
• Make retirement planning a top priority early in career
MAYMESTER 2014
The Financial Planning Process
1-2 A Basic Approach to Personal Finance (continued)
• Assess financial position annually
• Set goals with a plan to achieve them
• Invest wisely using key concepts
• Use insurance to “protect the plan”
• Use trusted sources for answers
MAYMESTER 2014
Who do you (or would you) see for advice
on a personal finance issue or
question?
A.
B.
C.
D.
E.
Friend
Parent or relative
Professional—planner or accountant
My broker
Newsletter, advisory service, on-line, magazine
MAYMESTER 2014
Describe how well you track/monitor your
financial accounts and spending.
A. I keep statements, and track income &
expenses very well
B. I keep my statements, but don’t track spending
too well
C. Kind of “hit and miss”
D. Not very organized at all
E. Say what?
MAYMESTER 2014
Assessing Current Financial Position
2-1 Rationale for Establishing Financial Position
Can’t accomplish a financial plan without:
– A starting point; knowing “where you’re at”
– Having goals you want to achieve
– Establishing a plan to get from “here” to “there”
Important to measure financial position on a regular
basis (for example, annually)
MAYMESTER 2014
Assessing Current Financial Position
2-1 Rationale for Establishing Financial Position
Financial Position entails:
– Personal income statement
• What you make, what you spend, what you save
– Personal balance sheet
• What you own, what you owe, and the difference (net worth)
MAYMESTER 2014
Assessing Current Financial Position
2-2 Personal Income Statement
Income
– Wages
– Self employment income
– Investment income (interest/dividends)
MAYMESTER 2014
Assessing Current Financial Position
2-2 Personal Income Statement
Expenses
Non-discretionary expenses (have to spend)
• Taxes
• Food
• Utilities
• Basic household
• Transportation (gas, oil, maintenance)
• Debt payments
• Insurance
• Basic clothing
MAYMESTER 2014
Assessing Current Financial Position
2-2 Personal Income Statement
Expenses (continued)
Discretionary expenses (want to spend)
• Entertaining
• Dining
• Fashion clothing
• Charitable contributions
• Subscriptions
• Vacation
• All those “little” conveniences (premium channels,
Starbucks, etc)
MAYMESTER 2014
Assessing Current Financial Position
2-2 Personal Income Statement
Expenses (continued)
Discretionary expenses are separated from nondiscretionary because these items can better be used
to increase savings.
Once personal income statement is made, a budget
can be created
MAYMESTER 2014
Assessing Current Financial Position
2-2 Personal Income Statement
Savings and debt:
• If total expenses exceed income, savings falls or debt
rises
• If total expenses less than income, savings rises or
debt falls
• Savings best accomplished if:
1) saved regularly from payroll
2) taken first, “off the top”
Link to Sample Personal Income Statement
MAYMESTER 2014
Assessing Current Financial Position
2-3 Personal Balance Sheet
Assets
– Cash and cash equivalents
• Checking, bank savings, money market, CDs
– Use assets
• Residence, auto, personal property
– Invested assets
• Taxable accounts
– Brokerage, securities, mutual funds,
• Tax sheltered accounts
– IRA, 401k, annuities, life insurance cash value
MAYMESTER 2014
Assessing Current Financial Position
2-3 Personal Balance Sheet
Liabilities
– Revolving credit
• Credit cards
• Home equity line of credit
– Installment loans
• Personal loans
• Car loans
• Home equity line of credit
– Home loan, Mortgage
MAYMESTER 2014
Assessing Current Financial Position
2-3 Personal Balance Sheet
Net Worth
– Equals total assets less total liabilities
Link to Sample Personal Balance Sheet
MAYMESTER 2014
)
Describe your debt situation:
A.
B.
C.
D.
E.
I have virtually no debt
I have student loans
I have credit card balance(s)
I have a mortgage
I have a combination of the above
MAYMESTER 2014
Have you ever gotten into trouble with credit
cards? (couldn’t afford, missed payments,
could only pay minimum)
A.
B.
C.
D.
No, never
No, but have had “close call”
Yes, in the past
Yes, currently
MAYMESTER 2014
Managing Personal Debt
3-1 Types and Forms of Personal Debt
Revolving credit (credit cards)
–
–
–
–
No set pay off date
High variable interest rate
Variable payments
Secured by general credit worthiness
MAYMESTER 2014
Managing Personal Debt
3-1 Types and Forms of Personal Debt
Installment credit (example: car loan)
–
–
–
–
Fixed pay off date (intermediate term, 3-7 years)
Fixed payment
Fixed interest rate
Secured by asset and credit worthiness, credit score
MAYMESTER 2014
Managing Personal Debt
3-1 Types and Forms of Personal Debt
Home Mortgage
–
–
–
–
Long term pay off date (10 to 30 years)
Fixed or variable interest rate
Fixed or variable payments
Secured by asset and credit worthiness, credit score
MAYMESTER 2014
Managing Personal Debt
3-2 Use and Role of Personal Debt
Our basic choice and trade-offs
– Save and earn return, forego use of asset to later
– Borrow and pay interest, have use of asset now
If debt is used, the choices are:
–
–
–
–
What kind of debt?
For what purpose?
How much is borrowed?
What is total expense?
MAYMESTER 2014
Managing Personal Debt
3-2 Use and Role of Personal Debt
General recommendations
– Avoid credit card debt entirely, pay off monthly
– Don’t use credit cards to “make ends meet”
– Borrow only for “key” assets when affordable
• Car, major appliances, furniture, house
• Use fixed rate installment debt, mortgage
How much borrowing is sensible?
MAYMESTER 2014
Managing Personal Debt
3-2 Use and Role of Personal Debt
Selecting good loans—characteristics:
– Credit cards
– Installment debt
– Mortgage
MAYMESTER 2014
Managing Personal Debt
3-2 Use and Role of Personal Debt
MAYMESTER 2014
Managing Personal Debt
3-3 Debt and Time Value of Money Problems
Borrowing creates RISK
– Risk you can’t “perform”/pay on debt
– Risk of loss of asset, foreclosure, repossession
– Risk of opportunity cost
» Funds borrowed now cannot be used for other
purposes later
MAYMESTER 2014
Managing Personal Debt
3-3 Debt and Time Value of Money Problems
Using Time Value of Money to Address Debt Questions
Working with your calculator
•
•
•
•
Setting decimals
Clearing memory
Checking periods per year
TVM buttons
MAYMESTER 2014
Managing Personal Debt
3-3 Debt and Time Value of Money Problems
Working with your calculator
MAYMESTER 2014
You’re interested buying a car. If you can secure a loan
for 48 months at 6% annual interest rate You have
saved $3,000 for a down payment and can afford a
payment of $200 per month. What’s the total price
you can pay on the car?
A.
B.
C.
D.
$ 6,600
$ 8,500
$11,500
$14,500
MAYMESTER 2014
You’re interested buying a car. The total cost of the car
is $27,500 and you have saved $4,000 for a down
payment. A loan proposal is for 60 months at 7%
annual interest. What would your monthly payment
be?
A.
B.
C.
D.
$ 356
$ 465
$ 785
$1,164
MAYMESTER 2014
You’re considering buying a house. The total cost is
$227,000 and you have saved $25,000 for a down
payment. The mortgage is fixed rate 5.5% for 360
months. What would your monthly payment be?
A.
B.
C.
D.
$ 865
$ 965
$ 1,086
$ 1,147
MAYMESTER 2014
Managing Personal Debt
3-4 Credit Reporting and Managing Debt
Credit file and your rating is important
• Affects whether you get credit
• Affects the cost of credit
• Can affect employment
It’s important to run your own credit report regularly
• What’s going on in report; catch fraud & ID theft
• Check accuracy, correct mistakes
• Who’s checking up on you; running your report
MAYMESTER 2014
Managing Personal Debt
3-4 Credit Reporting and Managing Debt
MAYMESTER 2014
Managing Personal Debt
3-4 Credit Reporting and Managing Debt
FICO score description
Running your own credit report
• Free report required to be provided annually
• Services: Experian, Equifax, TransUnion
http://annualcreditreport.com
Consumer credit counseling: www.nfcc.org
MAYMESTER 2014
Managing Personal Debt
3-4 Credit Reporting and Managing Debt
FICO SCORE
760-850
700-759
723
660-699
687
620-659
580-619
QUALITY
EXCELLENT
VERY GOOD
MEDIAN FICO SCORE
GOOD
AVERAGE FICO SCORE
NOT GOOD
POOR
MAYMESTER 2014
How much have you saved?
A.
B.
C.
D.
E.
Nothing at this point
Less than $1,000
$1,000 - $5,000
$5,001 - $25,000
Over $25,000
MAYMESTER 2014
Multiply your age by your household income.
Divide by 10. What does the resulting
number mean?
A. Maximum you should keep in a tax deferred plan
B. Total wages on which your Social Security
benefits will be based
C. A rule of thumb for what you’ll need for retirement
D. What your net worth should be today
MAYMESTER 2014
Setting and Achieving Personal Goals
4-1 Typical Finance Goals
Typical short term goals
– Create emergency cash reserves of 3 – 6 months
– Next vacation, major appliances, furniture, car
Funded by conservative investments in a taxable portfolio
• Investment goal is capital preservation
MAYMESTER 2014
Setting and Achieving Personal Goals
4-1 Typical Finance Goals
Typical longer term goals
–
–
–
–
–
Children (raising, college, wedding, etc)
Starting own business
Second home/vacation home
Retirement
Estate
Funded by more aggressive investments in tax
sheltered portfolios
• Investment goal is capital appreciation
MAYMESTER 2014
Setting and Achieving Personal Goals
4-2 How to Achieve Financial Goals
Typical inputs required to solve:
–
–
–
–
Cost of item
When item is acquired
Current amount saved
Expected return on investment
http://apps.finra.org/Calcs/1/Savings
MAYMESTER 2014
You’re saving for a 2 week cruise of Asia with friends in
5 years. You estimate you will need $8,500 for the
trip. If you expect a investment return of 6% after tax,
how much will you need to save monthly to reach
this goal?
A.
B.
C.
D.
$
$
$
$
121
135
141
254
MAYMESTER 2014
You’re saving for your child’s (age 6) college fund. You
plan to put aside $100 per month for the next 12
years, when she’ll begin college. If you can receive a
7% return after taxes, how much will you have in the
fund in 12 years?
A.
B.
C.
D.
$
$
$
$
14,400
16,900
22,469
32,540
MAYMESTER 2014
You’re saving for your child’s (age 6) college fund. The
college you expect he will attend currently charges
$16,500 per year for tuition, books, and fees. If you
expect the inflation rate for college costs to be 8%,
what will the first year’s costs be when your child
attends school in 12 years?
A.
B.
C.
D.
$
$
$
$
15,498
19,869
32,768
41,550
MAYMESTER 2014