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  • 1. WELCOME!!!
    • The Iota Alumni Association welcomes you to our Financial Planning Workshop
    • The Goal: Educate you on THE BASICS of Financial Planning
  • 2. Your Humble Presenter
    • Al Przygocki - Rat class: Fall 1991; Pledge class: Spring 1993 (Bagels & Buffoonery)
    • B.S. Mgt., Certificate in Finance, May 2003
    • NASD Series 7 & 66; Georgia Insurance License for Life, Accident, & Sickness; Variable Products
    • Licensed Personal Financial Representative
    • Washington Mutual & WM Financial Services
    • Your savings is the fuel that feeds the engine of long term security
    • You MUST earn more than you spend
    • Two Choices:
      • EARN MORE
      • SPEND LESS
  • 6. Earn More
    • Never settle for being unhappy
    • Changing companies to find a better job is commonplace now, even expected
    • Advanced degrees and Certifications
    • Always work on improving your job skills and your resume
    • Always be ready for change, it is constant
  • 7. Spend Less
    • Buy Quicken or MS Money or something similar (or design your own, smarty-pants!)
    • Track every expenditure (down to pieces of gum) for 30 days
    • Sort your expenses into 4 categories:
      • Savings
      • Taxes
      • Committed
      • Discretionary
  • 8. Expenses
    • Savings is probably your smallest expense but ideally would be the largest
    • Taxes are an expense that can be modified & must be accounted for but most people ignore
    • Committed Expenses
      • Mortgage/Rent
      • Car Loan
      • Utilities
      • Food (groceries)
  • 9. Expenses
    • Discretionary Expenses
      • Dining Out
      • Liquid Refreshments
      • GT Season Tickets
        • Football, Baseball, Basketball, Volleyball, etc.
      • Mall Shopping Sprees (those shoes are so you!)
      • Computer Games, Music CD’s, DVD’s, Books
      • Entertainment (movies, concerts, strip clubs)
      • Dates (if you’re married, it’s a committed expense)
  • 10. Budgeting
    • Once you know how much you currently spend on things, you can make a plan.
    • Take your after tax income (we’ll talk about controlling taxes later).
    • Subtract out your committed expenses.
    • This pool will need to fund both your savings and your discretionary expenses
  • 11. Budgeting, part 2
    • Most people spend first, and then save what’s “leftover”
    • So, they spend a lot and save little (if any)
    • Smart answer: Save First, spend leftovers
    • Automate your savings
      • 401(k) contributions
      • Automatic Transfers to Savings Accounts
      • Bank Authorizations into Brokerage Accounts
  • 12. Budgeting, part 3
    • Automate your regular expenses
      • Online Bill Pay
      • Bank Authorizations from Checking Accounts
    • Saves stamps
    • Saves time
    • Saves late payments
    • Saves your credit record
  • 14. Savings
    • Having a Cash Reserve is CRITICAL!!!
    • Experts recommend having between 3 and 6 months worth of CASH available to fund Committed Expenses
    • This is to take care of Emergencies or Opportunities as they arise. Cash is King!!!
    • Taking money out of your savings account is a lot cheaper than using Credit Cards
  • 15. Savings, part 2
    • Step 1: Direct Deposit your paycheck
      • You can do it into more than one account
      • Put enough in checking to cover your bills
      • Put the rest into your savings account
    • Step 2: Build up one month of reserve in your checking account
    • Step 3: Build up two to five months of reserve in your savings account
  • 16. Savings, part 3
    • Once you have a Cash Reserve in place, begin saving for long term goals
    • You should begin to save up for a down payment on a house
    • Direct the portion that was going into your savings into a new savings account
    • During this time, you should work on building your credit
  • 17. CREDIT & DEBT
  • 18. Credit
    • If you thought your GPA was important, wait until you meet your credit score
    • Your credit score impacts many things
      • Interest rate on Loans (Car, Home, Personal, etc.)
      • Employment (Many employers will run a credit check on you to see if you are responsible)
      • Relationships (Maybe this is an over 30 thing, but many people won’t get married to someone with a bad credit score)
  • 19. Credit Advice
    • Limit yourself to two credit cards
      • One is for paying bills and daily expenses
      • One is for Very Rainy Days (think Hurricane)
    • Link your Online Bill Payments to the Credit Card for bills & expenses
    • Have one of your Online Bill Payments come from your Checking Account to pay the Credit Card down to $100 at the end of each month
  • 20. Already in Debt?
    • Credit Cards, Student Loans, Bookies, etc.
    • Debt is like cholesterol; Some is good and some is bad, and we would be in trouble if we had too little and if we had too much
    • Good debt = Mortgages, Student Loans, anything at a low rate, anything investing in your future growth
    • Bad debt = Credit Cards, anything at a high rate, anything invested in stuff
  • 21. Getting out of Debt
    • Highest Rate not the highest balance
    • Don’t wipe out your Cash Reserve to pay off your debts!!! You’ll just end up right back in debt as soon as anything bad happens.
    • Take your Cash Reserve down some to pay off any debt that is at a high rate (over 10%)
    • If you don’t have a Cash Reserve but you do have debt, split your monthly savings evenly between Cash Reserves & paying off Debt until one goal is met and then finish off the other
  • 23. Insurance
    • Everyone needs insurance
    • You are paying the insurance company to take the risk of something bad happening
    • If you have a body, you need health insurance
    • If you have children and/or a spouse, you need life insurance
    • If you count on your job for income, you need disability insurance
    • If you have property, you should insure it
  • 24. Insurance, part two
    • Luckily, you can do the basics through your job
    • Sign up for the most free or low cost coverage you can get (life, health, dental, vision, long term care, & disability)
    • If you need more than the basics (life, disability, LTC), consult a financial advisor
    • Renter’s Insurance is cheap and worth it
    • Car Insurance tip: High Deductible = Low Rates; Low Deductible = High Rates. If your car has a low replacement value, go for a high deductible and save the difference into an account to buy a replacement (best value = 2 year old used car)
  • 26. Home Ownership
    • Renting is a temporary fix for a permanent problem. When the lease is up, what do you have to show for your money?
    • Buying a home is typically a larger monthly expense, but it actually costs less because you actually get something for your money (Appreciation in Value of the Home, Accumulation of Equity, Tax Write-Off)
  • 27. Renting vs. Buying
    • Pay $1,000 a month in rent for 7 years. You have spent $84,000 and have zero.
    • Pay $1,473 a month in mortgages for 7 years on a home worth $220,000. You have spent $123,732 and could have equity of $156,995, and a tax savings of $31,689 for a profit of $80,061 while you lived there.
    • Assumptions: 10% down, 6% fixed 30 year mortgage, 34% combined federal & state taxes, 7% selling expenses, 6% annual appreciation
  • 28. Mortgages
    • Fixed Rate Mortgages
    • Adjustable Rate Mortgages
    • Interest Only Mortgages
    • Home Equity Loans
    • Home Equity Lines of Credit
  • 29. Mortgage Types
    • Fixed Rate Mortgages
      • Most Common Type in the U.S.
      • Least Common Type in the rest of the world
      • Locked in Rate, Same Payment Throughout
    • Adjustable Rate Mortgages
      • Rate Resets periodically based on an Index
    • Interest Only Mortgages
      • Lowest Rate, Only have to pay interest portion, option to pay down principal, lowest monthly payment
      • Payment adjusts periodically based on remaining principal
  • 30. More Mortgage Types
    • Home Equity Loans
      • Loan equal to the amount of Equity in your Home
      • Paid to you in a lump sum
      • You pay it back over time in equal payments
      • Interest is tax deductible
    • Home Equity Lines of Credit (HELOC’s)
      • Credit Line equal to the amount of Equity in your Home
      • Works like a credit card
      • Only pay back what you use
      • Interest is tax deductible
  • 31. Mortgage Advice
    • If this is the last home you are ever going to buy, then a Fixed Rate is perfect when rates are low
    • If rates are high or you expect to be in your home for longer than 10 years but less than 30 years, Choose an Adjustable Rate
    • If you know you will be in your home for less than 10 years, Choose Interest Only
  • 32. Mortgage Advice, part two
    • Home Equity Loans are not a great idea
    • Home Equity Lines of Credit are a great idea
      • Flexibility – Use only how much you need, when you need it
      • Convenience – Only pay the minimums if cash flow is tight
      • Affordability – Cheaper than Credit Cards, especially considering the tax deductibility
  • 34. Why Start Now?
    • Two 20-year olds, Aaron & Bob
    • Aaron – invests $2,000/yr for 10 years and then sits on it for 20 years
    • Bob – does nothing for 10 years, then invests $2,000/yr for 20 years
    • At the end of 30 years, who has the most money?
  • 35. The Math
    • Assuming 10% rate of return, compound annually
    • Aaron has ($2,000)x(1.10)^30 + … + ($2,000)x(1.10)^21 = $235,881.85
    • Bob has ($2,000)x(1.10)^20 + … + ($2,000)x(1.10)^1 = $126,005.00
    • Aaron invested half as much and has almost twice as much!!!
    • Behold the Power of Compounding!!!
  • 36. Investing 101
    • Stocks
      • You are buying a piece of a Company
      • Profit for investor comes from dividends and/or from capital gain
    • Bonds
      • You are loaning money to a Company
      • Profit for investor comes from dividend and/or from capital gain
  • 37. Investing 101, part 2
    • Diversification comes in many different flavors
      • Types of industries (utility vs. high tech)
      • Types of companies (small cap vs. large cap)
        • Market Capitalization = Price of Stock x Shares Outstanding
        • General Electric (GE) is a Large Cap (well over $5 Billion)
        • Barnes & Noble (BKS) is a Mid Cap ($1 Billion - $5 Billion)
        • Hot Topic (HOTT) is a Small Cap ($250MM - $1Billion)
      • Types of investments (stocks vs. bonds)
      • Value (established companies with dividends) vs. Growth (newer companies seeking capital gain)
      • Length of time (short term vs. retirement)
      • Tax Treatments (tax deferred vs. taxable)
  • 38. Diversification
    • If you own one stock, then your entire portfolio is dependent on that one company doing well.
    • If you own 20 stocks but they are all in the same sector (oil companies), then you are dependent on one sector doing well
    • If you own 500 stocks spread across 20 different sectors, then you are dependent on the stock market to do well
    • The same holds true for bonds
    • If you have a portfolio that is truly diversified across all stock sectors and all bond sectors, then you are dependent on the world doing well
  • 39. Diversification, part 2
    • Problem: How in the heck am I going to own the hundreds of stocks and hundreds of bonds I need to get truly diversified?
    • Solution: Buy Mutual Funds!
  • 40. Mutual Funds
    • Fund companies gather investor assets and buy enough stocks and/or bonds to have diversified portfolios
    • You, the investor, then buy shares of the whole portfolio
    • You can buy pieces of thousands of stocks and bonds in small increments
    • Different funds have different foci
  • 41. Harry Markowitz & You
    • 1990 Nobel Prize in Economics
    • Researched Portfolio Performance
    • Used Linear Regression Modeling
    • Found 3 Major Factors in Returns
      • Selection (which stocks or bonds to buy)
      • Timing (when to sell, when to buy)
      • Asset Class (what types of investments)
  • 42. Asset Allocation
    • 2% comes from Timing
    • 6% comes from Selection
    • 92% comes from Asset Allocation
    • It makes sense. A portfolio of 100% stock will behave much differently than one that is 100% bonds, regardless of which stocks or bonds are in the portfolios.
    • So, let’s focus on the 92% for a minute
  • 43. Asset Allocation, part 2
    • The asset allocation in your portfolio is based on your risk tolerance and your long term needs for returns.
    • The more risk-averse you are, and the less dependent you are on high returns, then the higher the bond component
    • The less risk-averse you are and the more dependent you are on high returns, then the higher the stock component
  • 44. Asset Classes
    • Stocks
      • Large Cap (Growth & Value)
      • Mid Cap (Growth & Value)
      • Small Cap (Growth & Value)
    • Bonds
      • Short Term
      • Intermediate
      • Long Term
      • Government
      • High Yield
      • Junk
    • International (same as above classes)
  • 45. Sample Portfolios
    • Aggressive – 100% stock, 0 % bond
      • 40% Large, 30% Mid, 20% Small, 10% Intl.
    • Moderate Aggressive – 80% stock, 20% bond
      • 40% Large, 20% Mid, 10% Small, 10% Intl., 10% High Yield Bonds, 10% Government Bonds.
    • Moderate – 50% stock, 50 % bond
      • 20% Large, 10% Mid, 10% small, 10% Intl., 20% High Yield Bonds, 20% Government Bonds, 10% Intl. bond
    • Moderate Conservative – 20% stock, 80% bond
      • 10% Large, 5% Mid, 5% Small, 20% High Yield, 20% Government, 20% Intermediate, 20% Intl. bond
    • Conservative – 100% bond
      • 30% High Yield, 30% Government, 20% Intermediate, 20% Intl.
  • 46. Rebalancing
    • OK, so you have your perfect portfolio, but over time different funds will grow at different rates – So what? Well, now your perfect portfolio is out of whack
    • You need to rebalance your account at least annually (at most quarterly) by selling your winners and buying your losers
    • This forces you to sell high and buy low and it also uses Dollar Cost Averaging!
  • 48. Tax Diversification
    • There are basically three ways that your investments accounts can be taxed
      • Taxed Now
      • Taxed Later
      • Taxed Never
  • 49. Taxed Now
    • You pay taxes on the interest payments you receive
    • You pay taxes on Capital Gains if you sell for a profit
      • Basic Brokerage Account
      • Savings Account
      • Certificates of Deposit
  • 50. Taxed Later
    • Funded with pre-tax dollars (or write off in the case of IRA’s)
    • Withdrawals taxed as Ordinary Income
    • Typically, there are special rules
      • Age 59 ½, 10% early withdrawal penalty
      • RMD (Required Minimum Distributions) at Age 70 ½
    • Examples: 401(k), 403(b), Annuities, Traditional IRA’s
  • 51. Taxed Never
    • These accounts are funded with after tax dollars
    • If managed properly, withdrawals are not taxable
    • Examples:
      • Roth IRA
      • Municipal Bonds
      • Cash Value Life Insurance
  • 52. Basic Tax Diversification
    • If you could invest all of your money in only one of these categories, you would go for Tax Never, but it’s not that easy
    • Roth IRA – limited contributions ($4,000 for 2005-07; $5,000 in 2008); Also, if you have a large income, you may not qualify
    • Municipal Bonds – Too little return
    • Cash Value Life Insurance – great if you need life insurance; pricey if you don’t
  • 53. Tax Strategy
    • Max your 401(k) to the match
    • Then, max your Roth IRA
    • Then, max your 401(k) ($14,000 for 2005)
    • Then, fund a Cash Value Life Insurance Policy (if you have a need for life insurance)
    • Then, fund a Brokerage Account (taxable)
  • 54. Financial Professionals
    • Financial Professionals are more affordable than ever before
    • If you’d rather spend your time making money than managing it, hire a Pro
    • Get a good accountant
    • Get a Financial Advisor
    • Get a Will (not Bishop, he’s a pansy!)
    • Paying for advice on the front end is cheaper than fixing problems on the back
  • 55. Want to know more?
    • Many great sources of information on the internet
    • Talk to a financial professional; Almost all of them offer a free consultation (the first one’s free, then you’re hooked!)
    • Many great books out there (but beware of the bad ones)
    • ASK ME!!! (Al) – Take a business card!
  • 56. QUESTIONS?