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Savings Fitness - March 2007
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Savings Fitness - March 2007

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  • 1. Savings Fitness A Guide to Your Money and Your Financial Future PPT Developed by Karissa Berndt USU Family Finance Student Financial Planning for Women March 2007
  • 2. Today’s Program
    • Provides a general overview of saving & investing
    • Focus on retirement but principles apply to all goals
    • Details are in the Savings Fitness booklet
    • PPT & links available at www.usu.edu/fpw
  • 3. Program Objectives
    • Identify your goals
    • Distinguish between savings and investing
    • Develop net worth statement & savings plan
    • Learn to manage debt
    • Understand risk-return relationship
    • Begin or increase saving/investing
  • 4. How to manage financial challenges and afford a secure retirement?
    • Write your goals on a 3”x5” card
    • Sort the cards into two stacks:
      • Goals in the next 5 years or less
      • Goals in 5 years or more
    • Sort the cards in order of priority
      • Make retirement a priority!
    • Write on each card what you need to do to accomplish that goal
  • 5. Beginning Your Savings Fitness Plan
    • Current financial resources:
      • Net worth : the total value of what you own (assets) minus what you owe (liabilities)
        • Assets
          • Possessions, vehicles, home, bank accounts, investments, etc.
        • Liabilities
          • Remaining mortgage on your home, any loans/debts, etc.
        • Subtract your liabilities from your assets.
          • Goal: a positive net worth, which grows each year
        • Review your net worth annually (at tax time)
  • 6. Saving vs. Investing
    • Short term goals
      • < 5 years
    • No risk of loss of principal
    • No or low real return after taxes & inflation
    • Steady but slow growth
    • Long term goals
      • 5 years or more
    • Trade potential short term loss for long term gains
    • Positive real return after subtracting taxes & inflation
    • Volatility
  • 7. Estimate How Much You Need to Invest for Retirement
    • Worksheets & software programs can help you estimate how much you need to invest.
      • kiplinger.com (click on “Retirement”)
      • moneymag.com (click on “Retirement”)
      • usnews.com (click on “Retirement Calculator”)
      • asec.org (click on “Ballpark Estimate Worksheet”)
        • See FPW website for PPT on Ballpark Estimate
      • nasd.com (click on “Investor Services,” then “Financial Calculators”)
      • Planning for a Secure Retirement
        • http:// www.ces.purdue.edu /retirement/
  • 8. How Much Retirement Income Will I Need?
    • Need to replace 70 to 90 percent of pre-retirement income
    • Lower the income, the higher the % that needs to be replaced
    • It depends on the kind of retirement you want to enjoy
  • 9. How Long Will I Live In Retirement?
    • Average male life expectancy: age 78
    • Average female life expectancy: age 82
    • Consider your health and family history
    • Expect to live longer than previous generations!
    • Planning for a Secure Retirement
      • http:// www.ces.purdue.edu /retirement/
      • Module 1b Life Expectancy Calculators
  • 10. What Savings Do I Already Have?
    • Social Security retirement benefits
    • A pension that provides a fixed amount of retirement income each month
    • Nest egg  the desired total income/year  (Social Security  any pension income)
      • Nest egg examples- Retirement plan accounts at work, IRAs, annuities, and personal savings
  • 11. What Adjustments Must Be Made For Inflation?
    • The cost of retirement will go up every year due to inflation
    • The average annual inflation rate is 3.1%
      • In 1980 the inflation rate was 13.5%
      • In 1998 it reached a low of 1.6%
    • Assume a higher, rather than a lower, rate of inflation
      • It’s safer to plan on 4% than 3.1%
  • 12. One Simple Trick… Spend Less Money Than You Earn!
    • Start with a “spending plan” or budget
      • Income
        • Add up monthly income: wages, average tips or bonuses, alimony payments, etc.
      • Expenses
        • Add up monthly expenses: mortgage or rent, car payments, food bills, entertainment, etc.
        • Include savings as an expense!
      • Subtract income from expenses
    • Consult USU Family Life Center, 797-7224
  • 13. Spending Plans Cont.
    • What if expenses exceed income?
    • Cut Expenses (nickel & dime vs. BIG expenses)
      • clipping grocery coupons
      • bargain hunting (thrift stores, etc.)
      • changing phone or cable to a cheaper plan
      • Real savings : housing & transportation!
    • Increase Income
      • work a part-time second job
      • turn a hobby into income
      • jointly decide that another family member will work
  • 14. Adopt Savings “Rules”
    • Americans who follow “rules” save more*
      • Pay yourself first
      • Put savings/investing on auto pilot
      • Save your tax refund
      • Save unexpected money (i.e., windfall, gifts)
      • Save all change
      • Save $ you ‘saved’ on grocery & gas (receipts)
      • Other ideas?
    *Rha, Montalto,& Hanna (2007). The Effect of Self-Control Mechanisms on Household Saving Behavior. Financial Counseling and Planning, 17(2), 3-16.
  • 15. Avoid Debt & Credit Problems
    • How much debt is too much debt?
      • [monthly debts (credit card payments, car loan payments, student loan payments, etc.)  mortgage]  by the money you bring home each month.
      • The result is your “debt ratio.”
      • Keep this ratio at 10% or less
      • Total mortgage and non-mortgage debt should be no more than 36% of your take-home pay.
  • 16. What’s the Difference Between “Good Debt” and “Bad Debt”?
    • Good debt - provides a financial pay off
      • buying or remodeling a home (within reason!)
      • investing in education
      • advancing your own career skills
    • Bad debt - borrowing for things that do not provide financial benefits, or that don’t last as long as the loan
      • Depreciating assets: vehicles
      • vacations, clothing, furniture, dining out
  • 17. Handle Credit Cards Wisely
    • Use only 1 or 2 cards, not the usual eight or nine
    • Don’t charge big-ticket items.
      • Save or find less expensive loan alternatives
    • Shop for the best interest rates, annual fees, service fees, and grace periods
    • Pay off the card each month,
      • If you cannot pay in full, pay more than minimum
    • Still have problems? Leave the cards at home
      • USU FLC 797-7224
  • 18. How to Climb Out of Debt
    • Work with your creditors directly to try and work out payment arrangements
      • Request lower APR on credit card
    • USU Family Life Center Housing & Financial Counseling
      • can help you set up a plan to work with your creditors and reduce your debts
      • PowerPay Debt Analysis: https://powerpay.org/
  • 19. Investing for Retirement
    • Once you’ve reduced unnecessary debt and created a spending plan, you’re ready to begin investing for retirement.
    • Participate in your employer’s retirement plan
    • Invest in an Individual Retirement Account
  • 20. Where to Save/Invest?
    • Cash Equivalents - very little risk; very low return
      • Savings accounts
      • Money market mutual funds
      • Certificates of deposit
      • U.S. Treasury bills
    • Suitable for short term goals only
      • Your money won’t grow
      • Taxes & inflation negate any growth!
  • 21. Bonds
    • Corporate or Government Bonds
      • You loan money to a U.S. company or a government body in return for its promise to pay back what you loaned with interest
    • Small % of your long term investments
      • Conservative
      • Low growth potential
  • 22. Stocks
    • You own a part of a U.S. or international company
    • High potential for growth in the long run
    • Short term volatility
    • Must be willing to accept the ups & downs along the road to inflation-beating growth
  • 23. Mutual Funds
    • Pools your money with money of other investors and invests it.
    • A stock mutual fund, for example, invests in stocks on behalf of fund’s shareholders.
    • Easier to invest and to diversify.
    • Ideal for your Individual Retirement Account (IRA)
    • See FPW PowerPoints on website
  • 24. Where to Put Your Money
    • For goals that are at least 5 years in the future:
      • stocks
      • bonds
      • real estate
      • foreign investments
      • mutual funds
    • Not insured by the federal government - there is the risk that you could lose some of your money
    • The longer you have until retirement, the more risk you can afford.
  • 25. Why Take Risk At All?
    • The greater the risk, the greater the potential return
      • a diversified portfolio of stocks & bonds will earn significantly more than a savings account.
      • No/low risk = no growth
    • Historic Average Annual Returns
      • U.S. Treasury Bills: 3.8%
      • Government Bonds: 5.3%
      • Large-Company Stocks: 11.2%
    • Inflation averages 3.1%
    • Taxes reduce investment returns
  • 26. Reducing Investment Risk
    • Diversification
      • Distributing your money among several investments, rather than investing in individual companies.
      • You can do this by investing in:
        • mutual funds
        • index mutual funds
      • Diversification will greatly decrease your risk of losing money.
  • 27. Why Diversify?
    • At any given time one investment might do better than another.
    • The factors that can cause one investment to do poorly may actually cause another to do well.
    • By diversifying into different types of assets, you are more likely to reduce risk, and actually improve return, than by putting all of your money into one investment.
    • “ Don’t put all your eggs in one basket!”
  • 28. Reducing Investment Risk Cont.
    • Asset Allocation - investing among different categories of investments (FPW PPT)
      • Put some money in cash, some in bonds, some in stocks, and some in other investments
      • The choices you make about what % to have in these major categories defines your investment strategy.
  • 29. Employer-Based Retirement Plans
    • Does your employer provide a retirement plan?
      • If so…grab it! Employer-based plans are the most effective way to invest for your future.
      • You’ll enjoy tax benefits.
      • Two types of employer-based plans :
        • defined benefit
        • defined contribution
  • 30. Defined Benefit Plans
    • Pay a lump sum upon retirement or a guaranteed monthly benefit.
    • The payout is typically based on a set formula
      • such as: (# of years you have worked for the employer)  (a percentage of your highest earnings)
    • Usually the employer funds the plan--commonly called a pension plan.
    • Most are insured by the federal government.
  • 31. Defined Contribution Plans
    • 401(k) plans are the most common type
    • Does not guarantee a specified amount for retirement
    • The money you have available to help fund your retirement depends on:
      • how long you participate in the plan
      • how much you invest
      • how well the investments perform
    • More common than traditional pension plans.
  • 32. Vesting Rules
    • Money that you put in a retirement plan and earnings on those contributions, always belongs to you .
    • Employees don’t always have immediate access to the money their employer invests in their fund.
    • Once you are “vested” you own all of your employer’s contribution.
    • Some plans vest in stages, others after fixed period of employment.
    • Know your employer’s vesting rules.
    • Don’t leave before you are vested!
  • 33. What If You Can’t Join An Employer-Based Plan?
    • If possible, take a job with a plan
    • Encourage your employer to offer a plan
    • Invest in an IRA (see FPW PPTs)
    • Build your personal savings
    • Consider an annuity (April 11 FPW)
  • 34. What If You Are Self-Employed?
    • SEP (Simplified employee pension plan)
    • SIMPLE IRA
    • IRA
    • Annuities
  • 35. Coping With Financial Crisis
    • Establish an Emergency Fund
      • This can lessen the need to dip into retirement savings for a financial emergency
    • Insure Yourself
      • Having adequate insurance will protect your financial assets
      • Insurance coverage:
        • Health
        • Disability
        • Homeowners or Renters (PPT on FPW website)
        • Automobile
        • Umbrella liability
        • Life (if someone else depends on your income)
  • 36. Monitor Your Progress
    • Financial planning is not a one-time process, so make sure to do the following:
      • Periodically review your spending plan
      • Monitor the performance of your investments
        • make adjustments as necessary
      • Contribute more toward retirement as you earn more
      • Update your insurance to reflect changes in income or personal circumstances
      • Keep your finances in order
  • 37. April 11 FPW
    • Making Your Money Last for a Lifetime: Why You Need to Know About Annuities
    • Check FPW web http://www.usu.edu/fpw/ for related PowerPoint presentations
      • Asset allocation
      • IRA picks 2005; Mutual Funds 2006
      • What is an IRA?
      • Ballpark E$timate
      • Taking the mystery out of retirement planning
  • 38. Questions?

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