Financial check up


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Dr. Barbara O'Neill will present the topic: How Are You Doing: A Financial Check Up on December 4 at 11 a.m. ET on behalf of the Military Families Learning Network. Learn more:

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  • Cash flow, very simply, is the relationship between the total of household income and expenses:
    Earn more than you spend and you have positive cash flow.
    Spend more than you earn and you have negative cash flow.
    Occasional periods of negative cash flow can happen to almost anyone and are probably not a major concern. When negative cash flow becomes a way of life, however, it is very dangerous because it indicates that you are living beyond your means. In order to spend more than you earn, you are probably depleting savings and/or relying on credit to maintain your lifestyle.
    When one wants to lose weight, they can do three things: eat less, burn more calories through exercise, or do a little of both (better diet and exercise).
    When one wants to have positive cash flow, they can also do three things: increase income (or products or services in lieu of income), reduce expenses, or do a little of both (increased income and reduced expenses).
  • This slide lists possible strategies to increase household income:
    Adjust tax withholding, using Form W-4 through your employer.
    Taking advantage of available tax benefits, such as deductions for tax-deferred savings plans, the child tax credit, and the earned income tax credit.
    Starting a home-based business or freelancing your talents and skills.
    Trying to increase/collect child support or alimony (caution: this may require court intervention and the expense of a lawyer).
    Accessing public benefits such as free rabies shots for pets and low-cost immunizations and health screening tests).
    Selling assets, such as a unneeded car, or having a garage sale.
    Upgrading job skills through additional education and training.
    Charging adult children “rent” and bartering (swapping) products/services.
  • Note to Instructor: Review each household expense category and ask participants to share strategies that they have used to reduce expenses. Some examples are:
    Housing- refinancing mortgage, canceling private mortgage insurance when equity reaches 20% of home value, buying energy efficient appliances, trading down to a smaller home at retirement, etc.
    Food- combining coupons and store sales for double savings, buying in bulk when food is on sale or in season, buying cheaper store brands, etc.
    Transportation- keeping a car for as long as possible (8-10 years), buying “new used” (2-3 year old) cars, purchasing low cost airline tickets, having car routinely maintained to avoid major repair problems, etc.
    Clothing- shopping sales and “alternative” vendors such as thrift and consignment shops, avoiding dry clean garments, coordinating colors, etc.
    Utilities- using e-mail instead of the telephone, low-cost telephone calling plans, insulating the water heater, lowering the thermostat, etc.
  • What is asset allocation
    Asset allocation refers to the mix of stock, bonds and cash vehicles in a person’s portfolio. . .or collection of investments.
    The asset mix (or allocation) in a portfolio can vary widely.
    For example: StocksBondsCash Options
    Asset mix is closely associated with investment success.
    Research has shown that the asset mix in a portfolio is by far the most important determinant of overall investment performance … far more important than the selection of particular securities in an asset category (e.g., Coke stock versus Pepsi) or the timing of acquisitions or sales. Two studies of pension plan investment returns in 1986 and 1991 by Brinson et al found that 93.6% and 91.5% of the variability in plan returns, respectively, was due to asset allocation decisions.
  • Financial check up

    1. 1. Welcome to the Military Families Learning Network Webinar: How Are You Doing? A Financial Check Up A few days after the presentation, we will send an evaluation and links to an archive and resources. We appreciate your feedback. To receive these emails, please enter your email address in the chat box before we start the recording. Once we start the recording, all chat will be recorded and archived. This material is based upon work supported by the National Institute of Food and Agriculture, U.S. Department of Agriculture, and the Office of Family Policy, Children and Youth, U.S. Department of Defense under Award No. 2010-48869-20685.
    2. 2. Welcome to the Military Families Learning Network Webinar: How Are You Doing? A Financial Check Up To receive notifications of future webinars and other learning opportunities from the Military Families Learning Network, sign up for the Military Families Learning Network Email Mailing list at: This material is based upon work supported by the National Institute of Food and Agriculture, U.S. Department of Agriculture, and the Office of Family Policy, Children and Youth, U.S. Department of Defense under Award No. 2010-48869-20685.
    3. 3. Find the Personal Finance team online • Facebook:!/PersonalFinance4PFMs • Blog: • Website: • Twitter: Follow #MFLN
    4. 4. How Are You Doing? A Financial Check Up Barbara O’Neill, Ph.D., CFP®, AFC, CHC Rutgers Cooperative Extension
    5. 5. Webinar Objectives • Provide assessment tools to determine financial strengths and weaknesses • Provide worksheets to set goals and make calculations • Provide suggestions to improve financial management • Improve “financial fitness” and “screen” for potential problems (like physical exams)
    6. 6. Question #1 What check-up tools and techniques do you use to assess financial wellness (your own or your clients’)?
    7. 7. Webinar Topics • Financial goals • Marginal tax brackets • Net worth • Insurance analyses • Financial ratios • Retirement analyses • Cash flow (income and expense) statements • Investment performance • Spending plans (budgets) • Retirement and estate planning • Credit cards • Asset allocation
    8. 8. 1. Online Financial Self-Assessment Tools (Personalized Quizzes) • Financial Fitness Quiz (20 questions); available online at • FFQ research study results (O’Neill & Xiao, 2012):
    9. 9. FFQ Study Findings Volume 23 (1) » Journal of Financial Counseling and Planning, Financial Behaviors Before and After the Financial Crisis: Evidence from an Online Survey Authors: Barbara O'Neill and Jing J. Xiao This study investigated the performance of 20 financial practices before and after the recent global financial crisis. Data were obtained from an online financial self-assessment tool using responses collected from January 2005 through December 2010. The 10,661 respondent sample was divided into pre- and post-December 31, 2007 cohorts for purposes of comparison. Significant time-period differences were found in a positive direction for quiz scores that indicated the frequency of performance of 12 financial practices and for the total score of all practices. After converting quiz items to three broad behavioral categories, scores for all three behaviors- budgeting, spending, and saving- were significantly higher after the financial crisis began.
    10. 10. Other Online Assessment Tools • Identity Theft Risk Assessment Quiz: • Investment Risk Tolerance Quiz: • Personal Resiliency Assessment Quiz: • Wise Credit Management Quiz:
    11. 11. Another Helpful Check-Up Tool: The PFW Scale • Personal Financial Wellness (PFW) Scale: • Sample PFW questions: • Scores range from 1 (overwhelming financial distress) to 10 (no financial distress) • Contact PFEEF for usage queries:
    12. 12. Question #2 What other online financial self-assessment tools do you recommend? Please share them in the chat box.
    13. 13. 2. Incremental Progress Toward Financial Goals • Financial goals should be SMART – Specific (date, cost) – Measurable (progress) – Attainable – Relevant – Time-related (deadline) • Short-, intermediate-, long-term goals (match investments to goal time frame)
    14. 14. Financial Goal-Setting Worksheet 1 Goals Short-Term (under 3 years) Medium Term (3-10 years) Long-Term (10 or more years) 2 Approximate Amount Needed 3 Month & Year Needed 4 Number of Months to Save 5 Date to Start Saving 6 Monthly Amount to Save (2-4)
    15. 15. Then Do the Math! • Approximate amount needed • Number of months to save • Divide number of months into goal amount • Try to automate savings Example: $15,000 goal divided by 48 months = $312.50 per month to save
    16. 16. 3. Incremental Changes in Net Worth • Assets: everything that you own – Liquid (cash assets) – Tangible (property) – Investment • Debts: everything that you owe – Short-term (a.k.a., current debt; < 1 year) – Long-term • Assets minus debts equals net worth
    17. 17. Net Worth Calculation Worksheet
    18. 18. Benefits of Net Worth Statement • Determine adequacy of emergency savings • Determine home equity • Analyze portfolio diversification • See gaps in planning (e.g., no IRA) • See total amount of debt owed • Use to track progress annually • Needed for large loans and divorces
    19. 19. Question #3 How often do you personally do a net worth calculation as a financial check-up? Please reply in the chat box.
    20. 20. 4. The “Wealth Test” Source: The Millionaire Next Door (Stanley & Danko) •Multiply your age by pre-tax income from all sources except an inheritance •Divide by 10 •This is what your net worth should be for your age and income level •Example: 35 x $40,000 = $1,400,000 divided by 10 = $140,000 minimum net worth
    21. 21. Wealth Test Worksheet Your net worth (assets minus debts) ________________ Your annual household income (from all sources (excluding income from inherited wealth) _______________ Your age (if both spouse work, average your ages) ________________ Multiply your income by your age ________________ Divide line 4 by the number 10 to get expected net worth for someone with your age and income __________ Divide your net worth (line 1 by line 5) to get your final score. ________________ Interpretation of your Score 2.0 or higher, you rank in the top 25% of wealth builders called PAWs (prodigious accumulators of wealth) 1 to 1.99, you rank in the top half of Americans in your wealth building prowess. 0.51 to 0.99, you’re a below average generator of wealth for your age and income level. 0.50 or lower, you are one of Stanley and Danko’s UAWs (under accumulators of wealth) Adapted from
    22. 22. 5. Cash Flow Statement • Relationship of income and expenses • Track expenses – Fixed – Variable – Periodic/irregular • Track income (all sources) • Income Minus Expenses = Cash Flow
    23. 23. Question #4 What do you say or do when clients have negative cash flow? Please reply in the chat box.
    24. 24. Improving Cash Flow • Relationship between income and expenses – Positive cash flow – Negative cash flow • Three sustainable ways to improve cash flow – Increase household income – Decrease household expenses – Do both
    25. 25. Ways to Increase Income • Adjust tax withholding/tax benefits (EITC) • Add a second job or work overtime • Start a small business • Increase/collect child support/alimony • Access public benefits • Sell assets • Upgrade job skills • Charge adult children room & board • Bartering • Other?
    26. 26. Ways to Reduce Expenses • Housing • Food • Transportation • Clothing • Utilities • Other expenses
    27. 27. 6. Review Irregular Expenses • List all expenses that come irregularly throughout the year – Examples: car registration, school tuition, birthdays, holidays, vacations, quarterly property tax payment, water and sewer bills, insurance premiums • Total each expense and divide by 12 • Save that amount monthly in a “holding” savings account to cover irregular expenses
    28. 28. Irregular Expense Worksheet Identify the months that you pay irregular expenses, what they are, & the cost (Example: February, property tax: $1,600). Then add up all of your irregular expenses and divide the total by 12 to determine the monthly savings amount •Jan ____________________ •Feb.____________________ •Mar ____________________ •Apr _____________________ •May ____________________ •June ___________________ •July ____________________ •Aug ____________________ •Sept ____________________ •Oct _____________________ •Nov _____________________ •Dec _____________________ •Total of Annual Irregular Expenses____________________ •Monthly Savings Amount __________
    29. 29. 7. Use Financial Ratios • Liquidity Ratio: Liquid assets divided by monthly expenses – Should be 3 (months expenses) or more – Example: $10,000/$4,000 = 2.5 • Consumer Debt-to-Income Ratio: Monthly consumer debt payments (not including a mortgage) divided by take-home pay – Should be less than 15% to 20% (overextension) – Example #1: $250/$2,000 = 12.5% – Example #2: $350/$2,000 = 17.5%
    30. 30. More Financial Ratios • Savings Ratio: Amount saved per month divided by gross monthly income – Example: $100/$2,300 = 4.3% – Experts recommend at least a 10% savings ratio • Current Ratio: Liquid assets divided by current liabilities – Example #1: $4,000/$2,000 = 2 – Example #2: $8,000/$2,000 = 4 – The higher the ratio number, the better – More back-up cash to pay expenses
    31. 31. 8. Assess Spending Plan/Budget • List after-tax sources of income • List expenses – Fixed (including revolving savings) – Variable – Irregular (periodic) • Compare budgeted amount with actual amount • Adjust as necessary
    32. 32. Spending Plan Worksheets •Excel Spreadsheet: •Downloadable printed worksheet: heet.pdf
    33. 33. Spending Plan Leaks
    34. 34. Question #5 What are your clients’ biggest spending plan leaks? Please reply in the chat box.
    35. 35. 9. Credit Card Check-Up • Are there credit cards you don’t use that can be cancelled without hurting your credit score? • Can you find or negotiate a better interest rate? • Have you checked your credit report? – • Do you have a summary list of credit card info (e.g., account numbers and 800 numbers)? • What is the status of your rewards?
    36. 36. 10. Income Tax Check-Up • What is your marginal tax bracket? – See • Would you do better in taxable or tax-exempt investments? • Are you contributing to tax-deferred savings plans such as IRAs and the TSP? – If yes, could you contribute more? • Is your tax withholding accurate? – If not, complete a new W-4 form.
    37. 37. Taxable Equivalent Yield Formula Use to compare tax-exempt and taxable bonds Tax - exempt yield Taxable Equivalent Yield = 1 - Your tax rate Example : .03 Taxable Equivalent Yield = = .0416 = 4.16% 1 - .28 11-37
    38. 38. 11. Life Insurance Check-Up • Follow these steps to determine life insurance need: – Estimate annual income needed by survivors – Calculate # of years income is needed – Add expenses (e.g., funeral, debt, other) – Subtract income, such as government benefits and survivor’s income, and existing assets • Review periodically as needs change
    39. 39. Life Insurance Worksheet #1
    40. 40. Life Insurance Worksheet #2
    41. 41. Question #6 What tools or process do you use to assess clients’ life insurance needs? Please reply in the chat box.
    42. 42. 12. Other Insurance Check-Ups • Is your home insured for at least 80% of its replacement cost? • Do you have replacement cost riders on property? • Do you have at least $300k of auto liability? • Do you have long-term disability insurance? • Do you have a umbrella liability policy? • Have you considered LTC insurance? • Have you recently compared health insurance options (coverage and cost)?
    43. 43. 13. Retirement Planning Check-Up • Estimate required annual income (% of preretirement income) • Subtract SS, pension, earnings, etc. • Estimate life expectancy and retirement age • Determine total required savings • Add up value of existing retirement savings • Subtract future value of savings • Calculate total savings needed and annual (or per-paycheck) savings amount
    44. 44. The Ball Park Estimate • Six easy steps; one of the simplest planning tools • Tells savings amount needed to reach retirement goal (can then divide by number of paydays) • Can download paper worksheet or do online at • Flexible annual retirement income and life expectancy figures • Assumes a 3% constant real rate of return
    45. 45. 45
    46. 46. Other Retirement Planning Resources • Planning For a Secure Retirement (Purdue Extension) – • Center For Retirement Research (Boston College) – • Retirement Confidence Survey (EBRI) – • Retirement Readiness Rating (R3) (EBRI) –
    47. 47. Monte Carlo Calculators
    48. 48. 14. Social Security and/or Pension Check-Up • Review annual SS benefit report: – Retirement benefits at 62, full retirement age, 70 – Disability benefits – Annual earning amounts (check accuracy) • Get a benefit estimate (defined benefit) or check account balance (defined contribution) • Be alert to pension plan changes
    49. 49. 15. Investment Performance Check-Up • Can do for each investment individually or for total portfolio • Write down beginning balance and ending balance • Add half of annual contributions (deposits) to beginning balance and subtract half of annual contributions from ending balance • Divide adjusted ending balance by adjusted beginning balance • Convert into a percentage
    50. 50. Example of Calculating Investment Performance • Invest $200 /month or $2,400 over a year • January 1 balance: $15,368 • December 31 balance: $19,627 • $15,368 + $1,200 = $16,568 • $19,627 - $1,200 = $18,427 • $18,427 ÷ 16,568 = 1.11 • Subtract one and multiply by 100 to convert to a percentage = 11.1%
    51. 51. 16. Investment Risk Tolerance Check-Up • Check online quizzes (Rutgers Cooperative Extension, investment firms) • Ideally risk tolerance should be stable • Most people are more sensitive to potential losses than potential gains • Have clients consider possible losses in dollar figures (e.g., $3,000)- NOT percentages
    52. 52. Rutgers Risk Tolerance Quiz
    53. 53. 17. Investment Asset Allocation Check-Up • Review your desired asset allocation (% of portfolio in stocks, bonds, cash, real estate, etc. ) • Rebalance back to the original weightings – If percentages shift by a certain amount (e.g., 5%) – Periodically according to a certain schedule • Can rebalance by selling assets or directing new deposits to underweighted asset classes
    54. 54. Asset Allocation Basics • Important factor in overall investment success • The more stock in portfolio, the more aggressive the asset allocation • Guidelines: 100 to 115 – age = % of portfolio in stock • Conservative portfolio: lower stock percentage Conservative S C Moderate C Aggressive B S B B C S
    55. 55. 18. Estate Planning Check-Up • Do you have a current will? • Have you recently reviewed beneficiary designations on insurance and retirement accounts? – (Worksheet) • Are there any conflicts between your will and the titling of assets? • Do you have a living will, power of attorney, trusts (if needed)?
    56. 56. Quick Estate Planning Check-Up • Do you have a Will or Trust? (Yes/No) • Do you rent your home? (Yes/No) • Do you have a Power of Attorney for Financial Matters? (Yes / No) • Do you have a Power of Attorney for Healthcare Decisions? (Yes / No) • Do you have a Living Will? (Yes/No) • Have your estate planning documents (Wills, Trusts, Powers of Attorney been prepared or reviewed in the last five years? (Yes / No) • Are all of the beneficiaries of your estate over 18 years old? (Yes/No) • Are all of the beneficiaries of your estate without disabilities (i.e., not receiving any type of government assistance)? (Yes/No) • Do you want your estate to go to probate court after your death? (Yes/No) • Have you done any type of planning for long-term care? (Yes/No) If you answered “No” to any of these questions, you need an estate planning review.
    57. 57. 19. Compare Yourself With Other Americans • Median U.S. household income in 2012: $51,100 • Median net worth of all U.S. households in 2010: $77,300 Under age 35: $ 9,300 Age 35 to 44: $ 42,100 Age 45 to 54: $117,900 Age 55 to 64: $179,400 Age 65 to 74: $206,700 (Source: Federal Reserve SCF, 2010)
    58. 58. Net Worth: How Do You Stack Up? CNN Money Online Calculator Example: Age 40, $30,000 annual income
    59. 59. 20. Top Percentage Income and Asset Thresholds Household Annual Income Household Net Worth Top 1%: $521,411 Top 5%: $208,810 Top 10%: $148,688 Top 20%: $107,628 Top 1%: $6,816,200 Top 5%: $1,863,800 Top 10%: $952,200 Top 20%: $415,700 Source: 8205502185873348
    60. 60. Question #7 Are there any other Financial Check-Up tools or methods that you can think of? Please reply in the chat box.
    61. 61. Final Thoughts A financial check-up is as important as a medical check-up – Can assess problems (e.g., high debt ratio) and risks (e.g., lack of disability insurance) – Can evaluate progress toward goals – Can help identify “action steps” to take – Can provide motivation to change financial practices
    62. 62. Recommended Action Steps • Take the Rutgers Financial Fitness Quiz • Create/update net worth statement, cash flow statement, and spending plan • Take the “Wealth Test” (Millionaire Next Door) • Create personal financial ratios • Order and review your credit report • Do a life insurance needs analysis • Create/update estate planning documents • Do a retirement savings analysis • Order and review SS benefit estimate
    63. 63. Questions? Comments Experiences? Please complete the webinar evaluation and follow the instructions to receive CEU credits. Follow me on Twitter at @moneytalk1