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Go to: law.georgetown.edu/finaid/

  1. 1. Go to : law.georgetown.edu/finaid/ lifeafterlinks.html Need a calculator? Go to: www.calculator.com
  2. 2. Welcome to Life After GULC
  3. 3. Topics of Interest
  4. 4. Check Your “Guess-timator”
  5. 5. Welcome to the Financial Buffet <ul><li>The goal is to provide enough information to allow you to make your initial financial plans. </li></ul><ul><li>The basics are resolved before you see a financial planner. You can tell the planner your goals, available resources and expenses. (See booklet for tips on choosing a planner) </li></ul><ul><li>Charles and Ruth are available for questions throughout the session and during the summer. </li></ul>
  6. 6. Man the Worksheets!
  7. 8. The Tax Bites and More Starting income = $40,000 <ul><li>Federal Tax $5,027 </li></ul><ul><li>State Tax $2,010 </li></ul><ul><li>City Taxes – $0 </li></ul><ul><li>Social Security Tax of 6.20% – $2,480 </li></ul><ul><li>Medicare of 1.45% – $580 </li></ul><ul><li>Insurance premiums (employee paid) – $900 </li></ul><ul><ul><li>Medical, Dental, Disability, etc. </li></ul></ul><ul><li>Mandatory Withholding – $0 </li></ul><ul><li>Retirement Withholding – $2,000 </li></ul>
  8. 9. Page 1 Wrap-up <ul><li>Subtract all of the debits ($12,997) from Total Gross Income of $40,000 . </li></ul><ul><li>Result is Net Annual Income of $27,003 . </li></ul><ul><li>Divide by 12 to get monthly income of $2,250 </li></ul>
  9. 10. Measure Your Accuracy <ul><li>Adding back any retirement you took out on the worksheet, was your estimate close? </li></ul><ul><li>Did you overestimate or underestimate your resources? </li></ul><ul><li>Where did the discrepancies arise? </li></ul>
  10. 11. Income After Fixed Expenditures <ul><li>Housing $800 </li></ul><ul><li>Utilities $100 </li></ul><ul><li>Telephone $40 </li></ul><ul><li>Education Debt Payment $800 </li></ul><ul><ul><li>LRAP Benefits ($800) </li></ul></ul><ul><li>Consumer Debt Payment $150 </li></ul><ul><li>Food $200 </li></ul><ul><li>Prescriptions/Eyecare $15 </li></ul><ul><li>Transportation $200 </li></ul>
  11. 12. Flexible Spending Accounts <ul><li>Medical </li></ul><ul><ul><li>Allows medical and dental expenditures to be made free of federal, state, social security and Medicare taxes. Saves you about 40% </li></ul></ul><ul><ul><li>Employer offers program as part of benefit package </li></ul></ul><ul><ul><li>Up to $6500 per year, but balance remaining at end of year is lost </li></ul></ul><ul><ul><li>Covers items such as aspirin, contacts and doctor visits and more </li></ul></ul><ul><li>Childcare </li></ul><ul><ul><li>Same savings and limits as above </li></ul></ul><ul><ul><li>Used to pay daycare and other related costs </li></ul></ul>
  12. 13. Transportation <ul><li>Employers offer ability to have transportation costs such a Metro debited from your paycheck </li></ul><ul><li>Saves federal and state taxes and reduces the costs of your commuting by 33% or more </li></ul><ul><li>Check your benefits statement for more information </li></ul>
  13. 14. Income After Fixed Expenditures <ul><li>Housing $800 </li></ul><ul><li>Utilities $100 </li></ul><ul><li>Telephone $40 </li></ul><ul><li>Education Debt Payment $800 </li></ul><ul><ul><li>LRAP Benefits ($800) </li></ul></ul><ul><li>Consumer Debt Payment $150 </li></ul><ul><li>Food $200 </li></ul><ul><li>Prescriptions/Eyecare $15 </li></ul><ul><li>Transportation $200 </li></ul><ul><li>Life and other Insurance $25 </li></ul>
  14. 15. Page 2 Wrap-up <ul><li>Net Monthly Income $2,250 </li></ul><ul><li>less </li></ul><ul><li>Total Fixed Expenditures $1,505 </li></ul><ul><li>equals </li></ul><ul><li>Monthly Disposable Income $745 </li></ul>
  15. 16. Discretionary Income <ul><li>Entertainment $100 </li></ul><ul><li>Clothing $100 </li></ul><ul><li>Dry Cleaning $40 </li></ul><ul><li>Furnishings $100 </li></ul><ul><li>Pager/Cell Phone $30 </li></ul><ul><li>Professional Services $25 </li></ul><ul><li>Health and Fitness $25 </li></ul><ul><li>Subscriptions $15 </li></ul><ul><li>Dues $30 </li></ul>
  16. 17. Page 3 Wrap-up <ul><li>Monthly Disposable income $745 </li></ul><ul><li>less </li></ul><ul><li>Total Elastic Expenditures $465 </li></ul><ul><li>equals </li></ul><ul><li>Monthly Discretionary Income $280 </li></ul>
  17. 18. Other Items to Consider <ul><li>Starting Amount $280 </li></ul><ul><li>Tax Savings $291 </li></ul><ul><ul><li>Student Loan Interest Deductibility </li></ul></ul><ul><ul><li>Lifetime Learning Tax Credit </li></ul></ul><ul><ul><li>State Tax Savings </li></ul></ul><ul><li>Add back retirement taken out pg 1. $166 </li></ul><ul><li>Actual Discretionary Income $737 </li></ul>
  18. 19. We have a number. So, now what? <ul><li>The Monthly Discretionary Income number is the basis for all financial planning made. </li></ul><ul><li>This is your “entry fee” to the Financial Buffet. </li></ul><ul><li>Think about your goals- what do you hope to accomplish with your earnings besides “paying the bills”? </li></ul>
  19. 20. Building Your Financial House
  20. 21. Step 1 – Build a Good Foundation <ul><li>The Emergency Reserve Account should be the foundation for the your financial plan. </li></ul><ul><li>How much? – 3 to 6 months of expenses including: </li></ul><ul><ul><li>Housing / utilities </li></ul></ul><ul><ul><li>Food </li></ul></ul><ul><ul><li>Consumer Debt Payment </li></ul></ul><ul><ul><li>Transportation </li></ul></ul><ul><li>Sources of Funding: </li></ul><ul><ul><li>Loan Grace Period – Payments already counted </li></ul></ul><ul><ul><li>Unused Credit Card – until account is funded </li></ul></ul>
  21. 22. Where to keep your Emergency Reserve Account <ul><li>Liquidity and Security – The ability to obtain the resource without concern for a sudden drop in value is critical. </li></ul><ul><li>Savings-Type Accounts – Insured accounts with banks and credit unions are ideal. </li></ul><ul><ul><li>Internet banks such as ING Direct, HSBC and Emigrant pay significantly more than “brick and mortar” banks and the account can be linked to your checking account. </li></ul></ul><ul><li>Automate your contribution either directly from your paycheck or monthly from your checking account. </li></ul>
  22. 23. Step 2 – Build a Strong Wall for the Future <ul><li>Prepare for your retirement using these two major types of retirement accounts - </li></ul><ul><ul><li>401(k), 403(b), 457 Accounts </li></ul></ul><ul><ul><li>IRAs – Roth and Traditional </li></ul></ul>
  23. 24. 401(k), 403(b) and 457 Accounts <ul><li>The contribution from the account comes directly out of your paycheck. </li></ul><ul><li>Grows tax-free until withdrawn for retirement. </li></ul><ul><li>$15,500 annual contribution limit for 2007 rising by $500 increments based on inflation. </li></ul><ul><li>Possibility of “free money” if employers match. </li></ul><ul><li>Contribution reduces federal and state taxes – but not FICA (Social Security 6.2% and Medicare 1.45%). </li></ul>
  24. 25. IRAs (2007 TY) - Roth v. Traditional <ul><li>Pay Tax Now </li></ul><ul><li>$4,000 per year </li></ul><ul><li>$99,000 -$114,000 income phase-out </li></ul><ul><li>Future tax savings generally better for people further away from retirement. </li></ul><ul><li>Pay Tax on Withdrawal </li></ul><ul><li>$4,000 per year </li></ul><ul><li>$52,000 - $62,000* income phase out </li></ul><ul><li>Present tax savings generally better for people near retirement. </li></ul>
  25. 26. The Impact of one $4000 contribution <ul><li>A single $4000 investment </li></ul><ul><ul><li>Held for 35 years </li></ul></ul><ul><ul><li>Invested in an S&P tracking fund </li></ul></ul><ul><ul><li>Can result in a $92,000 account at retirement </li></ul></ul>
  26. 27. A wise man once said…. <ul><li>“ It is the greatest mathematical discovery of all time.” </li></ul><ul><li>Quotation regarding compound interest attributed to Albert Einstein. </li></ul>
  27. 28. Start Now! <ul><li>Albert contributes $250 per month for 30 years </li></ul><ul><li>Betty contributes $300 per month for 25 years. </li></ul><ul><li>Each contributes same total dollar amount - $90,000 </li></ul>
  28. 29. Results <ul><li>Albert’s account contains $565,122. </li></ul><ul><li>Betty’s account contains only $398,050. </li></ul><ul><li>Difference of over $167,000 due to compounding of the initial $15,000 ($3,000 x 5 years) </li></ul>
  29. 30. Start Now, Even if You Have to Stop <ul><li>Albert contributes $250 per month for 8 years and then stops. Total contribution = $24,000 </li></ul><ul><li>Betty waits 8 years and then contributes $250 per month for 22 years. Total contribution = $66,000 </li></ul><ul><li>Albert has $326,828 in his account at retirement. </li></ul><ul><li>Betty has $238,293 in her account. </li></ul><ul><li>Difference of $88,535 due to compounding and Albert put in $42,000 less to boot! </li></ul>
  30. 31. Prepayment vs. Retirement <ul><li>Financial Aid Heresy – It is not always best to prepay your federal student loans. </li></ul><ul><li>In low interest rate environment, it is financially more sound to eliminate other forms of debt. </li></ul><ul><li>Similar calculation can be done with retirement growth and contributions. </li></ul><ul><li>Allows you to leverage student loan debt in order to promote long-term stability. </li></ul>
  31. 32. Retirement Action Items <ul><li>Managing your 401(k) </li></ul><ul><ul><li>Does your employer match your participation? </li></ul></ul><ul><ul><li>When are you allowed to enter? </li></ul></ul><ul><ul><li>Traditional vs. Roth 401(k) calculator @ http://www.moneycentral.msn.com/content/common/P139556.asp </li></ul></ul><ul><li>IRAs </li></ul><ul><ul><li>Will you have resources available to contribute for 2006 (until April15) and/or 2007? </li></ul></ul>
  32. 33. Recalculate Your Figures <ul><li>Go back to the paycheckcity.com data entry page and enter an amount that represents your intended 401K contribution. (reduces federal and state taxes) </li></ul><ul><li>Include any Flexible Spending Accounts in a second item. (reduces federal, state, and FICA taxes) </li></ul><ul><li>Note the difference in taxes paid. </li></ul>
  33. 34. Step 3 – Build a Wall for Defense <ul><li>Additional types of insurance to consider to protect you and your resources - </li></ul><ul><ul><li>Disability </li></ul></ul><ul><ul><li>Homeowner’s / Renter’s </li></ul></ul><ul><ul><li>Umbrella Liability </li></ul></ul>
  34. 35. Disability Coverage – What’s its Purpose? <ul><li>Replaces your income when unable to work. </li></ul><ul><li>What about Social Security and State disability programs? – The coverage is minor relative to your total current income. </li></ul><ul><li>Where can you obtain the coverage? </li></ul>
  35. 36. Typical Disability Coverage <ul><li>Benefit usually is between 60 and 66% of your annual income. </li></ul><ul><li>This is a taxable benefit! </li></ul><ul><li>Determine if you are adequately covered by recalculating your worksheets. </li></ul><ul><li>Some firms in the area provide less coverage: </li></ul><ul><ul><li>60 % of the first $25,000 = $15,000 </li></ul></ul><ul><ul><li>40% of the remainder = $40,000 </li></ul></ul><ul><ul><li>Total benefit on $125K = $55,000 - TAXABLE </li></ul></ul>
  36. 37. Disability Coverage <ul><li>What Are the Odds? </li></ul><ul><li>People in their early thirties are three times more likely to suffer a disability lasting three months or longer than they are to die. </li></ul><ul><li>48% of all mortgage foreclosures in this country are caused by disability. </li></ul><ul><li>There is a 1 in 3 probability that a person aged 25 will suffer a disability before age 65. </li></ul><ul><li>The average disability will last more than five years, but for 30 percent of those disabled, it will persist for life. </li></ul>
  37. 38. Disability Coverage Action Items <ul><li>Determine minimum required income to meet your expenses. </li></ul><ul><li>Verify type and amount of disability coverage available through your employer. </li></ul><ul><li>Investigate supplemental disability coverage through your employer. </li></ul><ul><li>If your employer allows you to pay the premium the benefits would be tax free. </li></ul><ul><li>If you want more information, visit www.about-disability-insurance.com (in session packet) </li></ul>
  38. 39. Homeowner’s/Renter’s Coverage <ul><li>What do you wish to have covered? </li></ul><ul><li>What type of coverage you have? </li></ul><ul><ul><li>Replacement Cost </li></ul></ul><ul><ul><li>Cash Value </li></ul></ul><ul><li>How do you prove what you have covered in case the insurance is needed? </li></ul><ul><li>Liability coverage – how much? </li></ul><ul><li>Review your coverage levels each year when you renew your policy. </li></ul>
  39. 40. Umbrella Liability Coverage <ul><li>The umbrella sits on top of your other liability coverage, such as with your Homeowner’s / Renter’s policy and your car policy. </li></ul><ul><li>If your liability coverage limit is pierced with your other policies, the umbrella stands between you and the claim, protecting your assets. </li></ul><ul><li>Coverage is inexpensive – approx $200 for $1 million in additional coverage. </li></ul><ul><li>Insurance is jurisdiction specific – work with a single insurance company/agent to ensure your coverage is appropriate. </li></ul>
  40. 41. Step 4 – Building your Roof <ul><li>Actions you should take before buying a home: </li></ul><ul><ul><li>Before you get too far along in your home search, determine if renting or purchasing is better for you: E-Loan Rent vs. Own Calculator </li></ul></ul><ul><ul><li>Check with your employer to see if it has a preferred banking relationship. </li></ul></ul><ul><ul><li>Pull your credit from all major bureaus. Effective 9/1/05, all US residents will be able to obtain a free credit report at: annualcreditreport.com </li></ul></ul>
  41. 42. Mortgage Basics <ul><li>Determine your eligibility for a mortgage by reviewing your Debt to Income ratio </li></ul><ul><ul><li>Fixed monthly debt payments in relation to gross income </li></ul></ul><ul><ul><li>Consolidation and graduated repayment options help </li></ul></ul><ul><li>The basic types of mortgages </li></ul><ul><ul><li>Fixed </li></ul></ul><ul><ul><li>Variable </li></ul></ul>
  42. 43. Recommended Goals to enable a Career Path Change <ul><li>Fully fund your Emergency Reserve Account </li></ul><ul><li>Eliminate the following: </li></ul><ul><ul><li>Credit Card Debt </li></ul></ul><ul><ul><li>Commercial Student Loans – as much as possible </li></ul></ul><ul><li>Contribute to Retirement </li></ul><ul><ul><li>Start early </li></ul></ul><ul><ul><li>As much as possible </li></ul></ul>
  43. 44. Test Your Expertise <ul><li>How much can I set aside for my emergency reserve? </li></ul><ul><li>How much can I contribute to my retirement? </li></ul><ul><ul><li>Does my employer offer a 401(k) type account and if so, when can I participate? </li></ul></ul><ul><ul><li>Can I contribute to an IRA by automating a monthly contribution? </li></ul></ul><ul><li>Am I taking advantage of all of my other employee benefit programs? </li></ul><ul><li>Can I set up a separate account for loan payments AND utilize auto-debit for additional interest rate savings? </li></ul><ul><li>Which additional financial obligations can I automate? </li></ul>
  44. 45. Thank you for your participation! <ul><li>This session is just the beginning of a lifelong journey. The first step begins with you. Best wishes in your future careers. </li></ul>

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