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  1. 1. WELCOME!!! <ul><li>The Iota Alumni Association welcomes you to our Financial Planning Workshop </li></ul><ul><li>The Goal: Educate you on THE BASICS of Financial Planning </li></ul>
  2. 2. Your Humble Presenter <ul><li>Al Przygocki - Rat class: Fall 1991; Pledge class: Spring 1993 (Bagels & Buffoonery) </li></ul><ul><li>B.S. Mgt., Certificate in Finance, May 2003 </li></ul><ul><li>NASD Series 7 & 66; Georgia Insurance License for Life, Accident, & Sickness; Variable Products </li></ul><ul><li>Licensed Personal Financial Representative </li></ul><ul><li>Washington Mutual & WM Financial Services </li></ul>
  3. 3. THE BASICS <ul><li>BUDGETING </li></ul><ul><li>CASH RESERVE </li></ul><ul><li>CREDIT CARDS </li></ul><ul><li>INSURANCE </li></ul><ul><li>MORTGAGES </li></ul><ul><li>INVESTMENTS </li></ul><ul><li>RETIREMENT PLANNING </li></ul>
  5. 5. BUDGETING <ul><li>Your savings is the fuel that feeds the engine of long term security </li></ul><ul><li>You MUST earn more than you spend </li></ul><ul><li>Two Choices: </li></ul><ul><ul><li>EARN MORE </li></ul></ul><ul><ul><li>SPEND LESS </li></ul></ul>
  6. 6. Earn More <ul><li>Never settle for being unhappy </li></ul><ul><li>Changing companies to find a better job is commonplace now, even expected </li></ul><ul><li>Advanced degrees and Certifications </li></ul><ul><li>Always work on improving your job skills and your resume </li></ul><ul><li>Always be ready for change, it is constant </li></ul>
  7. 7. Spend Less <ul><li>Buy Quicken or MS Money or something similar (or design your own, smarty-pants!) </li></ul><ul><li>Track every expenditure (down to pieces of gum) for 30 days </li></ul><ul><li>Sort your expenses into 4 categories: </li></ul><ul><ul><li>Savings </li></ul></ul><ul><ul><li>Taxes </li></ul></ul><ul><ul><li>Committed </li></ul></ul><ul><ul><li>Discretionary </li></ul></ul>
  8. 8. Expenses <ul><li>Savings is probably your smallest expense but ideally would be the largest </li></ul><ul><li>Taxes are an expense that can be modified & must be accounted for but most people ignore </li></ul><ul><li>Committed Expenses </li></ul><ul><ul><li>Mortgage/Rent </li></ul></ul><ul><ul><li>Car Loan </li></ul></ul><ul><ul><li>Utilities </li></ul></ul><ul><ul><li>Food (groceries) </li></ul></ul>
  9. 9. Expenses <ul><li>Discretionary Expenses </li></ul><ul><ul><li>Dining Out </li></ul></ul><ul><ul><li>Liquid Refreshments </li></ul></ul><ul><ul><li>GT Season Tickets </li></ul></ul><ul><ul><ul><li>Football, Baseball, Basketball, Volleyball, etc. </li></ul></ul></ul><ul><ul><li>Mall Shopping Sprees (those shoes are so you!) </li></ul></ul><ul><ul><li>Computer Games, Music CD’s, DVD’s, Books </li></ul></ul><ul><ul><li>Entertainment (movies, concerts, strip clubs) </li></ul></ul><ul><ul><li>Dates (if you’re married, it’s a committed expense) </li></ul></ul><ul><ul><li>EVERYTHING ELSE!!!! </li></ul></ul>
  10. 10. Budgeting <ul><li>Once you know how much you currently spend on things, you can make a plan. </li></ul><ul><li>Take your after tax income (we’ll talk about controlling taxes later). </li></ul><ul><li>Subtract out your committed expenses. </li></ul><ul><li>This pool will need to fund both your savings and your discretionary expenses </li></ul><ul><li>SAVING IS BETTER THAN SPENDING!!! </li></ul>
  11. 11. Budgeting, part 2 <ul><li>Most people spend first, and then save what’s “leftover” </li></ul><ul><li>So, they spend a lot and save little (if any) </li></ul><ul><li>Smart answer: Save First, spend leftovers </li></ul><ul><li>Automate your savings </li></ul><ul><ul><li>401(k) contributions </li></ul></ul><ul><ul><li>Automatic Transfers to Savings Accounts </li></ul></ul><ul><ul><li>Bank Authorizations into Brokerage Accounts </li></ul></ul>
  12. 12. Budgeting, part 3 <ul><li>Automate your regular expenses </li></ul><ul><ul><li>Online Bill Pay </li></ul></ul><ul><ul><li>Bank Authorizations from Checking Accounts </li></ul></ul><ul><li>Saves stamps </li></ul><ul><li>Saves time </li></ul><ul><li>Saves late payments </li></ul><ul><li>Saves your credit record </li></ul>
  13. 13. CASH RESERVE
  14. 14. Savings <ul><li>Having a Cash Reserve is CRITICAL!!! </li></ul><ul><li>Experts recommend having between 3 and 6 months worth of CASH available to fund Committed Expenses </li></ul><ul><li>This is to take care of Emergencies or Opportunities as they arise. Cash is King!!! </li></ul><ul><li>Taking money out of your savings account is a lot cheaper than using Credit Cards </li></ul>
  15. 15. Savings, part 2 <ul><li>Step 1: Direct Deposit your paycheck </li></ul><ul><ul><li>You can do it into more than one account </li></ul></ul><ul><ul><li>Put enough in checking to cover your bills </li></ul></ul><ul><ul><li>Put the rest into your savings account </li></ul></ul><ul><li>Step 2: Build up one month of reserve in your checking account </li></ul><ul><li>Step 3: Build up two to five months of reserve in your savings account </li></ul>
  16. 16. Savings, part 3 <ul><li>Once you have a Cash Reserve in place, begin saving for long term goals </li></ul><ul><li>You should begin to save up for a down payment on a house </li></ul><ul><li>Direct the portion that was going into your savings into a new savings account </li></ul><ul><li>During this time, you should work on building your credit </li></ul>
  17. 17. CREDIT & DEBT
  18. 18. Credit <ul><li>If you thought your GPA was important, wait until you meet your credit score </li></ul><ul><li>Your credit score impacts many things </li></ul><ul><ul><li>Interest rate on Loans (Car, Home, Personal, etc.) </li></ul></ul><ul><ul><li>Employment (Many employers will run a credit check on you to see if you are responsible) </li></ul></ul><ul><ul><li>Relationships (Maybe this is an over 30 thing, but many people won’t get married to someone with a bad credit score) </li></ul></ul>
  19. 19. Credit Advice <ul><li>Limit yourself to two credit cards </li></ul><ul><ul><li>One is for paying bills and daily expenses </li></ul></ul><ul><ul><li>One is for Very Rainy Days (think Hurricane) </li></ul></ul><ul><li>Link your Online Bill Payments to the Credit Card for bills & expenses </li></ul><ul><li>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 </li></ul>
  20. 20. Already in Debt? <ul><li>Credit Cards, Student Loans, Bookies, etc. </li></ul><ul><li>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 </li></ul><ul><li>Good debt = Mortgages, Student Loans, anything at a low rate, anything investing in your future growth </li></ul><ul><li>Bad debt = Credit Cards, anything at a high rate, anything invested in stuff </li></ul>
  21. 21. Getting out of Debt <ul><li>Highest Rate not the highest balance </li></ul><ul><li>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. </li></ul><ul><li>Take your Cash Reserve down some to pay off any debt that is at a high rate (over 10%) </li></ul><ul><li>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 </li></ul>
  22. 22. INSURANCE
  23. 23. Insurance <ul><li>Everyone needs insurance </li></ul><ul><li>You are paying the insurance company to take the risk of something bad happening </li></ul><ul><li>If you have a body, you need health insurance </li></ul><ul><li>If you have children and/or a spouse, you need life insurance </li></ul><ul><li>If you count on your job for income, you need disability insurance </li></ul><ul><li>If you have property, you should insure it </li></ul>
  24. 24. Insurance, part two <ul><li>Luckily, you can do the basics through your job </li></ul><ul><li>Sign up for the most free or low cost coverage you can get (life, health, dental, vision, long term care, & disability) </li></ul><ul><li>If you need more than the basics (life, disability, LTC), consult a financial advisor </li></ul><ul><li>Renter’s Insurance is cheap and worth it </li></ul><ul><li>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) </li></ul>
  25. 25. MORTGAGES
  26. 26. Home Ownership <ul><li>Renting is a temporary fix for a permanent problem. When the lease is up, what do you have to show for your money? </li></ul><ul><li>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) </li></ul>
  27. 27. Renting vs. Buying <ul><li>Pay $1,000 a month in rent for 7 years. You have spent $84,000 and have zero. </li></ul><ul><li>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. </li></ul><ul><li>Assumptions: 10% down, 6% fixed 30 year mortgage, 34% combined federal & state taxes, 7% selling expenses, 6% annual appreciation </li></ul><ul><li>http://www.wamuhomeloans.com/calculators/c04rent/index.ognc </li></ul>
  28. 28. Mortgages <ul><li>Fixed Rate Mortgages </li></ul><ul><li>Adjustable Rate Mortgages </li></ul><ul><li>Interest Only Mortgages </li></ul><ul><li>Home Equity Loans </li></ul><ul><li>Home Equity Lines of Credit </li></ul>
  29. 29. Mortgage Types <ul><li>Fixed Rate Mortgages </li></ul><ul><ul><li>Most Common Type in the U.S. </li></ul></ul><ul><ul><li>Least Common Type in the rest of the world </li></ul></ul><ul><ul><li>Locked in Rate, Same Payment Throughout </li></ul></ul><ul><li>Adjustable Rate Mortgages </li></ul><ul><ul><li>Rate Resets periodically based on an Index </li></ul></ul><ul><li>Interest Only Mortgages </li></ul><ul><ul><li>Lowest Rate, Only have to pay interest portion, option to pay down principal, lowest monthly payment </li></ul></ul><ul><ul><li>Payment adjusts periodically based on remaining principal </li></ul></ul>
  30. 30. More Mortgage Types <ul><li>Home Equity Loans </li></ul><ul><ul><li>Loan equal to the amount of Equity in your Home </li></ul></ul><ul><ul><li>Paid to you in a lump sum </li></ul></ul><ul><ul><li>You pay it back over time in equal payments </li></ul></ul><ul><ul><li>Interest is tax deductible </li></ul></ul><ul><li>Home Equity Lines of Credit (HELOC’s) </li></ul><ul><ul><li>Credit Line equal to the amount of Equity in your Home </li></ul></ul><ul><ul><li>Works like a credit card </li></ul></ul><ul><ul><li>Only pay back what you use </li></ul></ul><ul><ul><li>Interest is tax deductible </li></ul></ul>
  31. 31. Mortgage Advice <ul><li>If this is the last home you are ever going to buy, then a Fixed Rate is perfect when rates are low </li></ul><ul><li>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 </li></ul><ul><li>If you know you will be in your home for less than 10 years, Choose Interest Only </li></ul>
  32. 32. Mortgage Advice, part two <ul><li>Home Equity Loans are not a great idea </li></ul><ul><li>Home Equity Lines of Credit are a great idea </li></ul><ul><ul><li>Flexibility – Use only how much you need, when you need it </li></ul></ul><ul><ul><li>Convenience – Only pay the minimums if cash flow is tight </li></ul></ul><ul><ul><li>Affordability – Cheaper than Credit Cards, especially considering the tax deductibility </li></ul></ul>
  34. 34. Why Start Now? <ul><li>Two 20-year olds, Aaron & Bob </li></ul><ul><li>Aaron – invests $2,000/yr for 10 years and then sits on it for 20 years </li></ul><ul><li>Bob – does nothing for 10 years, then invests $2,000/yr for 20 years </li></ul><ul><li>At the end of 30 years, who has the most money? </li></ul>
  35. 35. The Math <ul><li>Assuming 10% rate of return, compound annually </li></ul><ul><li>Aaron has ($2,000)x(1.10)^30 + … + ($2,000)x(1.10)^21 = $235,881.85 </li></ul><ul><li>Bob has ($2,000)x(1.10)^20 + … + ($2,000)x(1.10)^1 = $126,005.00 </li></ul><ul><li>Aaron invested half as much and has almost twice as much!!! </li></ul><ul><li>Behold the Power of Compounding!!! </li></ul>
  36. 36. Investing 101 <ul><li>Stocks </li></ul><ul><ul><li>You are buying a piece of a Company </li></ul></ul><ul><ul><li>Profit for investor comes from dividends and/or from capital gain </li></ul></ul><ul><li>Bonds </li></ul><ul><ul><li>You are loaning money to a Company </li></ul></ul><ul><ul><li>Profit for investor comes from dividend and/or from capital gain </li></ul></ul>
  37. 37. Investing 101, part 2 <ul><li>Diversification comes in many different flavors </li></ul><ul><ul><li>Types of industries (utility vs. high tech) </li></ul></ul><ul><ul><li>Types of companies (small cap vs. large cap) </li></ul></ul><ul><ul><ul><li>Market Capitalization = Price of Stock x Shares Outstanding </li></ul></ul></ul><ul><ul><ul><li>General Electric (GE) is a Large Cap (well over $5 Billion) </li></ul></ul></ul><ul><ul><ul><li>Barnes & Noble (BKS) is a Mid Cap ($1 Billion - $5 Billion) </li></ul></ul></ul><ul><ul><ul><li>Hot Topic (HOTT) is a Small Cap ($250MM - $1Billion) </li></ul></ul></ul><ul><ul><li>Types of investments (stocks vs. bonds) </li></ul></ul><ul><ul><li>Value (established companies with dividends) vs. Growth (newer companies seeking capital gain) </li></ul></ul><ul><ul><li>Length of time (short term vs. retirement) </li></ul></ul><ul><ul><li>Tax Treatments (tax deferred vs. taxable) </li></ul></ul>
  38. 38. Diversification <ul><li>If you own one stock, then your entire portfolio is dependent on that one company doing well. </li></ul><ul><li>If you own 20 stocks but they are all in the same sector (oil companies), then you are dependent on one sector doing well </li></ul><ul><li>If you own 500 stocks spread across 20 different sectors, then you are dependent on the stock market to do well </li></ul><ul><li>The same holds true for bonds </li></ul><ul><li>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 </li></ul>
  39. 39. Diversification, part 2 <ul><li>Problem: How in the heck am I going to own the hundreds of stocks and hundreds of bonds I need to get truly diversified? </li></ul><ul><li>Solution: Buy Mutual Funds! </li></ul>
  40. 40. Mutual Funds <ul><li>Fund companies gather investor assets and buy enough stocks and/or bonds to have diversified portfolios </li></ul><ul><li>You, the investor, then buy shares of the whole portfolio </li></ul><ul><li>You can buy pieces of thousands of stocks and bonds in small increments </li></ul><ul><li>Different funds have different foci </li></ul>
  41. 41. Harry Markowitz & You <ul><li>1990 Nobel Prize in Economics </li></ul><ul><li>Researched Portfolio Performance </li></ul><ul><li>Used Linear Regression Modeling </li></ul><ul><li>Found 3 Major Factors in Returns </li></ul><ul><ul><li>Selection (which stocks or bonds to buy) </li></ul></ul><ul><ul><li>Timing (when to sell, when to buy) </li></ul></ul><ul><ul><li>Asset Class (what types of investments) </li></ul></ul>
  42. 42. Asset Allocation <ul><li>2% comes from Timing </li></ul><ul><li>6% comes from Selection </li></ul><ul><li>92% comes from Asset Allocation </li></ul><ul><li>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. </li></ul><ul><li>So, let’s focus on the 92% for a minute </li></ul>
  43. 43. Asset Allocation, part 2 <ul><li>The asset allocation in your portfolio is based on your risk tolerance and your long term needs for returns. </li></ul><ul><li>The more risk-averse you are, and the less dependent you are on high returns, then the higher the bond component </li></ul><ul><li>The less risk-averse you are and the more dependent you are on high returns, then the higher the stock component </li></ul>
  44. 44. Asset Classes <ul><li>Stocks </li></ul><ul><ul><li>Large Cap (Growth & Value) </li></ul></ul><ul><ul><li>Mid Cap (Growth & Value) </li></ul></ul><ul><ul><li>Small Cap (Growth & Value) </li></ul></ul><ul><li>Bonds </li></ul><ul><ul><li>Short Term </li></ul></ul><ul><ul><li>Intermediate </li></ul></ul><ul><ul><li>Long Term </li></ul></ul><ul><ul><li>Government </li></ul></ul><ul><ul><li>High Yield </li></ul></ul><ul><ul><li>Junk </li></ul></ul><ul><li>International (same as above classes) </li></ul>
  45. 45. Sample Portfolios <ul><li>Aggressive – 100% stock, 0 % bond </li></ul><ul><ul><li>40% Large, 30% Mid, 20% Small, 10% Intl. </li></ul></ul><ul><li>Moderate Aggressive – 80% stock, 20% bond </li></ul><ul><ul><li>40% Large, 20% Mid, 10% Small, 10% Intl., 10% High Yield Bonds, 10% Government Bonds. </li></ul></ul><ul><li>Moderate – 50% stock, 50 % bond </li></ul><ul><ul><li>20% Large, 10% Mid, 10% small, 10% Intl., 20% High Yield Bonds, 20% Government Bonds, 10% Intl. bond </li></ul></ul><ul><li>Moderate Conservative – 20% stock, 80% bond </li></ul><ul><ul><li>10% Large, 5% Mid, 5% Small, 20% High Yield, 20% Government, 20% Intermediate, 20% Intl. bond </li></ul></ul><ul><li>Conservative – 100% bond </li></ul><ul><ul><li>30% High Yield, 30% Government, 20% Intermediate, 20% Intl. </li></ul></ul>
  46. 46. Rebalancing <ul><li>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 </li></ul><ul><li>You need to rebalance your account at least annually (at most quarterly) by selling your winners and buying your losers </li></ul><ul><li>This forces you to sell high and buy low and it also uses Dollar Cost Averaging! </li></ul>
  48. 48. Tax Diversification <ul><li>There are basically three ways that your investments accounts can be taxed </li></ul><ul><ul><li>Taxed Now </li></ul></ul><ul><ul><li>Taxed Later </li></ul></ul><ul><ul><li>Taxed Never </li></ul></ul>
  49. 49. Taxed Now <ul><li>You pay taxes on the interest payments you receive </li></ul><ul><li>You pay taxes on Capital Gains if you sell for a profit </li></ul><ul><ul><li>Basic Brokerage Account </li></ul></ul><ul><ul><li>Savings Account </li></ul></ul><ul><ul><li>Certificates of Deposit </li></ul></ul>
  50. 50. Taxed Later <ul><li>Funded with pre-tax dollars (or write off in the case of IRA’s) </li></ul><ul><li>Withdrawals taxed as Ordinary Income </li></ul><ul><li>Typically, there are special rules </li></ul><ul><ul><li>Age 59 ½, 10% early withdrawal penalty </li></ul></ul><ul><ul><li>RMD (Required Minimum Distributions) at Age 70 ½ </li></ul></ul><ul><li>Examples: 401(k), 403(b), Annuities, Traditional IRA’s </li></ul>
  51. 51. Taxed Never <ul><li>These accounts are funded with after tax dollars </li></ul><ul><li>If managed properly, withdrawals are not taxable </li></ul><ul><li>Examples: </li></ul><ul><ul><li>Roth IRA </li></ul></ul><ul><ul><li>Municipal Bonds </li></ul></ul><ul><ul><li>Cash Value Life Insurance </li></ul></ul>
  52. 52. Basic Tax Diversification <ul><li>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 </li></ul><ul><li>Roth IRA – limited contributions ($4,000 for 2005-07; $5,000 in 2008); Also, if you have a large income, you may not qualify </li></ul><ul><li>Municipal Bonds – Too little return </li></ul><ul><li>Cash Value Life Insurance – great if you need life insurance; pricey if you don’t </li></ul>
  53. 53. Tax Strategy <ul><li>Max your 401(k) to the match </li></ul><ul><li>Then, max your Roth IRA </li></ul><ul><li>Then, max your 401(k) ($14,000 for 2005) </li></ul><ul><li>Then, fund a Cash Value Life Insurance Policy (if you have a need for life insurance) </li></ul><ul><li>Then, fund a Brokerage Account (taxable) </li></ul>
  54. 54. Financial Professionals <ul><li>Financial Professionals are more affordable than ever before </li></ul><ul><li>If you’d rather spend your time making money than managing it, hire a Pro </li></ul><ul><li>Get a good accountant </li></ul><ul><li>Get a Financial Advisor </li></ul><ul><li>Get a Will (not Bishop, he’s a pansy!) </li></ul><ul><li>Paying for advice on the front end is cheaper than fixing problems on the back </li></ul>
  55. 55. Want to know more? <ul><li>Many great sources of information on the internet </li></ul><ul><li>Talk to a financial professional; Almost all of them offer a free consultation (the first one’s free, then you’re hooked!) </li></ul><ul><li>Many great books out there (but beware of the bad ones) </li></ul><ul><li>ASK ME!!! (Al) – Take a business card! </li></ul>
  56. 56. QUESTIONS?