Savings Fitness - March 2007


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Savings Fitness - March 2007

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