The Savings Waterfall Contact: firstname.lastname@example.org 832-630-7841 by www.owlinvest.com Nirav Batavia, CFA
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About Nirav Batavia • BS in Economics (Finance Concentration) from Wharton, May 2003Education • MBA University of Chicago, Booth School of Business, June 2012 • CFA Charterholder • Over 10 years in financeExperience • Sales & Trading, Hedge Fund, Chartered Financial Analyst • Disciplined Financial Planning Passion • Helping you “Invest Wisely” • Keep More of Your Hard-Earned Money
The Background of Owl Get expert, personalized, unbiased advice at a reasonable cost online • Advice is based on Nobel Prize-Winning research used by the top financial institutions for their wealthy clients Nirav Batavia (CEO) • Focus on maximizing returns while minimizing riskChartered Financial Analyst Founder • We keep costs low through our online platform • We do not accept commissions, so we are on your side Owl Finance, Inc is a SEC-registered investment advisor
The Keys to Financial SecurityFinancial Security Does Not It Does Come From Getting TheCome from Skipping Lattes Big Decisions Right
The Savings Waterfall 1. Where you put your savings will make MILLIONS of dollars in difference in your long- term outcome. 2. For most households, these decisions matter MORE than what you actually invest in. 3. Understanding where to invest and what to invest in are two sides of the same coin. Focus on both to maximize your financial security. 4. Whether you are just starting or have millions you can make the savings waterfall work for you (Waterfall Image)
Step 1: 401(K)/403(B)/Profit Sharing MatchYou Always Want to Get FREE Money a. The company match is FREE Money, do not pass it up b. Borrow, Beg, Steal but make sure you contribute enough to get your full match c. Average Company Match is 4.1% of Employee SalaryBiggest Mistakes People Make a. Not Getting The Full Match b. Putting away additional money into 401(K) before getting through the rest of the list (401k logo)
Step 2: Debt Paydown (of any debt >5%)Investing while carrying high cost debt is MATHEMATICALLY INSANE a. Realistic future expected returns are 7%-8% for stocks 3%-4% for bonds PRETAX (after-tax is obviously lower) b. Debt above 5% provides an after-tax return of the interest rate with no risk (unlike an investment portfolio) c. Generally this includes Credit Cards and Most Student Loans (but not most Mortgages and Car Loans) (Image of Credit Card and Student Loan)
Step 3a: Set Up an Emergency FundRule of Thumb is that Emergency Fund = 3-6 months of expenses a. A household can expect to have a major unexpected expense (replacing a vehicle, unexpected illness, etc.) every 10 years or so b. You don’t want to take out credit cards or loans against your 401(k) because it can take years to get back on track
Step 3b: Fund Any Near Term Financial Obligations You should not risk money that you need soon a. These are major obligations like down payment on a house, buying a car, paying for higher education, etc. b. Our rule of thumb is to set aside 100% for any expenses inside a year, 2/3rd for any expenses that are 1-2 years out, and 1/3rd for anything 2-3 years out. c. Again, just like the emergency fund, put it in checking and do not touch it.
Step 4-8: Invest Whatever is Left OverTake advantage of the best investment vehicles for your savings. a. Step 1 Covered FREE money b. Step 2 Covered High Interest Debt c. Step 3 Covered Any Set Asides (Emergency Fund + Major Obligations) d. Now we focus on putting your money in the right types of investment accounts so that you minimize taxes
Step 4: A 529 Plan If you have a child, set up a 529 Plan for higher education a. You can set up a plan for any state, and it can be applied to a college in any state b. In some cases there a State Income Tax Deductions for 529 and for some tuition discounts as well (look it up at savingsforcollege.com) c. Generally, contribution limits are based on gift tax exemption ($14,000 for 2013) d. Rule of Thumb: you need approximately $60,000 initially to fund higher education, also use NY and Utah plans if you are not benefited by in-state deductions
Step 5: Roth IRA A Roth IRA investment means no taxes EVER a. An individual can contribute up to $5,500 in 2013 ($6,500 if 50 or older) b. Income limits are the biggest problem ($125,000 for single filers and $183,000 for married, with phaseouts starting at $110,000 and $173,000 respectively) c. All contributions are after-tax (still preferable to traditional IRA or 401(k) with no match if you meet income qualifications) d. You cannot generally access money until you hit 59½
Step 6: Max out your 401(K)/Roth 401(k) 401(k)s and Roth 401(k)s have higher limits than IRAs a. An individual can contribute up to $17,500 in 2013 ($23,000 if 50 or older) b. All contributions are pre-tax for 401(k), after-tax for Roth 401(k) c. You cannot generally access money until you hit 59½
Step 7: Backdoor Roth IRAThis is a complex strategy only for people who are above the income limits tocontribute to a Roth IRA a. This is a 2-step process i. Contribute to a non-deductible IRA after-tax (up to $5,500/$6,500 over 50 for 2013) ii. Convert the IRA assets to Roth IRA b. Since IRA contribution was after-tax, no additional tax on conversion c. Money that would have been in a brokerage account and subject to taxes is now in a Roth IRA (no taxes EVER) d. WARNING: You cannot do this if you have existing Traditional IRAs
Step 8: A Brokerage AccountThe final step if you still have savings left over is to invest it in a brokerageaccount a. Brokerage accounts are taxable so you will pay capital gains on any gains and qualified dividends, and ordinary income taxes on interest income b. DO NOT put bonds unless you have to in this account (and if you do put a municipal bond ETF) c. Minimize trading to defer any tax consequences (do trades and rebalancings in other accounts)
A Simple ExampleHow the “Savings Waterfall” Works a. Monthly Savings = Income (after-tax) – Expenses = $2500/month b. Step 1: 401(k) Match = $200/month c. Step 2: High Interest Debt and Step 3: (Emergency Fund and Big Purchases) = None d. Step 4: No kids so no 529 contribution e. Step 5: Roth IRA ($5,500/year) = approx. $460/month f. Step 6: Max out 401(k) = additional $1,145/month g. Step 7: Already made Roth contribution so no backdoor Roth h. Step 8: Put the remainder ($695/month) in your brokerage account
The Payoff Getting the “Savings Waterfall” right is worth millions a. Getting your full match is worth 3-4% of salary over a 30 year career (approximate value for someone earning $60,000 ($500,000 over career) b. Roth IRA Contributions with no taxes ever saves you $600,000 in taxes vs. a brokerage account c. Paying off debt and setting aside emergency fund reduces potential interest payments (very situational)
Standard Costs Owl Invest Lowering fees: The average fund charges 1.15% in expenses + the average advisor 1%. $21,500 $6,000 We try to keep combined fees at 0.6%. cost cost Tax-Efficient Allocation: By allocating Net benefit to ordinary income investments to deferred $4,375 $0customers is $26,575 accounts and moving capital gains cost cost annually1 (2.65%) investments to tax-exempt accounts. with easy to implement, high quality investment advice. Diversification and rebalancing: The $0 +$6,700 Benefits of Rebalancing(Buetow 2002) cost benefit1 For a customer with $1.00MM inInvestible Assets 50%/50%allocation and 50% in deferred Annual Difference $25,875 +$700accounts and in 35% tax bracket. cost benefitAssumes a 5% return on bonds.
$800,000 With Owl Invest 41% MORE $700,000 Without Owl Invest ASSETS $600,000 Investment Size Owl Invest $500,000 BUILDSCUSTOMERS $400,000 5% MORE WEALTH $300,000 ASSETS $200,000 $100,000 $0 0 5 10 15 20 25 30 Years
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