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  1. 1. Chapter 18 Fitting the Pieces Together
  2. 2. The Ingredients of Success <ul><li>It is impossible to succeed financially unless you: </li></ul><ul><ul><li>Evaluate your financial health. </li></ul></ul><ul><ul><li>Plan and budget. </li></ul></ul><ul><ul><li>Manage your cash and credit. </li></ul></ul><ul><ul><li>Control your debt. </li></ul></ul><ul><ul><li>Make knowledgeable consumer decisions. </li></ul></ul>
  3. 3. The Ingredients of Success <ul><li>It is impossible to succeed financially unless you: </li></ul><ul><ul><li>Have adequate health, life, property, and liability insurance. </li></ul></ul><ul><ul><li>Understand investing principles. </li></ul></ul><ul><ul><li>Make investment decisions that reflect your goals. </li></ul></ul><ul><ul><li>Plan for retirement. </li></ul></ul><ul><ul><li>Plan for what happens to your accumulated wealth and your dependents after your die. </li></ul></ul>
  4. 4. The Financial Life Cycle <ul><li>Recent graduates make many financial decisions after leaving college. They: </li></ul><ul><ul><li>May purchase a car and possibly a home. </li></ul></ul><ul><ul><li>Will establish credit and pay taxes. </li></ul></ul><ul><ul><li>May get married and begin a family. </li></ul></ul><ul><li>Set up an emergency fund, start saving for your goals, and begin a retirement account. </li></ul>
  5. 5. The Financial Life Cycle <ul><li>At age 19, put away $2000 at the end of each year for 7 years in an IRA that earns 11%, and then nothing thereafter; at age 65 you will have more than $1.2 million. </li></ul><ul><li>If you wait until you are 25 to start that IRA and make payments every year for 40 years, you still won’t catch up (you’ll have $1.164 million). </li></ul><ul><li>Start at 30, make 35 payments, and end up with less than $700,000. </li></ul>
  6. 6. Women and Personal Finance <ul><li>While the basic principles of personal finance don’t change whether you’re a man or a woman, it is tougher for women to achieve financial security. </li></ul><ul><li>Women: </li></ul><ul><ul><li>Generally earn less </li></ul></ul><ul><ul><li>Are less likely to have pensions </li></ul></ul><ul><ul><li>Qualify for less Social Security </li></ul></ul><ul><ul><li>Live longer than men </li></ul></ul>
  7. 7. Women and Personal Finance <ul><li>Consider these facts: </li></ul><ul><ul><li>Over 90% of all women take sole responsibility for their financial decisions at some point. </li></ul></ul><ul><ul><li>Nearly half of all women over 65 get 90% of their income from Social Security, compared to 35% of comparable men. </li></ul></ul><ul><ul><li>75% of women don’t know how much they need to save for retirement. </li></ul></ul><ul><ul><li>Women tend to be more conservative in their investments, so they earn less. </li></ul></ul>
  8. 8. Women and Personal Finance <ul><li>Consider these facts: </li></ul><ul><ul><li>Only 28% of women over 65 receive pension benefits, compared to 45% of men, and the average men’s pension was twice that of women. </li></ul></ul><ul><ul><li>At age 65, women outnumber men 3 to 2, by 85 they outnumber them 5 to 2. </li></ul></ul><ul><ul><li>While 12% of the elderly live in poverty, 75% of them are women. </li></ul></ul><ul><ul><li>In 2001, median personal income for 65 year-old women was $11,313, while for 65 year-old men it was $19,668. </li></ul></ul>
  9. 9. Women and Personal Finance <ul><li>How does a woman start to take charge? </li></ul><ul><ul><li>Acquire knowledge. </li></ul></ul><ul><ul><li>Make things happen – create a plan. </li></ul></ul><ul><ul><li>See a financial planner about specific concerns. </li></ul></ul>
  10. 10. Financial Life Events <ul><li>Life Event 1: Getting Started </li></ul><ul><li>Lay the groundwork – understand investments and personal finance and assess current finances with planning for the future: </li></ul><ul><ul><li>Expenses and a budget </li></ul></ul><ul><ul><li>Control debt </li></ul></ul><ul><ul><li>Establish an emergency fund </li></ul></ul><ul><ul><li>Insure yourself </li></ul></ul><ul><ul><li>Control your credit score </li></ul></ul><ul><ul><li>Keep current on personal finance </li></ul></ul>
  11. 11. Financial Life Events <ul><li>Life Event 1: Getting Started </li></ul><ul><li>Identify your goals: </li></ul><ul><ul><li>Identify and prioritize financial goals. </li></ul></ul><ul><ul><li>Set a time frame. </li></ul></ul><ul><ul><li>Identify the costs of your goals. </li></ul></ul>
  12. 12. Financial Life Events <ul><li>Life Event 1: Getting Started </li></ul><ul><li>Begin saving for your goals: </li></ul><ul><ul><li>Save more than you think you can. </li></ul></ul><ul><ul><li>Make savings automatic. </li></ul></ul><ul><ul><li>Don’t procrastinate. </li></ul></ul><ul><ul><li>Catch your matches. </li></ul></ul><ul><ul><li>ROTH. </li></ul></ul><ul><ul><li>How much risk can you tolerate? </li></ul></ul><ul><ul><li>Put together a strategy. </li></ul></ul><ul><ul><li>Control your spending. </li></ul></ul>
  13. 13. Financial Life Events <ul><li>Life Event 2: Marriage </li></ul><ul><li>Get Organized – review and reorganize finances. </li></ul><ul><ul><li>Work together – discuss approaches to handling money. </li></ul></ul><ul><ul><li>Update financial records. </li></ul></ul><ul><ul><li>Gain control of your debt and your credit score – clear up debt issues to work towards getting a mortgage. </li></ul></ul><ul><ul><li>Merge finances to make good decisions. </li></ul></ul>
  14. 14. Financial Life Events <ul><li>Life Event 2: Marriage </li></ul><ul><li>Revisit Your Financial Goals – revisit both long- and short-term goals </li></ul><ul><ul><li>Reexamine your financial goals. </li></ul></ul><ul><ul><li>Begin saving for new goals. </li></ul></ul><ul><ul><li>Make saving automatic. </li></ul></ul><ul><ul><li>Make sure you have an emergency fund. </li></ul></ul><ul><ul><li>Begin working towards retirement. </li></ul></ul>
  15. 15. Financial Life Events <ul><li>Life Event 2: Marriage </li></ul><ul><li>Reexamine your insurance and benefits: may change beneficiaries, buy additional insurance, and coordinate benefits. </li></ul><ul><ul><li>Review your beneficiaries. </li></ul></ul><ul><ul><li>Include all family members. </li></ul></ul><ul><ul><li>Review your insurance. </li></ul></ul><ul><ul><li>Coordinate your benefits. </li></ul></ul>
  16. 16. Financial Life Events <ul><li>Life Event 2: Marriage </li></ul><ul><li>Reexamine your taxes: your tax status and the tax-advantaged benefits from your employer may change. </li></ul><ul><ul><li>Update W-4 form. </li></ul></ul><ul><ul><li>Take advantage of tax breaks. </li></ul></ul><ul><li>Make a will. </li></ul><ul><ul><li>Review your beneficiaries. </li></ul></ul>
  17. 17. Financial Life Events <ul><li>Life Event 3: Buying a Home </li></ul><ul><li>Does the purchase fit your financial plan? </li></ul><ul><ul><li>Keep track of your credit score. </li></ul></ul><ul><li>Consider the tax implications. </li></ul><ul><ul><li>Take advantage of tax benefits. </li></ul></ul><ul><ul><li>Build tax benefits into your budget. </li></ul></ul><ul><ul><li>Reexamine your investments. </li></ul></ul><ul><ul><li>Update your employer records. </li></ul></ul><ul><ul><li>Know your state. </li></ul></ul>
  18. 18. Financial Life Events <ul><li>Life Event 4: Having a Child </li></ul><ul><li>Survey your finances. </li></ul><ul><ul><li>Assess your current financial situation. </li></ul></ul><ul><ul><li>Reexamine your financial goals. </li></ul></ul><ul><ul><li>Revise your budget. </li></ul></ul><ul><li>Plan for college. </li></ul><ul><ul><li>Estimate costs. </li></ul></ul><ul><ul><li>Automate your savings. </li></ul></ul>
  19. 19. Financial Life Events <ul><li>Life Event 4: Having a Child </li></ul><ul><li>Reconsider your insurance needs. </li></ul><ul><ul><li>Review and update insurance. </li></ul></ul><ul><li>Update wills and trusts. </li></ul><ul><ul><li>Update or make a will. </li></ul></ul><ul><ul><li>Update your retirement account beneficiary. </li></ul></ul><ul><li>Take advantage of tax savings. </li></ul><ul><ul><li>Apply for Social Security number. </li></ul></ul><ul><ul><li>Update W-4. </li></ul></ul>
  20. 20. Financial Life Events <ul><li>Life Event 5: Inheritances, Bonuses, or Unexpected Money </li></ul><ul><li>Examine the priorities of your goals. </li></ul><ul><li>Reexamine your goals. </li></ul><ul><li>Consider estate planning. </li></ul><ul><li>Examine the tax implications. </li></ul><ul><ul><li>Plan for tax implications. </li></ul></ul><ul><ul><li>Consider estate taxes. </li></ul></ul>
  21. 21. Financial Life Events <ul><li>Life Event 6: A Major Illness </li></ul><ul><li>Reexamine your finances. </li></ul><ul><ul><li>Assess current financial situation. </li></ul></ul><ul><ul><li>Emergency fund – adequate liquidity. </li></ul></ul><ul><ul><li>Reexamine financial goals. </li></ul></ul><ul><ul><li>Reexamine investment strategy. </li></ul></ul><ul><ul><li>Revise budget. </li></ul></ul><ul><li>Take advantage of tax breaks. </li></ul><ul><ul><li>Understand the tax implications. </li></ul></ul><ul><ul><li>Explore flexible spending accounts (FSAs). </li></ul></ul>
  22. 22. Financial Life Events <ul><li>Life Event 6: A Major Illness </li></ul><ul><li>Alternatives to Finance Your Illness. </li></ul><ul><ul><li>Reverse mortgage </li></ul></ul><ul><ul><li>Life insurance </li></ul></ul><ul><ul><li>Disability insurance </li></ul></ul>
  23. 23. Financial Life Events <ul><li>Life Event 7: Caring for an Elderly Parent </li></ul><ul><li>Health care and estate planning concerns. </li></ul><ul><ul><li>Talk to your parents. </li></ul></ul><ul><li>Oversee your parents’ financial affairs. </li></ul><ul><ul><li>Understand their goals and budget. </li></ul></ul><ul><li>Discuss long-term health care options. </li></ul><ul><ul><li>Long-term health care insurance. </li></ul></ul><ul><li>Estate planning. </li></ul><ul><ul><li>Discuss estate planning. </li></ul></ul>
  24. 24. Financial Life Events <ul><li>Life Event 8: Retiring </li></ul><ul><li>Develop a retirement income plan. </li></ul><ul><ul><li>Mental and financial preparation. </li></ul></ul><ul><ul><li>Plan how to use your retirement savings. </li></ul></ul><ul><li>Manage your income in retirement. </li></ul><ul><ul><li>Withdrawal strategy. </li></ul></ul><ul><ul><li>Monitor your investments. </li></ul></ul><ul><ul><li>Emergency fund. </li></ul></ul>
  25. 25. Financial Life Events <ul><li>Life Event 8: Retiring </li></ul><ul><li>Review your insurance coverage and your will. </li></ul><ul><ul><li>Employer retiree health care. </li></ul></ul><ul><ul><li>Medicare and Medicare supplemental insurance. </li></ul></ul><ul><ul><li>Long-term health care insurance. </li></ul></ul><ul><ul><li>Homeowner’s insurance. </li></ul></ul><ul><ul><li>Review your will. </li></ul></ul><ul><li>Keep track of important retirement planning dates. </li></ul>
  26. 26. Financial Life Events <ul><li>Life Event 9: Death of a Spouse </li></ul><ul><li>Organize financial material. </li></ul><ul><li>Contact sources of survivor benefits. </li></ul><ul><ul><li>Insurers. </li></ul></ul><ul><ul><li>Social Security. </li></ul></ul><ul><ul><li>Past Employers. </li></ul></ul><ul><li>If you are the executor, carry out your responsibilities. </li></ul><ul><ul><li>Distribution of assets. </li></ul></ul>
  27. 27. Financial Life Events <ul><li>Life Event 9: Death of a Spouse </li></ul><ul><li>Change ownership or title to assets. </li></ul><ul><ul><li>Insurance policies. </li></ul></ul><ul><ul><li>Automobiles. </li></ul></ul><ul><ul><li>Bank accounts, stocks, bonds, and safe deposit boxes. </li></ul></ul><ul><ul><li>Credit cards. </li></ul></ul><ul><ul><li>Determine if your benefits change. </li></ul></ul><ul><ul><li>Review your insurance. </li></ul></ul>
  28. 28. Financial Life Events <ul><li>Life Event 10: Divorce </li></ul><ul><li>Nearly ½ of all marriages end in divorce and money problems are a main cause. </li></ul><ul><li>Prepare for divorce. </li></ul><ul><ul><li>Pay down debt. </li></ul></ul><ul><ul><li>Keep the costs down. </li></ul></ul><ul><ul><li>Protect yourself with the help of a financial planner. </li></ul></ul><ul><ul><li>Consider a prenuptial agreement. </li></ul></ul>
  29. 29. Financial Life Events <ul><li>Life Event 10: Divorce </li></ul><ul><li>Avoid Credit Damage. </li></ul><ul><ul><li>Late payments and your credit report. </li></ul></ul><ul><ul><li>Have your account re-aged. </li></ul></ul><ul><li>Revisit your financial goals. </li></ul><ul><ul><li>Insurance coverage. </li></ul></ul><ul><ul><li>Child support and alimony. </li></ul></ul><ul><li>Rework your budget. </li></ul><ul><ul><li>Retirement savings. </li></ul></ul><ul><ul><li>Reexamine your expenses. </li></ul></ul>
  30. 30. Making Financial Success Happen <ul><li>Wealthy Americans: </li></ul><ul><ul><li>Net worth from $1 million-$5 million, not inherited. </li></ul></ul><ul><ul><li>Most have incomes less than $100,000. </li></ul></ul><ul><ul><li>They own a home valued at $278,000. </li></ul></ul><ul><ul><li>They are self-employed or a partner. </li></ul></ul><ul><ul><li>In their original marriage, have 3 kids. </li></ul></ul><ul><ul><li>They are frugal – clip coupons, buy on sale or do without. </li></ul></ul>
  31. 31. The Keys to Success: A Dozen Decisions <ul><li>Number 1: Become Knowledgeable – avoid financial pitfalls and bad advice, handle unwanted financial surprises. </li></ul><ul><li>Number 2: Don’t Procrastinate - your financial future starts now. </li></ul><ul><li>Number 3: Live below your means – don’t spend at your level or earning. </li></ul>
  32. 32. The Keys to Success: A Dozen Decisions <ul><li>Number 4: Realize You Aren’t Indestructible - consider life and health insurance, stay healthy. </li></ul><ul><li>Number 5: Protect Your Stuff – have insurance to protect you from financial ruin. </li></ul><ul><li>Number 6: Embrace the “B” Word (Budget) – the budget is a means to reach your goals. </li></ul>
  33. 33. The Keys to Success: A Dozen Decisions <ul><li>Number 7: Reinvent and Upgrade Your Skills – prepare for job insecurity by having the right skills. </li></ul><ul><li>Number 8: Hide Your Plastic – credit cards are a dangerous threat to your financial well-being. </li></ul><ul><li>Number 9: Stocks Are Risky, But Not as Risky as Not Investing in Them – invest long-term in stocks and keep up with inflation. </li></ul>
  34. 34. The Keys to Success: A Dozen Decisions <ul><li>Number 10: Exploit Tax-Favored Retirement Plans to the Fullest. </li></ul><ul><li>Number 11: Plan for the Number of Children You Want. </li></ul><ul><li>Number 12: Stay Married. </li></ul>
  35. 35. Successful Debt Management <ul><li>Key #1: The Obvious: Spend less than you earn and budget your money. </li></ul><ul><li>Key #2: Know the costs. </li></ul><ul><li>Key #3: Understand the difference between good and bad debt. </li></ul>
  36. 36. Successful Debt Management <ul><li>Key #4: Make sure you can repay what you borrow – set your own standards. </li></ul><ul><li>Key #5: Keep your credit score strong – it keeps costs down and is a source of emergency money. </li></ul><ul><li>Key #6: Don’t live with bad (and expensive) debt. </li></ul>
  37. 37. Getting Started: Just Do It <ul><li>Start today – don’t procrastinate. </li></ul><ul><li>Begin with budgeting and planning. </li></ul><ul><li>Pay attention to managing your cash. </li></ul><ul><li>Rid yourself of bad debt. </li></ul><ul><li>Your safety net should be in order. </li></ul><ul><li>Start investing. </li></ul>