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Welcometo

Life After GULC

Topics of Interest

Check Your “Guess-timator”

Welcome to the Financial BuffetThe goal is to provide enough information to allow you to make your initial financial plans.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)Charles and Ruth are available for questions throughout the session and during the summer.

Man the Worksheets!

The Tax Bites and More Starting income = $40,000

Federal Tax $5,027State Tax $2,010City Taxes – $0Social Security Tax of 6.20% – $2,480Medicare of 1.45% – $580Insurance premiums (employee paid) – $900

Medical, Dental, Disability, etc.

Mandatory Withholding – $0Retirement Withholding – $2,000

Page 1 Wrap-up

Subtract all of the debits ($12,997) from Total Gross Income of $40,000.Result is Net Annual Income of $27,003.Divide by 12 to get monthly income of $2,250

Measure Your AccuracyAdding back any retirement you took out on the worksheet, was your estimate close?Did you overestimate or underestimate your resources?Where did the discrepancies arise?

Income After Fixed ExpendituresHousing $800Utilities $100Telephone $40Education Debt Payment $800

LRAP Benefits ($800)

Consumer Debt Payment $150Food $200Prescriptions/Eyecare $15Transportation $200

Flexible Spending AccountsMedical

Allows medical and dental expenditures to be made free of federal, state, social security and Medicare taxes. Saves you about 40%Employer offers program as part of benefit packageUp to $6500 per year, but balance remaining at end of year is lostCovers items such as aspirin, contacts and doctor visits and more

ChildcareSame savings and limits as aboveUsed to pay daycare and other related costs

TransportationEmployers offer ability to have transportation costs such a Metro debited from your paycheckSaves federal and state taxes and reduces the costs of your commuting by 33% or moreCheck your benefits statement for more information

Income After Fixed ExpendituresHousing $800Utilities $100Telephone $40Education Debt Payment $800

LRAP Benefits ($800)

Consumer Debt Payment $150Food $200Prescriptions/Eyecare $15Transportation $200Life and other Insurance $25

Page 2 Wrap-up

Net Monthly Income $2,250less

Total Fixed Expenditures $1,505equals

Monthly Disposable Income $745

Discretionary IncomeEntertainment $100Clothing $100Dry Cleaning $40Furnishings $100Pager/Cell Phone $30Professional Services $25Health and Fitness $25Subscriptions $15Dues $30

Page 3 Wrap-up

Monthly Disposable income $745less

Total Elastic Expenditures $465equals

Monthly Discretionary Income $280

Other Items to ConsiderStarting Amount $280Tax Savings $291

Student Loan Interest DeductibilityLifetime Learning Tax Credit State Tax Savings

Add back retirement taken out pg 1. $166

Actual Discretionary Income $737

We have a number. So, now what?

The Monthly Discretionary Income number is the basis for all financial planning made. This is your “entry fee” to the Financial Buffet.Think about your goals- what do you hope to accomplish with your earnings besides “paying the bills”?

Building Your Financial House

Step 1 – Build a Good FoundationThe Emergency Reserve Account should be the foundation for the your financial plan.How much? – 3 to 6 months of expenses including:

Housing / utilitiesFoodConsumer Debt PaymentTransportation

Sources of Funding:Loan Grace Period – Payments already countedUnused Credit Card – until account is funded

Where to keep your Emergency Reserve Account

Liquidity and Security – The ability to obtain the resource without concern for a sudden drop in value is critical. Savings-Type Accounts – Insured accounts with banks and credit unions are ideal.

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.

Automate your contribution either directly from your paycheck or monthly from your checking account.

Step 2 – Build a Strong Wall for the Future

Prepare for your retirement using these two major types of retirement accounts -

401(k), 403(b), 457 Accounts

IRAs – Roth and Traditional

401(k), 403(b) and 457 AccountsThe contribution from the account comes directly out of your paycheck.Grows tax-free until withdrawn for retirement.$15,500 annual contribution limit for 2007 rising by $500 increments based on inflation. Possibility of “free money” if employers match.Contribution reduces federal and state taxes – but not FICA (Social Security 6.2% and Medicare 1.45%).

IRAs (2007 TY) - Roth v. Traditional

Pay Tax Now$4,000 per year$99,000 -$114,000 income phase-outFuture tax savings generally better for people further away from retirement.

Pay Tax on Withdrawal$4,000 per year$52,000 - $62,000* income phase outPresent tax savings generally better for people near retirement.

The Impact of one $4000 contributionA single $4000 investment

Held for 35 yearsInvested in an S&P tracking fundCan result in a $92,000 account at retirement

A wise man once said….“It is the greatest mathematical discovery of all time.”

Quotation regarding compound interest attributed to Albert Einstein.

Start Now!

$0$10,000$20,000

$30,000$40,000$50,000

$60,000$70,000$80,000

$90,000

Contribution

Albert

Betty

Albert contributes $250 per month for 30 yearsBetty contributes $300 per month for 25 years.Each contributes same total dollar amount - $90,000

ResultsAlbert’s account contains $565,122.Betty’s account contains only $398,050.Difference of over $167,000 due to compounding of the initial $15,000 ($3,000 x 5 years)

$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

Contribution

Albert

Betty

Start Now, Even if You Have to StopAlbert contributes $250 per month for 8 years and then stops. Total contribution = $24,000Betty waits 8 years and then contributes $250 per month for 22 years. Total contribution = $66,000Albert has $326,828 in his account at retirement.Betty has $238,293 in her account.Difference of $88,535 due to compounding and Albert put in $42,000 less to boot!

Prepayment vs. Retirement

Financial Aid Heresy – It is not always best to prepay your federal student loans.In low interest rate environment, it is financially more sound to eliminate other forms of debt.Similar calculation can be done with retirement growth and contributions.Allows you to leverage student loan debt in order to promote long-term stability.

Retirement Action ItemsManaging your 401(k)

Does your employer match your participation?When are you allowed to enter?Traditional vs. Roth 401(k) calculator @ http://www.moneycentral.msn.com/content/common/P139556.asp

IRAsWill you have resources available to contribute for 2006 (until April15) and/or 2007?

Recalculate Your FiguresGo back to the paycheckcity.com data entry page and enter an amount that represents your intended 401K contribution. (reduces federal and state taxes)Include any Flexible Spending Accounts in a second item. (reduces federal, state, and FICA taxes)Note the difference in taxes paid.

Step 3 – Build a Wall for Defense

Additional types of insurance to consider to protect you and your resources -

DisabilityHomeowner’s / Renter’sUmbrella Liability

Disability Coverage – What’s its Purpose?

Replaces your income when unable to work.What about Social Security and State disability programs? – The coverage is minor relative to your total current income.Where can you obtain the coverage?

Typical Disability CoverageBenefit usually is between 60 and 66% of your annual income.This is a taxable benefit!Determine if you are adequately covered by recalculating your worksheets.Some firms in the area provide less coverage:

60 % of the first $25,000 = $15,00040% of the remainder = $40,000Total benefit on $125K = $55,000 - TAXABLE

Disability CoverageWhat Are the Odds?

People in their early thirties are three times more likely to suffer a disability lasting three months or longer than they are to die.48% of all mortgage foreclosures in this country are caused by disability.There is a 1 in 3 probability that a person aged 25 will suffer a disability before age 65.The average disability will last more than five years, but for 30 percent of those disabled, it will persist for life.

Disability Coverage Action ItemsDetermine minimum required income to meet your expenses.Verify type and amount of disability coverage available through your employer.Investigate supplemental disability coverage through your employer.If your employer allows you to pay the premium the benefits would be tax free.If you want more information, visit www.about-disability-insurance.com (in session packet)

Homeowner’s/Renter’s CoverageWhat do you wish to have covered?What type of coverage you have?

Replacement Cost Cash Value

How do you prove what you have covered in case the insurance is needed?Liability coverage – how much?Review your coverage levels each year when you renew your policy.

Umbrella Liability CoverageThe umbrella sits on top of your other liability coverage, such as with your Homeowner’s / Renter’s policy and your car policy.If your liability coverage limit is pierced with your other policies, the umbrella stands between you and the claim, protecting your assets.Coverage is inexpensive – approx $200 for $1 million in additional coverage.Insurance is jurisdiction specific – work with a single insurance company/agent to ensure your coverage is appropriate.

Step 4 – Building your RoofActions you should take before buying a home:

Before you get too far along in your home search, determine if renting or purchasing is better for you: E-Loan Rent vs. Own CalculatorCheck with your employer to see if it has a preferred banking relationship.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

Mortgage BasicsDetermine your eligibility for a mortgage by reviewing your Debt to Income ratio

Fixed monthly debt payments in relation to gross incomeConsolidation and graduated repayment options help

The basic types of mortgagesFixedVariable

Recommended Goals to enable a Career Path Change

Fully fund your Emergency Reserve AccountEliminate the following:

Credit Card DebtCommercial Student Loans – as much as possible

Contribute to Retirement Start earlyAs much as possible

Test Your ExpertiseHow much can I set aside for my emergency reserve?How much can I contribute to my retirement?

Does my employer offer a 401(k) type account and if so, when can I participate?Can I contribute to an IRA by automating a monthly contribution?

Am I taking advantage of all of my other employee benefit programs?Can I set up a separate account for loan payments AND utilize auto-debit for additional interest rate savings?Which additional financial obligations can I automate?

Thank you for your participation!

This session is just the beginning of a lifelong journey. The first step begins with you.

Best wishes in your future careers.