Savings FitnessSavings Fitness

A Guide to Your Money and Your Financial Future

PPT Developed by Karissa BerndtUSU Family Finance Student

A Guide to Your Money and Your Financial Future

PPT Developed by Karissa BerndtUSU Family Finance Student

Financial Planning for WomenMarch 2007

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Today’s Program Today’s Program

Provides a general overview of saving & investing

Focus on retirement but principles apply to all goals

Details are in the Savings Fitness booklet PPT & links available at www.usu.edu/fpw

Provides a general overview of saving & investing

Focus on retirement but principles apply to all goals

Details are in the Savings Fitness booklet PPT & links available at www.usu.edu/fpw

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Program ObjectivesProgram Objectives

Identify your goals Distinguish between savings and investing Develop net worth statement & savings

plan Learn to manage debt Understand risk-return relationship Begin or increase saving/investing

Identify your goals Distinguish between savings and investing Develop net worth statement & savings

plan Learn to manage debt Understand risk-return relationship Begin or increase saving/investing

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How to manage financial challenges and afford a secure

retirement?

How to manage financial challenges and afford a secure

retirement? Write your goals on a 3”x5” card Sort the cards into two stacks:

Goals in the next 5 years or less Goals in 5 years or more

Sort the cards in order of priority Make retirement a priority!

Write on each card what you need to do to accomplish that goal

Write your goals on a 3”x5” card Sort the cards into two stacks:

Goals in the next 5 years or less Goals in 5 years or more

Sort the cards in order of priority Make retirement a priority!

Write on each card what you need to do to accomplish that goal

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Beginning Your Savings Fitness PlanBeginning Your Savings Fitness Plan

Current financial resources: Net worth: the total value of what you own

(assets) minus what you owe (liabilities) Assets

Possessions, vehicles, home, bank accounts, investments, etc.

Liabilities Remaining mortgage on your home, any loans/debts, etc.

Subtract your liabilities from your assets. Goal: a positive net worth, which grows each year

Review your net worth annually (at tax time)

Current financial resources: Net worth: the total value of what you own

(assets) minus what you owe (liabilities) Assets

Possessions, vehicles, home, bank accounts, investments, etc.

Liabilities Remaining mortgage on your home, any loans/debts, etc.

Subtract your liabilities from your assets. Goal: a positive net worth, which grows each year

Review your net worth annually (at tax time)

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Saving vs. InvestingSaving vs. Investing

Short term goals < 5 years

No risk of loss of principal

No or low real return after taxes & inflation

Steady but slow growth

Short term goals < 5 years

No risk of loss of principal

No or low real return after taxes & inflation

Steady but slow growth

Long term goals 5 years or more

Trade potential short term loss for long term gains

Positive real return after subtracting taxes & inflation

Volatility

Long term goals 5 years or more

Trade potential short term loss for long term gains

Positive real return after subtracting taxes & inflation

Volatility

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Estimate How Much You Need to Invest for Retirement

Estimate How Much You Need to Invest for Retirement

Worksheets & software programs can help you estimate how much you need to invest. kiplinger.com (click on “Retirement”) moneymag.com (click on “Retirement”) usnews.com (click on “Retirement Calculator”) asec.org (click on “Ballpark Estimate Worksheet”)

See FPW website for PPT on Ballpark Estimate nasd.com (click on “Investor Services,” then “Financial

Calculators”) Planning for a Secure Retirement

http://www.ces.purdue.edu/retirement/

Worksheets & software programs can help you estimate how much you need to invest. kiplinger.com (click on “Retirement”) moneymag.com (click on “Retirement”) usnews.com (click on “Retirement Calculator”) asec.org (click on “Ballpark Estimate Worksheet”)

See FPW website for PPT on Ballpark Estimate nasd.com (click on “Investor Services,” then “Financial

Calculators”) Planning for a Secure Retirement

http://www.ces.purdue.edu/retirement/

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How Much Retirement Income Will I Need?

How Much Retirement Income Will I Need?

Need to replace 70 to 90 percent of pre-retirement income

Lower the income, the higher the % that needs to be replaced

It depends on the kind of retirement you want to enjoy

Need to replace 70 to 90 percent of pre-retirement income

Lower the income, the higher the % that needs to be replaced

It depends on the kind of retirement you want to enjoy

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How Long Will I Live In Retirement?

How Long Will I Live In Retirement?

Average male life expectancy: age 78 Average female life expectancy: age 82 Consider your health and family history Expect to live longer than previous

generations! Planning for a Secure Retirement

http://www.ces.purdue.edu/retirement/ Module 1b Life Expectancy Calculators

Average male life expectancy: age 78 Average female life expectancy: age 82 Consider your health and family history Expect to live longer than previous

generations! Planning for a Secure Retirement

http://www.ces.purdue.edu/retirement/ Module 1b Life Expectancy Calculators

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What Savings Do I Already Have?What Savings Do I Already Have?

Social Security retirement benefits A pension that provides a fixed amount of

retirement income each month Nest egg the desired total income/year

(Social Security any pension income) Nest egg examples- Retirement plan accounts at

work, IRAs, annuities, and personal savings

Social Security retirement benefits A pension that provides a fixed amount of

retirement income each month Nest egg the desired total income/year

(Social Security any pension income) Nest egg examples- Retirement plan accounts at

work, IRAs, annuities, and personal savings

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What Adjustments Must Be Made For Inflation?

What Adjustments Must Be Made For Inflation?

The cost of retirement will go up every year due to inflation

The average annual inflation rate is 3.1% In 1980 the inflation rate was 13.5% In 1998 it reached a low of 1.6%

Assume a higher, rather than a lower, rate of inflation It’s safer to plan on 4% than 3.1%

The cost of retirement will go up every year due to inflation

The average annual inflation rate is 3.1% In 1980 the inflation rate was 13.5% In 1998 it reached a low of 1.6%

Assume a higher, rather than a lower, rate of inflation It’s safer to plan on 4% than 3.1%

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One Simple Trick…Spend Less Money Than You Earn!

One Simple Trick…Spend Less Money Than You Earn!

Start with a “spending plan” or budget Income

Add up monthly income: wages, average tips or bonuses, alimony payments, etc.

Expenses Add up monthly expenses: mortgage or rent, car payments,

food bills, entertainment, etc. Include savings as an expense!

Subtract income from expenses Consult USU Family Life Center, 797-7224

Start with a “spending plan” or budget Income

Add up monthly income: wages, average tips or bonuses, alimony payments, etc.

Expenses Add up monthly expenses: mortgage or rent, car payments,

food bills, entertainment, etc. Include savings as an expense!

Subtract income from expenses Consult USU Family Life Center, 797-7224

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Spending Plans Cont.Spending Plans Cont. What if expenses exceed income? Cut Expenses (nickel & dime vs. BIG expenses)

clipping grocery coupons bargain hunting (thrift stores, etc.) changing phone or cable to a cheaper plan Real savings: housing & transportation!

Increase Income work a part-time second job turn a hobby into income jointly decide that another family member will work

What if expenses exceed income? Cut Expenses (nickel & dime vs. BIG expenses)

clipping grocery coupons bargain hunting (thrift stores, etc.) changing phone or cable to a cheaper plan Real savings: housing & transportation!

Increase Income work a part-time second job turn a hobby into income jointly decide that another family member will work

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Adopt Savings “Rules”Adopt Savings “Rules” Americans who follow “rules” save more*

Pay yourself first Put savings/investing on auto pilot Save your tax refund Save unexpected money (i.e., windfall, gifts) Save all change Save $ you ‘saved’ on grocery & gas (receipts) Other ideas?

Americans who follow “rules” save more* Pay yourself first Put savings/investing on auto pilot Save your tax refund Save unexpected money (i.e., windfall, gifts) Save all change Save $ you ‘saved’ on grocery & gas (receipts) Other ideas?

*Rha, Montalto,& Hanna (2007). The Effect of Self-Control Mechanisms on Household Saving Behavior. Financial Counseling and Planning, 17(2), 3-16.

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Avoid Debt & Credit ProblemsAvoid Debt & Credit Problems

How much debt is too much debt? [monthly debts (credit card payments, car loan

payments, student loan payments, etc.) mortgage] by the money you bring home each month.

The result is your “debt ratio.” Keep this ratio at 10% or less Total mortgage and non-mortgage debt should

be no more than 36% of your take-home pay.

How much debt is too much debt? [monthly debts (credit card payments, car loan

payments, student loan payments, etc.) mortgage] by the money you bring home each month.

The result is your “debt ratio.” Keep this ratio at 10% or less Total mortgage and non-mortgage debt should

be no more than 36% of your take-home pay.

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What’s the Difference Between “Good Debt” and “Bad Debt”?What’s the Difference Between “Good Debt” and “Bad Debt”?

Good debt - provides a financial pay off buying or remodeling a home (within reason!) investing in education advancing your own career skills

Bad debt - borrowing for things that do not provide financial benefits, or that don’t last as long as the loan Depreciating assets: vehicles vacations, clothing, furniture, dining out

Good debt - provides a financial pay off buying or remodeling a home (within reason!) investing in education advancing your own career skills

Bad debt - borrowing for things that do not provide financial benefits, or that don’t last as long as the loan Depreciating assets: vehicles vacations, clothing, furniture, dining out

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Handle Credit Cards WiselyHandle Credit Cards Wisely Use only 1 or 2 cards, not the usual eight or nine Don’t charge big-ticket items.

Save or find less expensive loan alternatives

Shop for the best interest rates, annual fees, service fees, and grace periods

Pay off the card each month, If you cannot pay in full, pay more than minimum

Still have problems? Leave the cards at home USU FLC 797-7224

Use only 1 or 2 cards, not the usual eight or nine Don’t charge big-ticket items.

Save or find less expensive loan alternatives

Shop for the best interest rates, annual fees, service fees, and grace periods

Pay off the card each month, If you cannot pay in full, pay more than minimum

Still have problems? Leave the cards at home USU FLC 797-7224

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How to Climb Out of DebtHow to Climb Out of Debt

Work with your creditors directly to try and work out payment arrangements Request lower APR on credit card

USU Family Life Center Housing & Financial Counseling can help you set up a plan to work with your

creditors and reduce your debts PowerPay Debt Analysis: https://powerpay.org/

Work with your creditors directly to try and work out payment arrangements Request lower APR on credit card

USU Family Life Center Housing & Financial Counseling can help you set up a plan to work with your

creditors and reduce your debts PowerPay Debt Analysis: https://powerpay.org/

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Investing for RetirementInvesting for Retirement

Once you’ve reduced unnecessary debt and created a spending plan, you’re ready to begin investing for retirement.

Participate in your employer’s retirement plan

Invest in an Individual Retirement Account

Once you’ve reduced unnecessary debt and created a spending plan, you’re ready to begin investing for retirement.

Participate in your employer’s retirement plan

Invest in an Individual Retirement Account

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Where to Save/Invest?Where to Save/Invest?

Cash Equivalents - very little risk; very low return

Savings accounts Money market mutual funds Certificates of deposit U.S. Treasury bills

Suitable for short term goals only Your money won’t grow Taxes & inflation negate any growth!

Cash Equivalents - very little risk; very low return

Savings accounts Money market mutual funds Certificates of deposit U.S. Treasury bills

Suitable for short term goals only Your money won’t grow Taxes & inflation negate any growth!

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BondsBonds

Corporate or Government Bonds 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

Small % of your long term investments Conservative Low growth potential

Corporate or Government Bonds 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

Small % of your long term investments Conservative Low growth potential

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StocksStocks

You own a part of a U.S. or international company

High potential for growth in the long run Short term volatility Must be willing to accept the ups & downs

along the road to inflation-beating growth

You own a part of a U.S. or international company

High potential for growth in the long run Short term volatility Must be willing to accept the ups & downs

along the road to inflation-beating growth

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Mutual Funds Mutual Funds

Pools your money with money of other investors and invests it.

A stock mutual fund, for example, invests in stocks on behalf of fund’s shareholders.

Easier to invest and to diversify. Ideal for your Individual Retirement

Account (IRA) See FPW PowerPoints on website

Pools your money with money of other investors and invests it.

A stock mutual fund, for example, invests in stocks on behalf of fund’s shareholders.

Easier to invest and to diversify. Ideal for your Individual Retirement

Account (IRA) See FPW PowerPoints on website

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Where to Put Your MoneyWhere to Put Your Money For goals that are at least 5 years in the future:

stocks bonds real estate foreign investments mutual funds

Not insured by the federal government - there is the risk that you could lose some of your money

The longer you have until retirement, the more risk you can afford.

For goals that are at least 5 years in the future: stocks bonds real estate foreign investments mutual funds

Not insured by the federal government - there is the risk that you could lose some of your money

The longer you have until retirement, the more risk you can afford.

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Why Take Risk At All?Why Take Risk At All? The greater the risk, the greater the potential return

a diversified portfolio of stocks & bonds will earn significantly more than a savings account.

No/low risk = no growth Historic Average Annual Returns

U.S. Treasury Bills: 3.8% Government Bonds: 5.3% Large-Company Stocks: 11.2%

Inflation averages 3.1% Taxes reduce investment returns

The greater the risk, the greater the potential return a diversified portfolio of stocks & bonds will earn

significantly more than a savings account. No/low risk = no growth

Historic Average Annual Returns U.S. Treasury Bills: 3.8% Government Bonds: 5.3% Large-Company Stocks: 11.2%

Inflation averages 3.1% Taxes reduce investment returns

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Reducing Investment RiskReducing Investment Risk

Diversification Distributing your money among several

investments, rather than investing in individual companies.

You can do this by investing in: mutual funds index mutual funds

Diversification will greatly decrease your risk of losing money.

Diversification Distributing your money among several

investments, rather than investing in individual companies.

You can do this by investing in: mutual funds index mutual funds

Diversification will greatly decrease your risk of losing money.

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Why Diversify?Why Diversify?

At any given time one investment might do better than another.

The factors that can cause one investment to do poorly may actually cause another to do well.

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.

“Don’t put all your eggs in one basket!”

At any given time one investment might do better than another.

The factors that can cause one investment to do poorly may actually cause another to do well.

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.

“Don’t put all your eggs in one basket!”

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Reducing Investment Risk Cont.Reducing Investment Risk Cont.

Asset Allocation - investing among different categories of investments (FPW PPT)

Put some money in cash, some in bonds, some in stocks, and some in other investments

The choices you make about what % to have in these major categories defines your investment strategy.

Asset Allocation - investing among different categories of investments (FPW PPT)

Put some money in cash, some in bonds, some in stocks, and some in other investments

The choices you make about what % to have in these major categories defines your investment strategy.

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Employer-Based Retirement Plans

Employer-Based Retirement Plans

Does your employer provide a retirement plan? If so…grab it! Employer-based plans are the

most effective way to invest for your future. You’ll enjoy tax benefits. Two types of employer-based plans :

defined benefit defined contribution

Does your employer provide a retirement plan? If so…grab it! Employer-based plans are the

most effective way to invest for your future. You’ll enjoy tax benefits. Two types of employer-based plans :

defined benefit defined contribution

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Defined Benefit PlansDefined Benefit Plans

Pay a lump sum upon retirement or a guaranteed monthly benefit.

The payout is typically based on a set formula such as: (# of years you have worked for the employer)

(a percentage of your highest earnings)

Usually the employer funds the plan--commonly called a pension plan.

Most are insured by the federal government.

Pay a lump sum upon retirement or a guaranteed monthly benefit.

The payout is typically based on a set formula such as: (# of years you have worked for the employer)

(a percentage of your highest earnings)

Usually the employer funds the plan--commonly called a pension plan.

Most are insured by the federal government.

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Defined Contribution PlansDefined Contribution Plans

401(k) plans are the most common type Does not guarantee a specified amount for

retirement The money you have available to help fund your

retirement depends on: how long you participate in the plan how much you invest how well the investments perform

More common than traditional pension plans.

401(k) plans are the most common type Does not guarantee a specified amount for

retirement The money you have available to help fund your

retirement depends on: how long you participate in the plan how much you invest how well the investments perform

More common than traditional pension plans.

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Vesting RulesVesting Rules

Money that you put in a retirement plan and earnings on those contributions, always belongs to you.

Employees don’t always have immediate access to the money their employer invests in their fund.

Once you are “vested” you own all of your employer’s contribution.

Some plans vest in stages, others after fixed period of employment.

Know your employer’s vesting rules. Don’t leave before you are vested!

Money that you put in a retirement plan and earnings on those contributions, always belongs to you.

Employees don’t always have immediate access to the money their employer invests in their fund.

Once you are “vested” you own all of your employer’s contribution.

Some plans vest in stages, others after fixed period of employment.

Know your employer’s vesting rules. Don’t leave before you are vested!

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What If You Can’t Join An Employer-Based Plan?

What If You Can’t Join An Employer-Based Plan?

If possible, take a job with a plan

Encourage your employer to offer a plan

Invest in an IRA (see FPW PPTs)

Build your personal savings

Consider an annuity (April 11 FPW)

If possible, take a job with a plan

Encourage your employer to offer a plan

Invest in an IRA (see FPW PPTs)

Build your personal savings

Consider an annuity (April 11 FPW)

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What If You Are Self-Employed?What If You Are Self-Employed?

SEP (Simplified employee pension plan)

SIMPLE IRA

IRA

Annuities

SEP (Simplified employee pension plan)

SIMPLE IRA

IRA

Annuities

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Coping With Financial CrisisCoping With Financial Crisis

Establish an Emergency Fund This can lessen the need to dip into retirement savings for a

financial emergency Insure Yourself

Having adequate insurance will protect your financial assets Insurance coverage:

Health Disability Homeowners or Renters (PPT on FPW website) Automobile Umbrella liability Life (if someone else depends on your income)

Establish an Emergency Fund This can lessen the need to dip into retirement savings for a

financial emergency Insure Yourself

Having adequate insurance will protect your financial assets Insurance coverage:

Health Disability Homeowners or Renters (PPT on FPW website) Automobile Umbrella liability Life (if someone else depends on your income)

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Monitor Your ProgressMonitor Your Progress Financial planning is not a one-time process, so

make sure to do the following: Periodically review your spending plan Monitor the performance of your investments

make adjustments as necessary

Contribute more toward retirement as you earn more Update your insurance to reflect changes in income or

personal circumstances Keep your finances in order

Financial planning is not a one-time process, so make sure to do the following: Periodically review your spending plan Monitor the performance of your investments

make adjustments as necessary

Contribute more toward retirement as you earn more Update your insurance to reflect changes in income or

personal circumstances Keep your finances in order

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April 11 FPWApril 11 FPW Making Your Money Last for a Lifetime:

Why You Need to Know About Annuities Check FPW web http://www.usu.edu/fpw/

for related PowerPoint presentations Asset allocation IRA picks 2005; Mutual Funds 2006 What is an IRA? Ballpark E$timate Taking the mystery out of retirement planning

Making Your Money Last for a Lifetime: Why You Need to Know About Annuities

Check FPW web http://www.usu.edu/fpw/ for related PowerPoint presentations Asset allocation IRA picks 2005; Mutual Funds 2006 What is an IRA? Ballpark E$timate Taking the mystery out of retirement planning

Questions?Questions?