Budgeting_Investing_PowerPoint_9Sept11 by fanzhongqing

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									                 BUDGETING AND
                   INVESTING
1   Budgeting and Investing
                                Budgeting and Investing




    (*) This is one of a series of money management courses provided by Financial Beginnings. Most slides
    included here are edited versions of the material included in the Financial Beginnings textbook.

    B-and-I-Ppt-slides-080211



2       Budgeting and Investing
                              Agenda

             1. Brief pre-test and post-test
             2. Objective for this session

             3. B&I concepts and definitions

             4. How to construct a budget
             5. Some investment choices
             6. Case study (class exercise)


3   Budgeting and Investing
               Budgeting & Investing
                   Objectives
    1. What are the primary aspects of a budget and how can one
       be created/maintained for your benefit,

    2. How to set and follow long-term and short-term goals and
       use them for your financial planning,

    3. Understand different investment and retirement accounts,

    4. Understand risk vs. return and diversification, and

    5. Understand common investment strategies
4   Budgeting and Investing
                              Session

    What’s planned for this class :
    Highlight things you can do (like budget, save, invest, etc)
    to help get the money you’ll need for:

        • Activities (vacations, education, etc)
        • Material items (cars, houses, etc )

    What we can’t (realistically) do in this class :
    Go into much detail on any topic (like stocks, budgets)
5   Budgeting and Investing
             What would you do if you
             won the lottery ?




6   Budgeting and Investing
                Key Budgeting & Investing
                concepts and definitions




7   Budgeting and Investing
              What are Savings and Investments?


    • Savings are dollars set aside and not used for
      current expenses

    • Investments are items like stocks, bonds, real estate
      that have the potential to increase the future value
     of your savings




8   Budgeting and Investing
             What are Budgets and Financial Plans?



    • Budgets use data on income vs. expenses to help
     you accumulate savings and avoid unnecessary debt




9   Budgeting and Investing
              What are Budgets and Financial Plans?



     • Financial planning involves setting specific
      objectives (eg, “buy a house in 5 yrs”) and identifying
      the means for accomplishing them.




10   Budgeting and Investing
              What are Budgets and Financial Plans?


     • Money management is the coordination of all
      financial activities (investing, spending, etc) so that
      you hit your financial targets.




11   Budgeting and Investing
                 Why save, invest, budget, etc ?



     • Some expenses can be covered from regular
       income, but some can’t

         • iPod, weekend trip    credit or debit card
         • New car, house/condo, college     savings plan




12   Budgeting and Investing
                Why save, invest, budget, etc ?


     • Dealing with budgeting and investing issues is
      unavoidable
        • 40+ % of households own stock
        • 90+ % have bank accts
        • 100% have bills
        • Most people acquire high-dollar items (car, college,
         house) over time

13   Budgeting and Investing
                   Budgeting and Planning




14   Budgeting and Investing
                    Primary parts of a budget:
                                                         Time horizon
                                                Jan – Jun   Jul – Dec
                                   Item                                 2011   2012   2013
                                                  2010        2010
                         Salary                 $ 14,000    $14,000     Etc

          Income         Bank interest            $300
          sources        Etc




                                                   --




                                                               --
                               Total income     $16,000     $16,000
                         Rent                    $4800
                         Groceries               $2000
         Expense         Car insurance            $500
          items          Entertainment
                         Taxes
                         Etc


                                                   --




                                                               --
                                                   -




                                                               -
                               Total expenses   $14,000     $17,000


                         Income –
                                                 $2000      ($1000)
                         expenses


15   Budgeting and Investing
               How do you make a budget ?


        • Pick a time period to cover --- 1 mo, 1 yr, etc
        • Identify expenses you expect (food, rent, etc)
         and how much you’ll spend in each area
        • Compare your total expenses to your take‐home
         pay and other sources of income




16   Budgeting and Investing
                What are some ways to track
                the money you are spending ?

        • Keep a notebook --- write down everything you buy
         and every bill you pay
        • Keep all your receipts in an envelope, shoe box, etc
        • Create a computer file to track your income and
         expenses




17   Budgeting and Investing
                                  Budgeting

     Items that are often captured in budgets
            1.    Automobile (car payments, maintenance, etc)
            2.    Child care
            3.    Clothing
            4.    Communications services (cell, internet, cable tv)
            5.    Contributions
            6.    Entertainment
            7.    Food (groceries, restaurant)
            8.    Gifts
            9.    Housing (rent, mortage payment, home repair)
            10.   Income taxes (state, federal)
            11.   Insurance (car, home, health)
            12.   Loans (student)
            13.   Medical (ins co-payments, medication)
            14.   Other transportation (mass transit, taxicabs)
            15.   Utilities (electricity, natural gas)
            16.   Vacations

18   Budgeting and Investing
                Other budgeting considerations



     • Understand “fixed” vs. “variable” expenses

        • Fixed: same each month
        • Variable: can change from month to month




19   Budgeting and Investing
                Other budgeting considerations


     • Focus on big “cost drivers” -- expenses that
      contribute the most to your total spending
        • Example:
           • Annual restaurant expenses = $1000
           • Annual magazine cost = $50/ yr

        • A 20% cut in restaurant $ has a much larger
          benefit than 50% cut in magazine $



20   Budgeting and Investing
                Other budgeting considerations


     • Look at various possible budget outcomes ,
      “What If ” :
        • A new job pays more (or less) than expected ?
        • Uncle Fred gives you his old car and you can
          avoid buying one ?
        • You change to a less expensive cable tv plan ?



21   Budgeting and Investing
           Average US consumer expenditures 2009:




                               US Dept of Labor, 4/09
22   Budgeting and Investing
              Short-term and long-term financial goals:
              Item            When       Cost          Cost coverage plan

      Short-term goals :
                                                  • $50/wk from salary to vacation
      1. Vacation              1 yr     $2000
                                                    account

      2. New flat screen tv    2 yrs    $1500     • Withdraw from savings

      Etc


      Long-term goals:
                                                  • Make final contributions to
      1. College               3 yrs   $9000/yr     college fund,
                                                  • Secure financial aid
      2. Condo down                               • Sell shares of ABC mutual fund,
                               5 yrs   $20,000
      payment                                     • XYZ corp bond matures in 4 yrs
      Etc



23   Budgeting and Investing
               Good money management practices


     • Make a budget, revise it regularly
     • Track your actual spending vs. your income
     • Pay bills on time, balance your checkbook
     • Use credit wisely
     • Set long‐ term and short‐term financial goals
     • Designate money for savings and investment



24   Budgeting and Investing
                            Case Study 1: Joey
     • Joey graduated from high school recently.
     • He just got a full‐time job as a checker at a local grocery store within walking
       distance of his home.
     • His starting salary is $10,500 per year and he never seems to have any money in
       his checking account.
     • Joey goes to a private night school, where he’s studying to become a bookkeeper.
       The tuition at the private vocational school is more than $300 per month.
     • Joey’s dream is to get his own apartment. For now he lives with his mom and gives
       her $50 per week for his room and board.
     • He likes to go out with his friends at night. They usually go to the movies, video
       game arcades or bowling. When his mom suggests he stay home sometimes, Joey
       likes to say, “I work hard, Mom. I deserve to have a little fun once in a while!”
     • Joey has been smoking cigarettes since he was 14 years old. He smokes a pack a
       day. His mom constantly urges him to quit.
     • Joey has a 1968 Mustang convertible. He does some of the mechanical work on it
       himself, but it breaks down a lot and the parts are very expensive to replace. His
       mom’s house doesn’t have a garage, so Joey pays a neighbor $50 per month to use
       his garage. As a young man, Joey pays more than $2000 per year for his
       automobile insurance.
     • Christmas is coming up, and Joey wants to buy his girlfriend a set of diamond
       earrings that cost $499.
     Do you have any ideas on how Joey could better manage his money while still
      achieving his short‐ and long‐term financial goals?

25   Budgeting and Investing
                  “Joey” case study --- budget worksheet
                   Item                                Description, etc     Annual $

       Joey's salary           Grocery checker                            $ 10,500
       Other income                                                       $     ???
       Total income            Includes only items listed in case study   $ 10,500

       Rent / meals at home    Lives with mother, $50 / week              $ 2,600
       School                  Night school, bookeeper, $300 / mo         $ 3,600
       Transportation          1968 Mustang, car repair ($ estimated)     $    500
       Transportation          Garage, $50 / mo                           $    600
       Transportation          Car insurance                              $ 2,000
       Gifts                   Diamond earings for girlfriend             $    499
       Entertainment           Out with friends to movies, etc ($ est)    $ 1,000
       Cigarettes              1 pack per day at $5/ pk ($ est)           $ 1,825
       Other expenses          Clothing, loans, income taxes, etc         $     ???
       Total expenses          Includes only items listed in case study   $ 12,624

       Income vs. expenses     Includes only items listed in case study   $ (2,124)

26   Budgeting and Investing
                Key investment concepts




27   Budgeting and Investing
                 Key investment concepts


     • In general, higher % returns mean greater risk

        • Government-insured accounts (bank savings) are
          guaranteed against loss, but pay a reduced %

        • Stocks, bonds can pay more, but may loose value

     • Risk can be reduced by “diversification”
         • Holding many types of investments vs. just a few



28   Budgeting and Investing
                                  Key investment concepts

                                                                            • Low-rated bond fund
                          Risk vs. return                                   • Riskier stk fund
                                                               • Stock
                                             • AAA corp bond   • Stk mutual fund
     Potential % return




                                             • AAA muni bond
                            • US T-note      • AAA GSE bond
                            • US T-bill
                            • Bank savings
                            • CD




29              Budgeting and Investing                   Risk of loss in value
                 Key investment concepts


     • Stocks, bonds, mutual funds are bought and re-
      sold repeatedly after initial sale to the public.

        • Buyers/sellers set market price of each investment

        • Prices re-set continuously and vary widely over time

        • Pricing indexes (like Dow Jones) are an important
          indicator of overall economic health and direction


30   Budgeting and Investing
                  Key investment concepts

     • Compound interest magnifies the future value of
      savings
        • CI is paid on your original deposit/investment + interest already earned

          “Rule of 72” :

          72 / Annual % rate = yrs to double $ with compound interest

          Interest Rate          Years To Double
               12%               6 years (ie, 72/12)
               8%                9 yrs
               6%                12 yrs
               3%                24 yrs
               1%                72 yrs


31    Budgeting $5000 invested at 7.2% at age 20
     Example: and Investing                                  $10,000 at 30
                   Types of investments




32   Budgeting and Investing
                   Types of investments


     • Bank savings account
        • Cash is deposited, money earns interest
        • Depositor can withdraw cash at any time
        • Savings are government insured, and money kept in
          a bank is safe from loss, theft, etc




33   Budgeting and Investing
                   Types of investments


     • Bank Certificate of Deposit (CD)

        • CDs are accounts where you leave your money for a
          set period of time (6 mo’s, 2 to 5 years, etc)

        • You usually earn a higher % rate than a regular
          savings account, and the longer you keep you
          money in a CD, the higher the interest rate


34   Budgeting and Investing
                   Types of investments



     • The previous two slides outlined some investment
       alternatives that involve banks (ie, savings accts, CDs)

     • The next few slides will look at investments in a business




35   Budgeting and Investing
                   Types of investments



     • Situation 1: Pete Smith is planning to open a pizza
       restaurant (“Pete’s Pizza”) and has asked you (and
       others) to loan him $1000 each to help finance his
       business.

     • Question: Before you give Pete the money, what do
       you want in exchange for this loan ?



36   Budgeting and Investing
                    Types of investments


     • Answer: Most lenders require:

     1. An agreement to repay the loan at a specific time in the
        future.

      2. An agreement to make periodic payments to the lender for
         the use of the money.

      3. An assessment of the borrower’s ability to pay on-time.

• Organizations that get loans from multiple lenders       “bond issuers”
• People /groups that make these loans         “bond investors”

37    Budgeting and Investing
                   Types of investments


     • Bonds

        • Buying a bond is essentially loaning money to a
          corporation or the government (the issuer)

        • The bond promises that the issuer will repay your
          investment and will pay a fixed % interest to maturity

        • Riskier bonds must pay a higher % to attract
         investors
38   Budgeting and Investing
                   Types of investments



     • Situation 2: Pete now gives you an alternative way to
       help finance “Pete’s Pizza” --- he will offer you (and
       others) the opportunity to pay $1000 each to buy a
       share in the business.

     • Question: Before you give Pete the money, what do
       you want in exchange for your investment ?



39   Budgeting and Investing
                    Types of investments


     • Answer: Most investors require:

     1. An opportunity to share in the profits.

     2. An opportunity to benefit from increases in the market
        value of the business.

     3. A voice in the operation of the business.


• Organizations that sell shares to multiple investors      “stock issuers”
• People /groups that buy these shares         “stock investors”
40    Budgeting and Investing
                   Types of investments


     • Stocks

        • Buying stock makes you part owner of the company

        • If the company does well, the value of your shares
          can increase and you may receive dividends (profits)

        • However, if the company does poorly, you might lose
          some or all of your money

41   Budgeting and Investing
         Stock performance, last 100+
         years
         (Dow Jones average)




     source: marketoracle.uk

42      Budgeting and Investing
                   Types of investments


     • Mutual Funds

        • These investments combine the stocks or bonds of
          many companies

        • By investing in the possible future success of many
          companies (not just one) you can reduce risk.




43   Budgeting and Investing
              Types of retirement accounts




44   Budgeting and Investing
              Types of retirement accounts


     • Retirement accounts (in general)

        • These are accounts set up specifically for retirement,
          and often have tax advantages (combined with a few
          restrictions on the timing of withdrawals).

        • A retirement account, on its own, is often not an
          “investment”. You still need to select stocks, bonds,
          mutual funds, etc (ie, investments) to deposit in your
          account.
45   Budgeting and Investing
              Types of retirement accounts


     • Individual retirement accounts (IRAs)

        • IRAs are savings accounts with tax advantages
          designed to help people put away money for
          retirement




46   Budgeting and Investing
              Types of retirement accounts


     • Individual retirement accounts (cont’d)

        • Traditional IRAs allow tax free deposits, capital gains
          and dividends. Taxes are applied to withdrawals from
          the account.

        • Roth IRA deposits use money that’s already been
          taxed, but capital gains, dividends, and withdrawals
          are tax free.


47   Budgeting and Investing
              Types of retirement accounts


     • Employment retirement plans

        • These include plans such as 401k, and employers
          usually match what you contribute

        • You will owe less tax because money put in the
          account is tax deductible




48   Budgeting and Investing
              Types of retirement accounts


     • Retirement annuities

        • These are offered by insurance companies and
          provide regular, fixed payments for a designated
          period, often throughout all of retirement




49   Budgeting and Investing
              Types of retirement accounts


     • Social Security

        • SS is a government program paid for by required
          deductions from paychecks

        • You can begin receiving payments at age 62, but
          many wait as payments are higher when you
          start later



50   Budgeting and Investing
               Budgeting & Investing summary


     • You can take specific actions to help insure
       financial success --- Create a budget, track spending, set
      financial goals, save and invest

     • Start early on your B & I plan --- Even with compound
      interest, it still takes time to accumulate savings

     • Educate yourself on the savings and investment
       alternatives open to you --- consult the experts, but
      remember you are the best judge of what’s best for your
      situation.
51   Budgeting and Investing
              Case studies and class exercises




52   Budgeting and Investing
                     Case Study 2: Juan and Carmen
     • Juan and his wife, Carmen, have four children aged two, five, seven and 13. They
       have no savings and live paycheck to paycheck.
     • Juan works as a night watchman at a large bank, earning $22,000 per year.
       Carmen is on the housekeeping staff of a large hotel. Her salary is $13,400 per
       year.
     • Juan and Carmen rent a large house with five bedrooms. Carmen’s brother,
       Paulo, who has a decent paying job, lives with them but does not contribute to
       the rent or food costs. Both Juan and Carmen have large families and often cook
       dinner for many family members on weekends.
     • Juan and Carmen lease two cars. On Juan’s truck, the payment is $299 per
       month. His lease is due to expire in three months. Carmen’s minivan, in the first
       year of the four‐year lease, has a payment of $269 per month. The car leasing
       companies require that Juan and Carmen have collision insurance coverage. The
       premium is $3,189 per year.

     • When Carmen goes shopping for groceries, she brings the children along. Even
       though she makes a list before she goes, she often buys items that the children
       ask for that were not on the list.
     • Juan and Carmen are not college graduates. They want their children to be able
       to go to college. They want to start a college savings fund.
     Can you think of some ways that Juan and Carmen could cut back in order to start
       a regular savings program?

53    Budgeting and Investing
                             Case Study 3: Cheryl
     • Cheryl, a single parent, has two children, ages five and nine. She works as a
       receptionist and makes $26,000 a year. Cheryl pays $700 a month in rent for her
       two‐bedroom apartment.

     • Cheryl was unemployed for a few months before she found her job, and during
       that time she rang up $2,200 in credit card debt. Her credit card APR is 24.99%.
       Even though it’s a struggle to pay the credit card bill, Cheryl always pays it on
       time.

     • Cheryl’s kids have two good friends in the neighborhood, Danny and LaTonya,
       and when they come over Cheryl often ends up feeding all the kids dinner and
       taking care of Danny and LaTonya until their parents get home from work.

     • Cheryl’s office is in a downtown shopping area, and she likes to stop in at her
       favorite clothing store during her lunch break. While she usually waits until items
       she likes are on sale, sometimes she makes an impulse buy using her credit card,
       even though the item may not be on sale.

     • Cheryl is planning to take her kids on vacation in three months to visit their
       grandparents in another state. She needs to save about $1,200 for the plan
       tickets and travel costs.

     What are some ways that Cheryl can cut down on her expenses so that she can
      afford to take the vacation with her family?
54    Budgeting and Investing
              Useful Resources

        www.mint.com
        www.budgettracker.com
        www.investopedia.com
        www.bankrate.com




55   Budgeting and Investing
                Budgeting & Investing
                    Objectives
     1. What are the primary aspects of a budget and how can one
        be created/maintained for your benefit,

     2. How to set and follow long-term and short-term goals and
        use them for your financial planning,

     3. Understand different investment and retirement accounts,

     4. Understand risk vs. return and diversification, and

     5. Understand common investment strategies
56   Budgeting and Investing

								
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