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financial_decision_making

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									CHAPTER 13


FINANCIAL
DECISION
 MAKING
FINANCIAL                       PYRAMID
                 CREDIT



               SAVINGS
                   &
             GOAL PLANNING

               FINANCIAL
            DECISION MAKING



             NEGOTIATING




               BUDGETING
              (first seminar)
          PRINCIPLES OF
    FINANCIAL DECISION MAKING
n   Thinking with your head, not your emotions.
n   Determining which decision will provide the
    greatest amount of benefit.
n   Know the length of benefit you are interested in
    maximizing. (short term, intermediate term or
    long term)
n   Forgetting about lost cost!
n   Calculating opportunity cost.
n   Don’t use long term debt to pay off short
    term needs.
         DECISION MAKING
n   HOW MANY MAJOR FINANCIAL DECISIONS
    WILL YOU MAKE IN YOUR LIFE? (AVG.)




                 23
          MAJOR DECISIONS
n   Buying vehicles (8)
n   Purchasing primary residence (6)
n   When you start saving for retirement (1)
n   When you start saving for college for your
    children or do you? (1)
n   Should you go back to get additional
    education? (3)
n   When do you get married or do you? (2)
n   Should you have a child (2)
 WHEN TO START SAVING FOR
       RETIREMENT
                 AGE 22    AGE 45
YEARLY DEPOSIT   $4,000    $4,000
YEARS TO SAVE      43        20
RATE OF RETURN     8%        8%

RESULTS      $1,318,332   $183,047
  WHEN TO START SAVING FOR
    COLLEGE EDUCATION
 19 YEARS PRIOR       3 YEARS PRIOR
MUST SAVE $266/MO   MUST SAVE $3,300/MO

FOR MOST PEOPLE $266/MO IS AN OPTION,
 HOWEVER FOR THOSE WHO WAIT, MOST
 TAKE A SECOND MORTGAGE OUT TO PAY
 FOR COLLEGE WHICH WILL END UP
 COSTING THEM AN ADDITIONAL $240,000
 OF INTEREST.
        TRADITIONAL IRA
          OR ROTH IRA
       RETIREMENT TAX BRACKET
             15%        38%
DED. IRA     $2,363     $1,720
ROTH IRA     $1,838     $1,838
TAX. INV.     $ 369     $ 318

THE DECISION IS BASED ON YOUR FUTURE
 TAX BRACKET AND INCOME.
    REBATE VS INTEREST RATE
n   WHICH ONE IS A BETTER DEAL?

PERCENTAGE RATE        0%             4%
CASH REBATE          $1,500         $2,500
SAVINGS RATE          2.5%           2.5%

SAVINGS              $1,175         $1,446

WHICH METHOD
IS BETTER?         INTEREST       CASH REBATE
    CREDIT CARD INTEREST
nHOW IMPORTANT IS THE INTEREST RATE?
                12%          22%
AMOUNT OWED     $8,000       $8,000
FUTURE CHARGES 200/MO.      200/M0.
MONTHLY PAY.    $ 300        $ 350

INTEREST CHARGES $9,044     $55,506
TOTAL COST DIFF.            $46,462
             NEW OR USED
               VEHICLE?
                            NEW        USED
AVG. COST PER YEAR          $1,978     $1,660
MONTHLY PAYMENT                 599       308
TOTAL DEPRECIATION           18,316     8,886
TOTAL INTEREST PAID           1,579     1,115

BEST DECISION                            $317/yr.
(The used car will save you $317/yr times 10 years
  will save you $3,170 plus inv. return.
    REFINANCE OR NOT?
CURRENT LOAN            $140,000
CURRENT INTEREST RATE      7.50%
TOTAL COST TO REFINANCE $ 2,100
STAY IN HOUSE            7 YEARS

REFINANCING WILL SAVE YOU $3,847
 OVER THE SEVEN YEARS.
   SHOULD SPOUSE WORK OR
            NOT?
First you must consider why you need the extra money. Is
   it to increase your status or is it to save for
   emergencies? Know the why so you can have a plan
   and work your plan.


Scenario:
Extra Income     $3,000
Less: Taxes       1,139
Less: Extra Exp.    946
Monthly Benefit $ 915 or $10,980/yr.
                 ______
           CONSOLIDATE DEBT
               OR NOT?
If you have two different loans and three credit cards,
   would it be wise to consolidate using a home equity
   line of credit:
                Current Loans      Consolidation Loan
Total Principle  $ 9,800             $ 9,800
Total interest      4,717               2,424
Other cost             -0-                  375
Investment Savings     -0-                 (634)
Tax savings            -0-                (819)
Total Cost       $14,817             $ 11,146
                 ------------       -------------
TOTAL SAVINGS OF                      $ 3,671
      FIXED OR ADJUSTABLE
             RATE?
                2 YR.     7 YR.   15 YR.
LOAN AMT.       $140K    $140K    $140K
TERM            30 YR.   30 YR.   30 YR.
DISC. PT.        1.0%     1.0%     1.0%

VARIABLE BEST
(SAVINGS)       $400
FIXED BEST
(SAVINGS)                $4,813 $10,613
   WHAT IS IT WORTH TO REDUCE
          MY SPENDING?
                            1 yr.     10 yrs.    30 yrs.
Waiting to buy a new car    $2,640    $32,454    $152,434
Eating out less                600      7,376      34,644
Buying fewer clothes         1,200     14,752      69,288
Taking fewer trips             600      7,376      34,644
Going to fewer movies          360      4,426      20,786
Paying off credit cards       1,800    22,128     103,932
Carpooling to work              300     3,688      17,322

Total Savings by reducing
spending and saving the
difference:                 $ 7,500   $ 92,200   $433,051
        WHAT IS THE VALUE OF
         HIGHER EDUCATION?
Should you strive for a graduate degree? At what age is
  this useful? (Break even point is 45)

Income with Bachelors           $2,125,433

Income with Masters              3,004,433
  (Subtotal)                    $ 879,000

Less: Educational Cost              150,000
      Lost wages                    100,000
      Increased Taxes               290,000
Total Financial Benefit         $ 339,000
                                _________
     SHOULD I PAY POINTS TO
      LOWER MY INTEREST?
The average family stays in their home for an average of
  seven years prior to moving!

                          LESS          MORE
                          POINTS        POINTS
LOAN AMOUNT               $140,000      $140,000
INTEREST RATE               6.5%          6.0%
DISCOUNT POINTS             1.0%          2.0%

FINANCIAL BENEFIT
(SAVINGS):                              $1,956
   TERM OR UNIVERSAL LIFE?
INVESTING IN LIFE INSURANCE IS A PERSONAL CHOICE AND
  A FINANCIAL CHOICE. BOTH CHOICES DON’T ALWAYS
  COINCIDE WITH EACH OTHER.
                       UNIVERSAL        TERM
POLICY AMOUNT          $350,000         $350,000
PREMIUMS               $150/MO.         $50
CASH VALUE
(AFTER 50 YRS)           5.21%          7.95%
ROR ON INV.


                                             x
BEST FIN. DEC. (May or may not be wisest choice)
(Assuming the insured invests the difference in
  premiums at 4% return.)
    SHOULD I MAKE EXTRA
   PAYMENTS ON MY HOUSE?
                      No         With
                      Extra      Extra
                      Pmts       Pmts
Principal & Int.      $885/mo.   $985/mo.
Taxes                  179        179
Mortg. Ins.             37         37

Total Interest Paid   $178,562   $128,255

TOTAL SAVINGS           N/A      $50,307
           15 YR OR 30 YR
            MORTGAGE?
In terms of cash flow a 15 yr. mortgage will
  be more demanding, but will always cost
  you less in interest.

                    15 yr.         30 yr.
Payment             $1,107.11      $839.37
Interest %            5.0%           6.0%
Total Payments      $199,280       $302,173

Savings             $102,893
                    ------------
COST OF MAKING THE WRONG
        DECISIONS!
n   VEHICLES $171,636
n   HOMES $305,800
n   RETIREMENT $817,405
n   COLLEGE $240,000
n   ADDITIONAL EDUCATION $339,000
n   WHEN AND WHO TO MARRY $200,000
n   HAVING CHILDREN TOO EARLY OR TOO MANY
    TO PROVIDE FOR $241,000

n   TOTAL COST $2,314,841

								
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