All investments involve some level of risk. The information presented above is for illustrative purposes only. Anyone interested in investing is encouraged to discuss their plans with a financial planner and/or tax advisor. The author of this information bears no liability as it relates to the use of this information.
An Introduction to Personal Finance
Glossary Dollar-Cost-Averaging Investing a set amount of money on a periodic basis (ex: $100 every week) - buy more shares when the price is low - average cost is less than the average price - allows for more compounding throughout the year Diversification Investing in different types of investments - stocks and bonds, domestic and international, small-cap and large-cap, growth and value, etc… - spreads out your overall risk o 90% of the return with 50% of the risk Asset Allocation Determines the proportion of your portfolio that is invested in a certain type of security - the further you are from needing the money, the more risk you can take o risk / return ratio the higher the risk the higher the potential return or loss Rebalancing As one investment class does well, your allocation becomes skewed Sell your winners and buy your losers to get back to your allocation Forces you to sell high and buy low
S&P 500 Index 1960 – 2007
Rules of Personal Finance 1. 2. Set realistic and measurable goals. - Write Down Your Goals Know where your money goes. - Don’t Spend More Than You Make. - Credit Card Debt is Evil. Know the difference between need and want. - Make Your Wants Count Pay yourself first. - Make it Automatic. - get company match in 401(k) - $5000 to a Roth IRA - then up to $15,000 in a 401(k) Pay yourself 25% of your gross pay. - Two Hours Per Day for Yourself Pay yourself weekly. - Earn Interest on Your Interest - Dollar Cost Averaging 7. Pay yourself now. - Start early. - Waiting 8 years can cost you 50% 8. Diversify, reallocate, and rebalance. - Stocks and Bonds - 100/0 90/10 80/20 70/30 60/40 - Domestic and International - Large Cap and Small Cap - Growth and Value 9. Own your home. Don’t rent it. - Homes usually appreciate in value. 10. Buy a used car, not a new one. - More depreciation in early years 6.
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I Have a Long Lifeline
School 0
Learning Years
22
Work Live Play Play
Working Years
65
Work Live Play Play
Retirement Years
95
School
22
Work Live Play Invest
55
Play Live Play Play Play Play
How Much Will I Have?
n (1+i) - 1 FV = C * --------------i
* (1+i)
The Rule of 72 72 --------------annual rate of return number of years needed to double your investment
=
FV = Future Value C = Constant amount invested each period i = periodic rate of interest n = number of periods
$5000 Invested Annually for 40 years at 9%
$96.16 Invested Weekly for 40 years at 9%
40 (1+.09) – 1 FV = 5000 * --------------- * (1+.09) .09
2080 (1+.0017) –1 FV = 96.16 * -------------------- * (1+.0017) .0017
$1,800,000.00
$2,000,000.00
What Are My Financial Goals? Eliminate any Credit Card Debt Set Up an Emergency Fund - or you’ll drown in high interest rates - at least 6 months of your expenses - job loss - unexpected repairs - illness - achieve financial freedom - don’t pass up free money - Roth IRAs are tax free - 401(k)s are tax deferred - don’t count on social security or pensions - appreciates in value - mortgage interest is tax deductible - cost will be very expensive - there are tax advantages for saving now - college grads make more than nongrads - new cars are the worst investment you can make - you’ll need to recharge occasionally - vacation home, boat, my own business - how old fashion are you? - generate positive cash flow with appreciation
Plan for Retirement
Purchase a Home Set Up a College Fund for My Children
Buy a Used Car Go on Vacation Finance My Dreams Save for My Daughter’s Wedding Purchase Rental Property
How Much Can I Save? Track your expenses for several months: - write checks - use debit or credit cards - keep receipts for all cash transactions - housing - food - personal care - transportation - insurance - education - medical / dental - entertainment - help you identify waste and savings opportunities - dining out - coffee, soda, bottled water - CDs, Books, Magazines - clothes, shoes
Break out your spending into several categories:
You need to know how you spend your money.
How Much Should I Save? Work for yourself, not the government or landlord, or bank…. Don’t pass up the “free money”. - one hour per day = 12.5% of your gross salary - two hours per day = 25% of your gross salary - Roth IRA = after tax $5,000 = tax free earnings - income limitations - 401(k) = pre tax $15,000 = tax deferred earnings - at least up to the company match
Where Can I Invest My Money? Savings / Checking Accounts Money Market Accounts / Funds Certificates of Deposit Treasury Bills, Treasury Notes Government or Corporate Bonds Individual Stocks Mutual Funds - very low interest rates, highly liquid - low interest rates, minimum balance requirements - reasonable interest rates, early withdrawal penalties - available with terms from 6 months to 5 years - good interest rates - ultra safe - better interest rates based on risk / return ratio - risk of default based on rating - best potential return - can be very risky (if not diversified) - pooling of money to buy diversified portfolio - professionally managed for a fee - index funds: -average return, below average risk, low fees - mutual funds that trade like stocks
ETFs
Where Should I Invest My Money? Savings / Checking Accounts Money Market Accounts Certificates of Deposit - current expenses - short term goals - short/medium term goals - now - less than six months - six months to five years - ladder your emergency fund - buy a 1 year CD every 3 months - five to ten years - more than ten years
Bond Funds Stock Mutual Funds - diversified index funds
- medium/long term goals - long term goals - retirement - kids’ college
How Should My Long Term Investments Be Allocated? 20’s 75% US stocks1 25% Foreign stocks 0% bonds3
1
30’s 70% US stocks1 20% Foreign stocks 10% bonds3
40’s 65% US stocks1 15% Foreign stocks 20% bonds3
50’s 60% US stocks1 10% Foreign stocks 30% bonds3
60’s 50% US stocks1 10% Foreign stocks 40% bonds3
Total Stock Market Index Fund U.S. Bond Market Index Fund
3
Vanguard and Fidelity both offer Lifecycle / Target Retirement funds that will automatically rebalance your portfolio each year, and reallocate to a more conservative portfolio as retirement approaches. Vanguard Target Retirement 2050** Fidelity Freedom 2050 Fund** T. Rowe Price **Warning: these allocations are pretty conservative. Think of picking a fund that is past your retirement date.