Savings Fitness

Savings Fitness A Guide to Your Money and Your Financial Future PPT Developed by Karissa Berndt USU Family Finance Student Financial Planning for Women March 2007 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 2 Program 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 3 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 4 Beginning 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) 5 Saving vs. Investing  Short term goals  < 5 years  Long term goals  5 years or more  No risk of loss of principal  No or low real return after taxes & inflation  Steady but slow growth  Trade potential short term loss for long term gains  Positive real return after subtracting taxes & inflation  Volatility 6 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/ 7 How Much Retirement Income Will I Need?  Need to replace 70 to 90 percent of preretirement income  Lower the income, the higher the % that needs to be replaced  It depends on the kind of retirement you want to enjoy 8 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!  Module 1b Life Expectancy Calculators 9  Planning for a Secure Retirement  http://www.ces.purdue.edu/retirement/ 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 10 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% 11 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 12 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 13 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? *Rha, Montalto,& Hanna (2007). The Effect of Self-Control Mechanisms on Household Saving Behavior. Financial Counseling and Planning, 17(2), 3-16. 14 Avoid 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. 15 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 16 Handle 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 17 How 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/ 18 Investing 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 19 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! 20 Bonds  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 21 Stocks  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 22 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 23 Where 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. 24 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 25 Reducing 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. 26 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!” 27 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. 28 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 29 Defined 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. 30 Defined 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. 31 Vesting 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! 32 What If You Can‟t Join An EmployerBased 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) 33 What If You Are Self-Employed?  SEP (Simplified employee pension plan)  SIMPLE IRA  IRA  Annuities 34 Coping 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) 35 Monitor 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 36 April 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 37 Questions?