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Covering Your Bases!

DEBT: Using Debt Wisely
1. Advantages: – Interest Free Loan • Know your billing date • Grace period: 25-30 days – Simplified Record Keeping – Convenience – Simplifies return of goods and resolution of purchase disputes – Emergencies

Debt (cont…)
2. Disadvantages
– Tendency to Overspend • Undisciplined sense of buying power not
supported by available income

– High Interest costs • 12% Annual Percentage Rate • Minimum Payment: $30/month – Assume $1000 Credit Card balance – It will take 41 months to pay off your $1000 credit card balance with a total payment of $1223.00

Interest rates on credit cards are the highest of any form of consumer credit. Rates, 10.6-13.5%
– – – – National average nearly 12% Variable rate, tied to prime leading rate Rates will vary from Bank to Bank, so shop around If you are carrying a balance, interest will be charged on your old balance purchases – On cash advances, interest begins on the day the advance is taken

– – – –

Annual Fees Late Payment Fees Over-the-Limit Fees Transaction Fees – Typically on Cash Advances

Be sure your monthly repayment burden does not exceed 20% of your monthly take-home pay. Recommended debt safety ratio
- 10% to 15% of your take-home pay
Debt Safety Ratio = Total Monthly Consumer Credit Payments @ Monthly Take-Home Pay
@ excludes monthly mortgage payment

• Remember, if credit is used properly, it can help
you manage your finances. Misuse it and it is big-time trouble.

Average credit card holder has 11 cards Approximately $3,300 in annual charges Average unpaid balance of about $1,700

Danger Signs of Using Too Much Credit: Regular Impulse buying Postdating checks to keep them from bouncing Regularly exceeding borrowing limit Taking 60-90 days to pay bills that should be paid in 30 days Borrowing to meet normal living expenses Using one credit card to make payments on another Using more than 20% of take home pay on consumer debt, credit card bills Dodging collection agencies Having zero savings

Risk Management
Generally we deal with Risk Exposure by Aquiring Related Insurance Products

1. 2. 3. 4. 5.

Health Insurance – employer provided Disability Insurance – employer provided Home Owner‟s Insurance Auto Insurance Life Insurance

Life Insurance
Two Purposes for Life Insurance Coverage

1. Primary Purpose
Provide funds for our dependent beneficiaries in the event of death

2. Secondary Purposes
Estate planning to provide needed liquidity to our estate and our heirs

Types of Life Insurance
Includes an insurance feature and a savings/investment feature Premium costs are fixed and high

Remains in existence for a certain term (period) and then expires This is „pure‟ insurance coverage and is less expensive than whole life You can get the most insurance coverage for the lowest premium cost Negative – premium costs will continue to rise as we age
***IMPORTANT: Before you buy an insurance coverage check the financial stability rating of the insurance company. Look for an A.M. Best rating of A++

Saving Vs. Investing
Saving: Primarily for funds we may need in a short period of time. Major Concern: Preservation of principle Selection: choose saving investments of low risk
 


Savings Accounts Money Market Accounts Short Term Certificates of Deposit

HOW MUCH SHOULD I HAVE IN SAVING? 3 Months to 6 months take home Pay


To cover unanticipated Financial Shocks
 e.g.: Employer downsizing – lost our job


What is it? Why do you have to be concerned about it?
Example: Assume - We have $100 - Pizza (only consumer item available) costs $5 each. Therefore we can purchase 20 pizzas. - We can invest $100 @ 15.5% - The inflation rate is 5%, so
- We will have $115.50, 1 year from now - Pizza will cost $5.25 1 year from now.

Therefore $115.50 - $5.25 = 22 pizzas
Notice: We have a 15.5% return on our financial assets, however, the number of pizzas we can consume only increased from 20 to 22 pizzas.

Inflation (cont…)
What if you invested your $100 and Received a 5% Rate of Return, equal to the Inflation?
- 1 year later you have $105 - Pizza also increased 5% $5.25/each - You can buy 20 pizzas

This is exactly the same number of Pizzas you could have purchased a year earlier for your $100. You now have more dollars $105, but the quantity of Pizzas you could purchase has remained the same. STAGNATION! Your standard of living has not changed.


Taking prudent, reasonable risks with your money in order to earn the higher returns that may be necessary to achieve your financial goals.
Warning: - All investments involve some risk - The Value of Your Investment Portfolio may decline - No guarantee that you will have gains

Four Issues to Address Before Beginning An Investment Program
1. 2. 3. 4.
Determine Determine Determine Determine situation your your your your financial goals time horizon risk tolerance level personal financial

Individual Stocks Vs. Mutual Funds
Limited Funds to Invest?
- Do not invest in individual stocks!

- Easier to achieve by buying mutual funds

What Are Mutual Funds And How Do They Work?
The idea behind Mutual Funds Is Simple:  Many people pool their money together into a fund  The investment advisor invests their money in various

 

securities Each investor shares proportionality in the fund‟s investment returns The investment returns consist of the dividend or interest income paid on the Securities, and any capital gains or losses caused by sales of the securities

Advantages of Mutual Funds
Diversification Professional Management Liquidity Convenience:

- Fund shares can be bought/sold (mail, telephone, internet) - Easy to move money from one fund to another - Automatic Investing - Automatic Transfers from a fund to your bank account - Record Keeping Services

Disadvantages of Mutual Funds
No Guarantees
Diversification “Penalty” Potentially High Costs

Tax Impact

General Risk Levels & Types of Investments
Lowest Risk:
- Money Market Mutual Funds - Large Certificates of Deposit, US Treasury Bills, Commercial Paper - Short Term Bond Funds - Gov‟t and Corporate - Mid-Term Bond Funds - Gov‟t and Corporate (Investment Grade) - Balanced Funds - Equity Income Funds - Index Funds

Low Risk:

Medium Risk:

General Risk Levels and Types of Investments (cont…)
Higher Risk:
- Growth & Income Funds - Growth Funds - Long-Term Bond Funds

Highest Risk:
- Aggressive Growth Funds

Morning Star Style Boxes For Equity Funds
VALUE LARGE CAP BLEND GROWTH American Funds - Euro Pacific Growth - Growth Fund of America

Meridian Value Fund

S & P 500 Index


Mid Cap Value Index

American Funds - Capital Income Builder

Mid Cap Growth Index


Small Cap Value Index

American Funds - Small Cap World Fund

Small Cap Growth Index

Morning Star Style Boxes For Bond Funds
High – Treasury & Agency


Money Market Mutual Fund American Funds S-T Bond Fund Of America

American Funds - US Gov‟t Securities Fund American Funds - Bond Fund of America

Medium – Corporate Investment Grade Low – Below Investment Grade

American Funds - Capital World Bond Fund

What to Look For Before Buying Any Particular Mutual Fund
1. The Investment Company that Manages the
– Examples: The three largest Fund Companies • Fidelity • Vanguard • American Funds

2. Long-Term Track Record
– – 5 yr, 10 yr, Life of the Fund How they performed through both up and down markets

What to Look For Before Buying Any Particular Mutual Fund – cont…
3. The Fund Manager
One Individual • Longevity – Committee –

4. Loads and/or Fees
– – –

Front end or Backend Load (Sales Charges) No Loads Operating Expense • Investment Advisory Fees, Legal Frees, Accounting Fees, •
Administrative Expenses Marketing (12b.1 Fees)

What to Look For Before Buying Any Particular Mutual Fund – cont…
5. Volatility
– Equity Funds • Beta • R – Squared – Bond Funds • Duration

Asset Allocation
How you allocate your investment portfolio between different classes of financial assets. Various studies have found that the asset allocation is more important than the actual selection of securities/investments in determining your overall investment results. Experts argue you should hold a mix of investments from among the asset classes to help reduce the volatility of your portfolio.

Asset Allocation cont…
Diversification spreads the risk around. A good performance in one area can temper a sub par performance in another.




80 % 15% 5% 100%

60% 30% 10% 100%

50% 40% 10% 100%

Individual Retirement Accounts (IRA)
Earnings grow tax-free Retirement withdrawals are free of federal income taxes Your contributions are not tax deductible You can continue to make contributions after age 70.5.

IRA (cont…)
Contributions Who can contribute:
- Anyone with earned income and spouses of wage earners who don‟t have any insurance of their own

Income limitation, Single filers - $101000 and under. Married Filing Jointly - $159,000 and under. Contribution amounts are phased out at Modified Adjusted Gross Income Levels above these amounts

IRA (cont…)
Withdraw contributions anytime penalty-free Withdraw earnings beginning at age 59.5 penalty-free Income tax on earnings does apply if you‟ve held account for less than 5 years No required minimum distributions

Roth IRA
Contributions allowed each year, Assumptions
 2008 - $5000  Monthly Contributions $416.66  Term 40 yrs or 480 months  Rate of Return 10%/yr or .8333%/month  Future Value = $2,634,991  Monthly Contributions $250.00  Term 40 yrs or 480 months  Rate of Return 10%/yr or .8333%/month  Future Value = $1,581,020

Change the Assumptions


 Withdrawals from your Roth IRA are free from Federal Income Taxes

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