TABLE OF CONTENTS

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. Getting Started Your Net Worth Where Does It All Go? Financial Counseling in Bad Times and Good Setting Family Financial Goals What You Should Know About Income Taxes Preparing An Adequate Insurance Program Investments: Financing For The Future About Your Retirement Estate Planning A Glossary of Financial Terms Bibliographies:
Personal Financial Planning Investments and Retirement Planning

4 7 9
12 13

20
22 25 29

33
35 37

38
39

12.

Program Options

TABLE OF CONTENTS
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. Getti ng Started Your Net Worth Where Does It All Go? Financial Counseling in Bad Times and Good Setting Family Financial Goals What You Should Know About Income Taxes Preparing An Adequate Insurance Program Investments: Financing For The Future About Your Retirement Estate Planning A Glossary of Financial Terms Bibliographies:
Personal Financial Planning Investments and Retirement Planning

4 7

9
12 13

20
22 25 29 33

35
37

38
39

12.

Program Options

FOREWORD
For most Americans, personal financial planning is a good news/bad news story. The good news is that virtually anyone with a desire to learn and the willingness to plan ahead can achieve a considerable degree of financial security. The bad news is that in the rush of daily living, too few of us are willing to set aside a few extra hours to establish a solid foundation for our financial planning. "Financial Planning - Controlling Your Personal Destiny" is designed to provide a guide for you in developing your own personal financial plan. It is not a "how to get more money" program, but a program to help you use more effectively the money you now have. You won't be asked to fit into a preconceived mold and manage your money "our" way. Instead, what this book does is give you some effective techniques that can be adapted to fit your financial situation. The book is divided into two parts. The first deals with personal financial planning now, and the second discusses retirement planning. Although planning for retirement now may seem far too premature for most Jaycees, you will probably be pleasantly surprised to learn how saving and investing now can make an important difference not only in how much you enjoy the years to come, but in your tax situation right now. Finally, a workable financial plan will help you put first things first, such as staying within your income and at the same time directing that income to do what you want it to do. Very few of us ever feel that we have enough of an income, but by planning and spending wisely, we can gain greater satisfaction from the money we do possess. This book will help you to do just that.

GETTING STARTED
The most important part of financial planning is getting started. The most logical first step is pulling together all of your important financial documents and records. These documents and records are important not only as financial planning tools; many of them are also important in and of themselves and should be given special care. Not only is it necessary for you to know where your important documents are. but it is also necessary for someone else to know. Most people don't like to think of calamity or death. But if your home burned down or you died tomorrow, would you (or your survivors) have the information necessary to carry on?

CHAPTER 1
It's equally important that your valuable documents be kept in a safe place. Since it will do you no good to have all of your important documents in your home file if your house burns down, it makes good sense to rent a safe deposit box from your bank. The rental fee is nominal (and usually taxdeductible) and well worth the peace of mind you will gain from knowing that your valuable papers are safe. The following is an "important documents checklist" for all of the major items and records you should have on file. Original documents and other valuables always should be placed in a safe deposit box; copies of inventory sheets can remain in your home files.

IMPORTANT DOCUMENTS CHECKLIST

In order to get your affairs deposit box and copies in your ment should be filed with your review and update this material in order, gather the following documents. Place the originals in your safe home files. The exception to this rule is your will. The original signed doculawyer. Since your financial status will change periodically, it's a good idea to at the beginning of each new year.

PERSONAUFAMIL

Y RECORDS

USE_S
Required to go through settle estate. probate and to

NOTES

Wills (file original with lawyer) Birth and death certificates Marriage license Adoption, custody papers Divorce and separation papers; property agreements Citizenship papers Military service records Passport Diplomas and school transcripts Social Security card or stub

These family records needed to: -Settle an estate -Obtain insurance and other benefits -Give evidence of marital status, citizenship and military service

Required to travel to most places out of the country. May be required to show job qualifications Needed to obtain benefits

PROPERTY RECORDS: REAL ESTATE

Deeds and title papers to property Appraisals of real property Mortgage documents - includes: records of mortgage payments assessed tax value tax payments repairs and improvements to house purchase price, closing costs, and selling costs

USES
Property records required to: -Prove ownership -Settle an estate -Sell property -Pledge property as security for a loan -Obtain tax advantages in property sale

NOTES

PROPERTY RECORDS: HOUSEHOLD

Household inventory (room-by-room list and color photos of all possessions; receipts for purchases; appraisals of antiques and jewelry)

USES
May be required to document in case of fire or theft insurance claim

NOTES

PROPERTY RECORDS: PERSONAL

Titles, bills of sale for autos, motorcycles, boats, other valuable property

USES
Required to sell or transfer property

NOTES

FINANCIAL RECORDS
Bank accounts (location, account number) Stock certificates and bonds (originals are negotiable and thus attractive to thieves; be sure to keep in safe deposit box) Records of stocks (name of company, kind of stock; number of shares; unit and total cost; purchase date; dividend date and payments; yield; sale price and date; profit or loss) Record of bonds (name of company, municipality or government; serial numbers, denominations; purchase date and price; interest payments and dates; maturity dates; selling price and date; profit and losses; records of any coupons) Savings certificates and passbooks Credit records (loan papers, installment contracts, etc.) List of credit cards with names of issuers and account numbers

USES
Records of bank accounts, stocks and bonds needed to: -Figure income tax -Analyze financial position -Figure net worth -Make buy-and-sell decisions -Figure profits and losses in buying and selling -Plan for financial security -Settle an estate (SHOULD BE KEPT FOR FIVE YEARS)

NOTES

Required to make deposits and withdrawals; Required to settle estate Required to figure income tax

Needed to notify issuers if card is lost or stolen

RETIREMENT AND INSURANCE RECORDS

Records of pension/profit sharing plans - include all statements issued by employer

USES
Pension/profit sharing/retirement plan records needed to: -Analyze financial position -Figure net worth -Make buy-and-sell decisions -Settle an estate -Figure profits and losses when buying or selling Required to make claims; to evaluate adequacy of insurance coverage periodically; to settle an estate

NOTES

IRA/Keogh plans (all statements issued by employer) Insurance policies (copies of all policies, payment! claims records)

TAX RECORDS
Copies of past returns (keep 7 years) Records of deductible expenses with receipts Records of income, including interest and dividends

USES
Both are required for possible tax audits and are helpful in filing future returns

NOTES

Both are required for possible tax audits and are helpful in filing future returns

Records of payments Cancelled checks (keep for 7 years) May be needed for tax audit or in dispute over bill payment

PLACE THIS CHECKLIST IN YOUR HOME FILE FOR REFERENCE

Location of safe deposit box: Box number: Number of keys: Location of keys: _ _ _ _

DISCUSSION QUESTIONS CHAPTER 1

1. 2. 3. 4. 5. 6. Why should a person go to all the trouble involved in separating and storing documents? Have you made a list of all your important documents? Do you store them outside the home? Does someone other than your wife know where these documents are in case of an emergency? Do you have an inventory list with either sales value or replacement value assigned to each item? Why should a person keep as accurate a record as possible of all the important documents or possessions he owns?

YOUR NET WORTH

Establishing your net worth on a regular basis is essential to personal financial planning because it provides you with a yardstick of your financial progress. Simply stated, your net worth is all of your assets minus all of your liabilities. By reviewing your net worth annually, you will be able to see how effectively you are managing your finances, and the amount of funds you have to work with for future planning. The net worth form provided in this chapter

CHAPTER 2
offers a simple step-by-step method for establishing your net worth. Once you have assembled all of your records, you should be able to complete this form in approximately one hour. Generally speaking, your net worth should increase every year. If you find your net worth is not increasing annually, you may wish to consider seeking professional financial counseling to ensure yourself of a comfortable nest egg by the time you reach retirement.

NET WORTH PLANNER YOUR ASSETS

Cash (money in savings and checking accounts, bank certificates money market funds, cash at home, etc.) of deposit,

DOLLAR AMOUNT OR VALUE

$ ------$ -------$ -------$ -------$ -------$ -------$ --------

Stocks, bonds, securities (current market value is often available in financial pages of your newspaper) Your home (current market value) Other real estate (current market value) Cars, motorcycles, vans, airplanes (current market value)

Cash value of life insurance policies (note: this is not the face value) Money owed to you (loans you have made to others; rebates due you, etc.)

Company savings or profit-sharing plans (actual amount of money due you if $ -------you left your present employer tomorrow) Company vested pension plan (actual amount due to you currently) Individual Retirement Account Keogh (current balance) Home furnishings/household goods (resale value) (current balance)

$ -------$ -------$ -------$ -------$ -------$ --------

Art, antiques, jewelry, furs, etc. (market value) Trusts (fair market value of property) Interest in a business/partnership/group Other assets investment, etc.

$ -------$ --------

TOTAL ASSETS:

$:..========

YOUR LIABILITIES
Home mortgage (unpaid balance) Other mortgages/real estate loans (unpaid balance) Balance due on other loans (Le., car loans, personal loans) Loan against insurance policy (balance due) Unpaid bills (total balance due)

DOLLAR AMOUNT OR VALUE

$ ------$ -------

$ ------$ -------

$ -------

Unpaid taxes (amount currently due on federal, state, local income or property taxes. Do not include amounts withheld from your paycheck or mortgage $ payment.) Other liabilities (legal statements, etc.) $ -------

TOTAL LIABILITIES: YOUR NET WORTH

Total Assets Minus Total Liabilities $ ---------

$======

$-------$

equals

NET WORTH:

DATE

DISCUSSION QUESTIONS
CHAPTER 2
1. 2. 3. 4. 5. 6. How did you feel about doing the Net Worth Planner? Were you shocked or pleased after totaling your net worth? When was the last time you computed your net worth? How much money is enough? Too much? Where should you start in planning your financial future? What makes money important?

WHERE DOES IT ALL GO? Planning Yqur Monthly Budget

x_. ' .

CHAPTER 3

10

"t

Once you have identified your net.worth, the next step is to look at your income and'expenses and establish where your money is:coming from ... and where it is going. Although virtually everyone operates-on a'1 unwritten monthly budget, effectiveJinahcial planning requires setting down on~pacper al~monthly income and expenses. The.following is~monthly 'IP,.W "\ ,:" budget planner that lJas"been.established for y~ur use." . You'll notice'thatrthis planner covers all income and expenseS-during the year, so it may be~necessary to go through last year's records to~niake sure you can identify all sources of income, fixed monthly expenses, average monthly' expenses, and those occasional expenses that arise d"Urlng,the year. (You should be putting some money aside each month to be able to meet these'"o-ccasio"nal expenses as they come up.) A sound monthly budget calls for regularly setting aside some money each month-forsavi"ngs purposes. Everyone, regcirdless'o{the size of his or her income, should'"Sav.era--setamount of money on a regular basis.! If.. yoU"discover you aren't saving at least a small percentage of your income every month, you are either spending too much or allo-

cEtting too much money for non-essential items. The following monthly budget planner' provides three columns for identifying your annu~1 incorTle and allocating all expenses during the year. Th~)ir.st,co.!umn i~ntifiesA;th'e amo!Jrit of income ,or expense~ndthe -..... ..... J period for which it is ! -"lit!. .'" earned or spentusually y<1Urpay period. The second"c6lumri is provided inorder to convert your pay,:period and annual:quarterly, or " '" r irregular income:and expensesJrom column one into a monthiy, amount. The*tabie)below will help you convert these sumsrinto monthly sums. The third column~is.yolli...rn9"nthly budget column. Here, you should put how much you earn or plan to spend-each month on each item. If, C}.fter ompleting your monthly budget c planner, you find that your monthly income exceeds your expenses, you should consider adding those additional dollars to your savings or investing the money. But if your expenses exceed your income, this planner will help you to examine each item carefully to see where you can reduce your spending. Should you find it impossible to make your budget "balance," you may wish to see a financial counselor to avoid getting too deeply in debt.
.11'-

Lio

ro..

"-

'\

RULES FOR CONVERTING TO MONTHLY AMOUNTS

If your information is in: Days Weeks Every two weeks Twice a month Irregular Adjust as $ amount $ amount $ amount $ amount Work out shown below: x 365 -;- 12 x 52 -;- 12 x 26 -;- 12 x 2 an estimate for the year and divide by 12

MONTHLY BUDGET PLANNER

Listed below are the common income and expense categories for most American each item and write down the appropriate amount for your own situation. households. Review

INCOME SOURCE
Take-home pay Commissions, bonuses, tips Interest, dividends (include stock and money market mutual funds here) Real estate income Social Security, pensions Other

COLUMN 1
($ per pay period)

COLUMN 2
($ per month)

COLUMN

(BUDGET $ per month)

TOTAL INCOME

INCOME PER MONTH

$--9

Insuranceoperation BankHealthcare/education Childwater, etc.) Homeowners/renters Auto Life taxes loans Income, Short term fund Othermaintenance Housing and local(list) Car payments Property Utilities (electricity, taxes Emergency savings Long debts SUBTOTAL:

EXPENSES SUBTOTAL: SAVINGS

($ per Savings per (BUDGET Fixed COLUMN $ month)2 COLUMNmonth) month COLUMN per expenses per 1$ $ 3 1 month

Food Clothing Medical/dental Telephone Transportation (gas, car repair, bus fares, etc.) Credit cards Home furnishings, equipment Dry cleaning/laundry Donations, club dues, church Vacation money Christmas gifts/ other gifts Personal items/ miscellaneous Other

SUBTOT AL: ADD

Flexible

expenses

per month

Savings per month Fixed expenses per month Flexible expenses per month TOTAL MONTHLY EXPENSES

$--$--$---

$--$===

10

DISCUSSION QUESTIONS CHAPTER 3

1.

2. 3. 4. 5. 6. 7. 8. 9. 10.

Why is a monthly and a yearly budget important? Were you able to account for all your money using the Monthly Budget Planner? What is the difference between fixed and.flexible expenses? If it becomes necessary to adjust your b~dget, how would you do it? Did any of the items surprise you? What are your three largest items, in"expenses? Are they the most important? How many items of the monthly buaget are from credit card purchases? Do you have a grasp on your cr~dit card situation? With lots of bills to payoff, h9V\1 'Ca'ilyou still live decently from day to day? How accurate should the check record in a checkbook be?

FINANCIAL COUNSELING IN BAD TIMES AND GOOD CHAPTER 4

Suppose you have figured out your monthly income and expenses and have the nagging feeling that you may be in trouble. The following are 10 early warning signals that can help you spot problems while there is still time to take corrective action. 1. Do you use credit today to buy many of the things you bought last year with cash? 2. Have you taken out loans to consolidate your debts or asked for extensions on existing loans to reduce monthly payments? 3. Does your checkbook balance get lower by the month while your standard of living stays the same? 4. Instead of paying most bills in full each month, as you did in the past, are you now paying only the minimum amount due on your charge accounts? 5. Have you begun to receive repeated notices of overdue bills from your creditors? 6. Have you been drawing on savings to pay regular bills that you used to payout of your monthly paycheck? 7. You've borrowed before on your life insurance policy but this time, are the chances of paying it back more remote? 8. Do you now depend on extra income, such as overtime and dividends, to get you through to the end of the month? 9. Do you use your checking account "overdraft" to pay regular monthly bills? 10. Are you juggling your rent or mortgage money to pay other creditors? Be honest with yourself. If you answered "yes" to two of these questions, it's time to take a close look at your budget. If you answered "yes" to three questions, you may be headed for difficulty. And if five or more of these questions apply to you, you are definitely in trouble. Should you discover that your financial situation is serious, DON'T PANIC. The most important step you can take at this time is to explain your situation to your lenders. This sounds simple, and it is. But many people feel it is a sign of personal failure when they see themselves getting into financial trouble and they make the unfortunate mistake of avoiding their lenders. Instead, they stop paying and wait for dunning letters and phone calls. Not only does this aggravate the problem, but it also often damages a person's credit rating unnecessarily. If you're having trouble, go to see your lender. Most lenders know that people with good credit histories can run into credit difficulties because of sudden unemployment, emergency medical bills, or other unexpected problems. Lenders know that it is not in their best interest or yours to repossess your property. They can offer you a number of alternatives, based on their company policies and their reading of your situation. For example, a lender may be able to help you reorganize your personal finances in a way that will eliminate the need for more drastic steps. He or she may suggest refinancing your loan to lower your monthly payments. He or she may suggest converting all of your debts into one loan. And in the case of mortgage loans, some companies may allow you to make smaller payments for a year or two. after which you make up the difference.

BANK HELP AVAILABLE IN GOOD TIMES, TOO

Even when your present financial situation looks good, making the most of your money - and making the right decisions on how to manage your money - can be complicated. Fortunately, a financial counselor who can help you at little or no cost is as close as your local full service bank. Once you have organized your personal files and finances, you should meet with a banker to review your current situation and your goals. Bankers can provide helpful information, backed up by their banks' financial services divisions, to make sure you make the most of your hard-earned dollars. It's a good idea to get into the habit of consulting your banker regularly as your financial situation changes. so that you can get the benefit of continuing financial planning advice.

DISCUSSION CHAPTER 4
1. 2. 3. 4. 5. 6.

QUESTIONS

Did you answer the ten early warning questions honestly? According to your answers to the ten questions, what do you think you should do? Does it really do any good to talk to your lenders when you are having trouble? Depending on your situation, counseling can be very beneficial whether you need help meeting expenses or help investing your money? Why should we ask for assistance? Have you seen a financial counselor. banker, insurance agent, or accountant for assistance? Can most people manage their money without the assistance of a professional financial counselor?

12

SETTING FAMILY FINANCIAL GOALS

By looking at the Net Worth Planner and the Monthly Budget Planner, you ought to be able to tell which way your financial situation is headed. The pertinent question now is, "Are you satisfied?" If you are satisfied, then you can continue your present spending and investment patterns and check yourself periodically to see that things are still under control. But if you are not satisfied, then you have some work left to do. You must decide, or plan, what it is you want to do. Are you spending too much? Are you in debt? Are you living the way you want to live? This chapter of Financial Planning devotes itself to setting family financial goals and how you can plan your spending to achieve those goals. From this point on, it becomes absolutely essential that both the husband and wife participate in financial planning together and with a positive attitude. This is extremely important because, if you are not satisfied with your present financial situation, the necessary decisions will not be easy or pleasant for either spouse. When a husband and a wife attempt to jointly resolve the problem, they expose their sensitive areas. -They let down personal barriers. -They try to see the partner's point of view. -They try to overcome selfish impulses. -They try not to let theirego dictate their decision. Is it really this big a deal? You bet it is! Sacrifice and changing habits do not come easily. So when you try this program, think about your ego, your selfishness, and how it may seem from your partner's point of view. This may sound more like a lecture in human relations than a financial planning program, but it's appropriate at this point, since a good positive attitude is half the battle. Now let's return to the financial planning process.

CHAPTER 5
not getting anywhere. "All these years I've worked and what do I have to show for it ... nothing!" Sound familiar? It doesn't have to if you set goals.

YOUR PLAN
Now that you have established a system for financial records and for analyzing your financial situation, you are ready to set objectives and allocate your money to meet those objectives. A workable spending plan is a road map for living. It provides you the opportunity to think about the ways you would like to live and the things you would like to do with your money.

GOALS
Managing your money without goals is great if you plan to always be where you are now. But if you think there might be more to life than the present circumstances, or you'd like to spend less time thinking about how you'll spend your money and more time deciding how you'll spend your life, then consider setting some goals. Once you've established a list of goals, you can now measure your spending. You should know how much you'll need by a certain date and whether you can afford that extra luxury item or not. With clearly set goals there is less frustration. You can see where you are going and you can gain a sense of achievement as you move closer to them. Without goals, there's always the old nagging feeling that you're

To make a realistic plan, it is important to consider the needs and wants of the family as a whole, as well as the needs and wants of each individual member of the family. It is also important to set short-term goals for the coming year, as well as objectives for two or five or more years ahead. Family planning for spending should not be done by one member of the family. All members who share in the spending should also understand how the money will be spent. Including the children in the planning process is a good lesson for their financial understanding. It will give them valuable training and help them appreciate family circumstances. If this kind of planning becomes a way of putting on paper what each member of the family wants and is willing to live with, it is a valuable family experience. All too often young people lack an understanding of these important parts of the family process and fail to develop a systematic approach to their own spending habits because they have not been included in family money matters. Everyone in the family should speak up about specific goals and wishes. Where do you want to go on vacation this year? Is there something that should be purchased for the house? A good suggestion is to ask everyone to write down separately what he or she thinks or envisions his life would be like five years from now and use that as a springboard to a family goal-setting discussion. Your goals may be many and varied. They may include planning for vacations, Christmas gifts, a new color TV, college educations for the children, a retirement income, a new home, a new car, additional life insurance, a household appliance replacement, automobile insurance premiums, or what you must save immediately to avoid repossession of

your car or furniture. The important point to remember is that, regardless of your goal, it's a lot easier to save money and make it a family effort if you have a specific reason rather than just trying to develop a nest egg. Now, have each member of the family make out a personal dream list. What would you really like to have in the next year, the next five years? After each family member has finished his list, ask him to separate the items into groups: Nice to have; Ought to have; Must have. Next, separate them further by noting the approximate date (month/year) you'd like to have them. Be realistic, considering your present situation. If you've read this far and haven't yet made out your dream list, STOP. Go back and list the things you'd like to have or do, then proceed. Which items were on more than one list? Which are true needs and which are luxuries? Which ones will benefit the entire group? Which ones benefit only one person? Spend as much time as you need on this discussion. Set priorities based on needs, desires, and available funds. Establish a list the group is comfortable with consisting of the following: Short-term goals (one year), and Long-term goals (two or more years). After a thorough discussion of family goals, write them on the following form. Beside each goal, indicate when you would like to have it (target date). Determine the number of months between now and the target date (time to complete) and enter the approximate cost as shown. To determine the cost per month, provide the approximate cost by the time to complete.

111

FAMilY AND INDIVIDUAL GOALS

Short-Term (one-year) SAMPLE:
1.
2. Insulate the Attic

Target Date
Aug ust 1

Time to Complete 8 months

Approximate Cost
$750.00

Cost per Month

$93.75

3. 4. 5.
6.

7. 8.
9.

10.

TOTAL Long- Term (two or more Target Date years) SAMPLE:

Down Payment Jan. 1, 19 __ on a new $60,000 Home

$---Approximate Cost
15% $9,000

$---Cost per Month

$187.00

Time to Com plete

48 months

1.
2. 3.

4. 5. 6.
7.

8. 9.
10.

TOTAL
Add cost per month from Short-Term Goals Total per month needed to reach all goals

$----

$---$.----

15

You now have the basic equipment for developing a workable financial plan: a list of what you want and a record of how you are using your money now. The next step in this process is to interrelate the two items. Add up the approximate cost and cost per month columns of all your goals by category (shortand long-term). Now total the cost per month for both categories. From this you should know how much you will need to set aside during each pay period in order to reach your goals as planned. Once you have definitely established the amount you need to set aside each pay period, consider your fixed expenses over which you have little or no control - taxes, mortgage or rent payment. installment amounts - and enter them in the appropriate spaces in column three of the income and Expense Plan you complete in the previous chapter. It is important that you set aside money each pay period for these savings and expenditures. The next step is to look at the remaining flexible expenses (the ones over which you have some control). In doing so, don't forget to include personal allowances, and be realistic. If you know you'll buy a candy bar and a cola every day, allow for it. At this point, total all of your expenses and compare that figure with your total monthly income. Chances are good that the total needed per month to reach all goals is more than your current income and expenses will allow. If not, congratulations! If so, don't give up yet. There is still hope for you. You have pinpointed the problem area. The options open to you now are: 1. Increase your income. 2. Decrease your expenses. 3. Eliminate or modify your goals. Your best solution will probably be a combination of the above options. If you are on a fixed income, option number one might mean taking a second job. So, look carefully at numbers two and three. Go over your list and mark the obvious problem areas.

Habits are fine as long as they will take us where we want to go. But when they are leading us in the wrong direction, it is time to change them. That's where the rub comes. It is not comfortable, nor is it easy, to break a habit. They can be broken, however. To break a habit, the first step is selfawareness. Be aware of what you are doing and how. Do this by listing your income, expenses, and net worth. The second step is goal-setting deciding what you want to replace your habit with. That's where we are now. You know what you've been doing and you know what you want, now all we have to do is develop a plan for changing. Consider the alternatives: Could you earn more money? How? In which areas could you cut back expenses? How? Which goals could you reduce? How? Can you still get excited about them in this reduced state?

HABITS
At this point, you may realize that the only way you are going to reach your goals is to change your spending habits. Notice we didn't say spend differently, we said change your spending habits. People are creatures of habit. They develop patterns of doing things. If you doubt this, just refer to your checkbook records for the past year. You'll probably notice a definite pattern from one month to the next. We establish habits because they take less effort than having to rethink something every time we do it. We become comfortable with our ways.

16

These are just some basic questions to ask yourself in preparing your plan. You can probably think of many more. Take all the time you need and answer them all. If you still can't identify enough ways to save epxenses, hang in there! There are lots of things we haven't considered yet. The rest of this book will cover many of them. Let's assume you have decided to cut back on some items. Cutting back or reducing expenditures won't be easy, but it is possible. If your income were cut by $50 or $100 a month right now, you would probably manage, even though it would mean some "belt tightening." Why wait for this to happen? If you can take such an income drop, you can also begin to save a similar amount to meet goals you would like to achieve. We are all prone to buy something on impulse or because it appears to be a good deal. But when your first priority is meeting objectives you can visualize, then it becomes easier to pass up the non-essential purchase or seek out and get a better price. As your family begins to face the question of which expenses to alter or reduce, it might be helpful to look at a conversation that could arise in your home. You say to your mate, "If you can cut down on driving around during the day and I cut down on my lunch expenses, we can save some money." Let's examine that exchange and see if we can learn from it. The important point to note is that there is an "if you do something, I'll do something" attitude exhibited. If this man and his wife are only a few dollars away from reaching their plan, they may make it with this type of approach. But if they need to reduce their expenditures by a sizable amount to make their plan work, then we suggest they openly and critically examine their largest flexible expense items first. Remember that purchasing power and willpower are inseparable. These are the first steps that most of us should take. We should examine the food, clothing, transportation, housing, and miscellaneous purchases in an objective manner and relate them to the goals we have set.

Once you have reached the satisfactory expenditure levels, record the new expense figures in column three of the Income and Expense Plan in Chapter 3. You now have your expense plan. With this plan as a base, you can turn to using the Family Operation Statement in this chapter to track your progress each month. This is a monthly summary statement to show how well you are doing on your expenditures in relation to your monthly income. Keep it with your bills, and each time you pay a bill or make a purchase, write it down. This may be a bit hard to do at first, but don't abandon it if your first records are incomplete. Just try to be more accurate next month. Remember, even a partial record beats none at all. Enter your income at the top of the column. Then list all expenses below it as they occur. At the end of the month, go over your Operation Statement and your account balances and see where you stand. Are you on target or did you go over/under in some areas? Zero in on those areas next month and try to control them. It may take a month or two to get used to this, so don't worry. The important thing is that you are working to establish new spending habits, not just correct a temporary situation. If you are not comfortable with this form, devise your own. It's the record, not the format, that is important. The final step in your financial planning process is re-examination. If the plan isn't working, be realistic and change it. But if you find yourself changing the plan every few months, it's time to ask yourself if you really went through an honest planning process. Unless you approach this honestly, a financial plan turns out just like any other way of living beyond your income, except, of course, you have a record of it.

------ ------17

ACTUAL MONTHLY OPERATION STATEMENT

Monthly
I

Plan
II II Ii

JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC TOTAL
I , I

I TOTAL
I

II iIIIII III I II I II ! jI I,II I I II III IIII I

I

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DISCUSSION QUESTIONS CHAPTER 5

1. 2. 3. 4. 5. 6. 7. 8. 9. Should the entire family be involved in financial planning, or can one person do it for the group? Who makes the financial decisions in your household? How are goals important to financial planning? What problems did you encounter in making a personal dream list? How can this be handled most effectively? In setting priorities, how did you make your decisions? Why do people have so much trouble setting personal and family goals? What spending habits are hardest to change? Why? Discuss your reactions to the questions under "Consider the Alternatives" in this chapter. How could you best use the Actual Monthly Operation Statement in this chapter?

1Q

WHAT YOU SHOULD KNOW ABOUT INCOME TAXES

Our federal income tax system is progressive in nature, which means that the higher your taxable income, the higher the rate at which you will be taxed. The percentage rate at which an individual is taxed is referred to as his or her "tax bracket." This percentage rate can be found in the tax tables printed in a federal income tax instruction booklet. For example, a single person with a taxable income of $16,000 in 1982 owed taxes of $2,230 on the first $15,000 of income, and 27 percent of the remaining $1,000. That person is therefore referred to as being in the "27 percent tax bracket," which means that for each additional dollar earned, 27 percent will go to federal income taxes. This progression continues until his or her income reaches $41,500 at which point his tax rate becomes 50 percent. Every taxable dollar he or she earns above that figure - no matter how high his earnings - will be taxed at 50 percent.

CHAPTER 6

INCOME
Paycheck stubs Interest payments received (from savings, bank cerfificates of deposit, loans you have made to other people, etc.) Dividend payments received (from money market mutual funds, stocks and bonds, etc.) Other income received (Le., rental property income)

OTHER FILES
__ __ __

(if applicable)

ORGANIZING

YOUR TAXES

Paying taxes doesn't rank high on anyone's list of "favorite things to do," but the job can be made a lot easier if you plan and organize your tax records. The easiest way to organize your records is to set up a series of files in which you place all of your monthly income and expense receipts, as well as receipts for major purchases and unusual expenditures. Most people need files for receipts and bills in the following areas:

Moving expenses Business expenses Theft or other casualty losses These receipts will provide you with the information you need to complete your tax forms. Equally important, they will give you much of the "back-up" that the Internal Revenue Service will require if you are audited. At the end of each year, after you have completed your tax returns, gather these receipts together and place them with copies of your tax returns in a new file marked "Income Tax for Year ____ ." Keep your income tax records for at least seven years.

OTHER RECORDS TAXES

TO KEEP FOR

EXPENSES
Mortgage payment' Other loan payments' Utility bills Gasoline and car repair bills Homeowner's insurance Life insurance Health insurance and medical bills Home maintenance bills Education expenses Child care expenses Church donations and charitable contributions Club expenses and dues Credit card payments' Property taxes and other tax receipts IRA or Keogh contributions Other pension contributions 'Each year your mortgage holder and other creditors will furnish a statement of the amount of interest paid. Be sure to watch for this statement and put it in your files.

In addition to these receipts, your bank statements or cancelled checks are excellent records for tax purposes. Keep a file of all your statements in numerical order. Should you ever need to provide proof of purchase or expenses, you can then obtain the appropriate document from your file or from your bank. You should keep this information for at least seven years. It's very important to retain all receipts, work orders, cancelled checks, and other documents relating to the purchase and improvement of your home and other real estate. You will need those records to document capital gains or losses should you ever sell your property. By the same token, be sure to keep all records relating to any investments for at least seven years after you have sold or disposed of them.

20

REDUCING YOUR TAXES

The two primary methods of reducing your federal income tax are tax deductions and tax credits. Deductions allowed by the IRS (and there are many) are subtracted from your adjusted gross income. This, in turn, lowers your taxable income - the amount of income on which you must pay taxes. Tax credits, on the other hand, reduce your final tax bill dollar-for-dollar. Recent changes in the tax laws have created some new tax deductions and tightened up on other deductions, such as medical care and casualty and theft losses. One of the most important new tax deductions in recent years is that allowed for' Individual Retirement Accounts. Up to $2,000 of your contribution to an individual IRA ($4,000 for married couples who are both employed and $2,250 for a married couple with a non-working spouse) is fully deductible. You should consult a financial counselor, such as a Full Service Banker or an accountant, for further information about reducing your taxes. And, whether you prepare your own tax returns or have them done by a professional, it is important to remember that the taxpayer alone is ultimately responsible for the accuracy of his or her tax return. Always make sure that you thoroughly check over your own tax return before mailing it. Any additional taxes or penalties assessed because of an inaccurate tax return will be your responsibility alone.

AN IMPORTANT NOTE
The Jaycees will not assume any responsibility for determining an individual's tax liability or status. The information provided herein is not in any way intended to be comprehensive or to be relied upon in preparing a tax return. Moreover, the information given in this material is subject to change. Any questions you may have about your taxes or your tax liability should be directed to the Internal Revenue Service or to a qualified tax professional.

DISCUSSION QUESTIONS CHAPTER 6

1. 2. 3. 4. 5. 6. Do you know your tax bracket? Do you keep a record of non-reimbursed business expenses, Jaycee expenses for volunteer purposes, educational expenses, or other deductible expenses? Do you know what expenses are deductible for your family? For your business? For Jaycees? Do you have your personal tax records for the last seven years? If you have investment property, or documents, do you have them in a safe place? Does anybody else know that you have them? What is the difference between a tax deduction and a tax credit?

PREPARING AN ADEQUATE INSURANCE PROGRAM

Insurance is a way of paying for security. It is protecting yourself, your family, and even those major possessions - your car, home, furniture, or jewelry - in which you have invested. When you have insurance, you are reducing your risk of loss. Not having insurance is, therefore, accepting a risk. The question you alone can answer is just what degree of risk do you find acceptable? Like savings and investments, insurance should be planned. You should analyze your goals, determine your needs, familiarize yourself with group policies available through your employer, and tailor a total insurance package to give you the degree of security you want, need, and can afford.

CHAPTER 7

WHO NEEDS LIFE INSURANCE?

Most financial experts agree on the following life insurance guidelines: If you are single and do not have any dependents, you probably do not need life insurance. If you are married and have no dependents, you probably need life insurance if only one spouse is employed. If both spouses work and have no dependents and each earns adequate income for self-sufficiency, they may not need life insurance. If you have children to support, you definitely need life insurance. If you're at retirement age, you probably do not need life insurance. In addition, many financial experts recommend that everyone carry enough life insurance to pay for funeral and burial expenses.

LIFE INSURANCE
The primary purpose of life insurance is to provide protection for your family if you should die. A secondary purpose, however, can be savings or retirement income. There are essentially two types of life insurance - term and permanent. With term insurance, you pay a specific premium to obtain a certain cash payment to your survivors upon your death. Because your chances of dying increase as you grow older, term insurance premiums increase with age. With permanent insurance, you also pay a premium to provide your survivors with a specific amount of money if you should die. However, this type of insurance also includes a mechanism for building up a savings nest egg. And, unlike term insurance, the premiums on permanent policies are set when you first buy it and do not increase or vary from year to year. The premiums for permanent insurance are considerably higher than those for term insurance, because only part of each payment goes to provide you with life insurance per se. The remainder of your premium is used to build up a type of savings account. This is the "cash value" of your policy. With a permanent policy, you can cancel the policy at any time and receive its cash value as of that date, although most people usually do not cash in permanent insurance policies until they retire. Another feature of the permanent policy is that you may borrow against its "cash value" at generally lower-than-market interest rates, while still keeping the insurance in force. Overall, term insurance provides the greatest amount of insurance coverage for the least amount of money. But, as stated before, term insurance generally provides no savings vehicle.

HOW TO BUY LIFE INSURANCE

Purchasing life insurance is fairly complicated. There are hundreds of companies offering literally hundreds of different variations on the term and permanent policies. The best course of action is to: Read about life insurance to try to determine the type of life insurance you need. Make appointments with representatives of several different life insurance companies and compare their rates and voerage. Make your decision carefully and base it on logic, not emotion. Think it over for at least a day before you sign anything.

PROPERTY

INSURANCE

Most individuals' largest assets are their home and personal possessions (furniture, silver, jewelry, clothes, art, etc.). To protect against the loss of these assets from fire, theft, or natural disasters, most people buy homeowner's or renter's insurance. The cost of homeowner's insurance is generally proportional to the value of your home. The cost of renter's insurance is generally proportional to the value of your possessions. Rates do vary, however, according to your geographical location, the quality and proximity of the fire department, the age and construction of your house, etc. Homeowner's insurance policies usually insure all physical structure on your residential property,

22

as well as your home's contents and its improvements (swimming pool, patio, landscaping, etc.). It also provides you with liability protection if someone is injured in your home or on your property. Renter's insurance policies are generally limited to personal possessions and furnishings (i.e., everything inside the rental structure that you actually own.) Most renter's insurance policies also provide personal liability protection. Condominium insurance policies are similar to renter's insurance in that they cover all of your possessions within the condominium unit. And, like homeowner's insurance, they also cover the physical structure that you own (i.e., the actual unit as bounded by your interior walls). These policies also provide personal liability protection.

GUIDELINES FOR PROPERTY INSURANCE COVERAGE

If you own your own home and have a mortgage on it, virtually all lenders require that you be insured for a certain percentage of its replacement cost. Because of inflation, it's essential to evaluate regularly the cost of replacing your home to make sure that you have adequate coverage. Automatic inflation adjusters are available on many policies. You should also regularly reevaluate the coverage on your personal possessions. Since most insurance policies do not pay fully for the loss of certain luxury items such as jewelry, furs, antiques and stereo components, you may wish to take out an additional policy or rider to cover these fully. As with life insurance, be sure to shop around before purchasing a policy. And you can often reduce your premiums by increasing the deductible or qualifying for special discounts available to reduced-risk policy holders, i.e., non-smokers or individuals with burglar alarm or smoke alarm systems.

HEALTH INSURANCE
The skyrocketing costs of medical care have made health insurance a necessity for every American. Statistics show that 50,000 Americans go bankrupt every year because of medical expenses. Although many people are covered by their employers' group health insurance plans, some 30 million Americans are not and must find insurance on their own. Many millions more seek additional

health insurance because their existing coverage is inadequate. And individuals who are between jobs, who retire before the age of 65 and thus are not eligible for Medicare, or who lose their group coverage through divorce or spouse's death also need to have health insurance coverage. Most health insurance coverage falls into one of the following three categories: Basic hospitalization - This covers the basic cost of surgery or treatment in a hospital and includes nursing services, hospital supplies, drugs and the use of special hospital facilities. The amount of coverage varies, but it is usually a percentage of the total cost minus the deductible. Major Medical - This coverage helps pay for really large medical bills. In other words, major medical coverage (or "catastrophic insurance") often begins where basic hospitalization ends, providing coverage for serious injuries or prolonged illnesses. Disability - This type of insurance provides you with money (usually a percentage of your salary) should you be injured or become too ill to work. Actual payment does not normally begin until regular medical coverage and/or sick leave coverage end. You should seriously consider disability insurance as a way of protecting yourself in case of medical disaster. Most financial advisors recommend that disability payments cover between 60 and 70 percent of your regular income. If you do not know or are unsure about the adequacy of your medical insurance. contact your local hospital or county medical association. Ask them for customary charges in your area and compare these costs to your current insurance coverage. On the following page is a Family Insurance Fact Sheet which, when completed, will give you a good record of your current insurance coverage and allow you to see what additional coverage may be needed or what insurance may be excessive.

23

FAMILY INSURANCE
Cash Date Date Annualof Premium Premium Purchase Due & Agent Type of PolicyCompany Value* Number Coverage Policy

FACT SHEET

*If appropriate.

DISCUSSION CHAPTER 7
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

QUESTIONS

How do you feel about life insurance? Which type of life insurance is the best? Explain. How many forms of insurance should a person have? Explain. What is the primary purpose of life insurance? Secondary purpose? What is the difference between term and permanent insurance? If you are considering a purchase of a life insurance contract, what should you do to get the best coverage? Do you have insurance protection on your largest asset, your home and your possessions? Do you know how to reduce the cost of liability insurance on your home or possessions? Do you know what the basic health insurance coverages are? Does your health insurance policy have first day accident and sickness coverage? What day does it become effective? Do you know what insurance protection you have personally? Through work? Have you listed your insurance policies and included them in a safe deposit box?

24

INVESTMENTS: FINANCING FOR THE FUTURE

Investments are made to acquire future income or benefits. Short-term investment goals will invariably change according to age, income level, or family obligations. Such objectives may include buying your home, starting your own business, or sending your children to college. In the final analysis, however, the ultimate goal of your investment strategies should be directed towards attaining a comfortable retirement nest egg. The key to effective investing lies in a basic understanding of your own financial needs and the types of investments that can best meet those needs.

CHAPTER 8

MUTUAL FUNDS
Another way of investing in the stock market is through mutual funds. Here, instead of investing in individual stocks, you buy shares in a mutual fund which in turn uses your money to buy the stocks and bonds of other companies. Mutual funds are directed by professional investment managers but, as in other investments, you should check carefully the records of several mutual funds before choosing to invest in one. Your stockbroker can help you get the background information you need.

MONEY MARKET MUTUAL FUNDS

Rather than stocks and bonds, these funds invest in short-term money market instruments such as bank certificates of deposit, U.S. government securities and commercial paper. Money market funds were restricted to brokerage houses until recently, when Congress passed legislation allowing banks and other financial institutions to set up similar money market accounts. Unlike money market mutual funds, the new money market accounts at banks and other financial institutions are federally insured.

SOME COMMON INVESTMENTS

The following descriptions of common investments have been compiled to provide a basic understanding of some different financial instruments and how they work. After you have looked it over, you should consult with a qualified professional in the field, such as a banker or registered financial advisor, to learn more about specific investment vehicles.

CORPORATE SECURITIES: STOCKS AND BONDS

Common stock - Purchasing the common stock of a company is equal to purchasing a share of ownership in that corporation. The price of a company's stock moves up or down according to the firm's business acumen and the general state of business and the economy. Generally, the company's board of directors will return a portion of the company's annual earnings to its stockbrokers in the form of dividends. Although stockholders are partowners of a corporation, their claims against a company's assets rank behind those of its bondholders. Bonds - These essentially represent "loans" that an individual makes to a corporation. The face value of each bond represents the amount of the loan. In return for lending money to the corporation, the bondholder holds a priority claim against the company's assets and regularly receives interest on the loan until a predetermined date, at which time the debt is fully repaId at face value. Stocks and bonds are bought and sold in the stock market. Sales are handled through brokerage houses which have seats on the various stock exchanges where actual sales are made. The two national exchanges are the New York Stock Exchange and the American Stock Exchange.

CERTIFICATES OF DEPOSIT
These are contracts with banks and other financial institutions where the investor agre,es to deposit a set amount of money with that institution for a specific period of time. During that time, interest accrues on the savings. Because the financial institution is guaranteed the use of the investor's money for a relatively long period of time, the interest rate available is relatively high. The longer the time to maturity, the higher the rate of interest. There are substantial penalties for early withdrawals.

REAL ESTATE
Some investors purchase commercial and/or residential properties as an investment, deducting the expenses of property maintenance, mortgage interest, and the property's depreciating usefulness from their taxable income. Besides the tax deductions, the investor gains rental income and a growing equity in a property that may well appreciate in value.

COLLECTIBLES
Collectibles are unique or limited items that often have an aesthetic value in and of themselves - such as art, precious gems, antiques, rare books, and commemorative stamps. Investors purchase these items for the purpose of reselling them at a later date, when it is presumed their worth will have increased in relationship to their increasing rarity and value.

TAX SHELTERS
These are investments in specific types of industries where, because of the risk involved, the government has authorized tax benefits to investors as a way to encourage the funding of these ventures. Tax shelters usually offer the investor exceptionally large tax deductions in connection with the venture's initial operations (generally in the first year). Later on, if the venture becomes profitable, the investor will realize profits, which may be reported as capital gains. In essence, tax shelters are for individuals who need tax deductions rather than income. Laws governing tax shelters and their constitution change constantly, so it is essential to check out carefully any such venture with a qualified tax advisor or banker before investing in one.

3.

4.

5. 6.

7.

SOME RULES OF THUMB SUCCESSFUL INVESTING

1.

FOR

8.

2.

Determine your investment objectives, including your ability (financial and psychological) to assume risks. Investments are long-term commitments of funds that involve some element of risk. The greater the risk, the greater the potential return - or loss. You should only get involved in an investment after you have established an adequate emergency fund of readily accessible savings. Factors you should consider include growth of capital, need for current income from investments, safety of principal, liquidity or marketability, and taxes. Consider several different types of investment vehicles before choosing the one or more that best fit YOUR needs. Ask for advice from others whose professional knowledge and judgment you respect.

9.

10.

Once you have selected your investment methods, become as knowledgeable as possible on the subject. Don't be afraid to ask questions, and don't make any investment until you feel comfortable with the subject matter. Don't go too far from home. Generally we reap success in those areas we know best. Therefore, it makes good sense to concentrate on those geographical areas or industries that you understand most thoroughly. Measure risk very carefully, including intangibles as well as dollar costs and benefits. Don't make investment decisions hastily. When you do not know what to do, it's often best to do nothing. Monitor your investments closely, whether they are doing well or poorly. Compare the actual performance of your investments with your initial projections. Invest generally for the long haul. Short-term swings will always occur, and even professionals have a hard time calling them. Don't try. Your commitment is to the future. Don't be stubborn about an obvious loss on an investment. Take it and try again. The object is to make the most of your good buys and cut the losses on your bad ones. Finally, be sure to consider the tax consequences of your investment decisions.

ORGANIZING AND KEEPING TRACK OF YOUR INVESTMENTS

Below and on the following page are charts to help you keep up to date on your investments and their earnings. When property filled out, these charts will also be helpful each year when you compute your income taxes and update your net worth information sheet.

INVESTMENT

ORGANIZER

UnitsCost Bought Commission Purchased Total Price Per Unit Date Type of Investment

Investment

Date Commission UnitsSoldProceeds Price Sold Unit Total Per

?f;

INTEREST/DIVIDEND
Issuer/Company

INCOME
Date Dividend/I nterest Paid Amount

SOCIAL SECURITY
These retirement benefits are based on taxes that you pay into the Social Security trust fund during your working years. Your retirement benefits are based on your average earnings, adjusted for such factors as the provision of spousal retirement benefits and the age when you begin to collect your benefits. Although the system is too complex to explain adequately in these pages, it's important to know that Social Security is much more than a retirement program. For example, Social Security provides benefits for your dependents while you are on the benefit rolls as a retired or disabled worker. If you die (before or after retirement), it pays benefits to your survivors to help replace your earnings. It helps with medical and hospital expenses when you reach 65 or if you become disabled. To be eligible for retirement benefits, a person must have contributed Social Security taxes for a minimum of 40 quarterly periods. Although most jobs in the United States are covered by the Social Security law, you should check with your local Social Security office if you have any doubt about your coverage.

Social Security payments are exempt from federal, state, and local income taxes and are increased to meet increases in the cost of living according to a mandated formula. However, it's very important to know that Social Security was NEVER envisioned as a retirement program in and of itself. It was designed to be a retirement supplement, to be used in conjunction with individual savings and other pension plans. On the following page is an instruction sheet that will help you estimate the amount of Social Security retirement benefits that you can expect to receive monthly. Obviously, the further away from retirement you are the less accurate this statement will be, since your earnings record to date will be relatively low. However, it is still useful to have some idea of these benefits for planning purposes.

SOCIAL SECURITY INFORMATION YOUR SOCIAL SECURITY NUMBER:

In order to assist you in estimating your retirement income, you should first establish the amount of Social Security retirement benefits that you can expect to receive monthly. You can do this by following these steps:

27

Ask your local Social Security office for a Statement of Earnings postcard, form OAR-7004. Fill the card out and mail it to Social Security Administration, Post Office Box 57, Baltimore, Maryland 21203. On the corner of the postcard write the words "Quarters, please" and "Benefits estimate, please." In return, you will receive a statement detailing the total amount of earnings credited to your Social Security number, plus the number of quarters that you have been accumulated, and an estimate of your monthly retirement benefit check (which is based on the earnings credited to your account to date.) When you receive this information, transfer your estimated monthly benefit to the form below. Repeat this process and update as necessary. Date Estimated Monthly Benefit At Age 65

others do not. Pension benefits are taxable as ordinary income. The quality and requirements of pension programs vary dramatically from company to company. If your company has such a program, you should ascertain what pension benefits you are entitled to, and how much or how little you will receive upon retirement. In order to obtain this information, contact the person in charge of your company's pension plan and ask the following questions. You should update this information every three years. 1. 2. 3. How many years of employment do you currently have to your credit? At what age can you receive full retirement benefits? How many years must you work at the company before you are guaranteed full benefits at retirement? How many years must you work at the company to guarantee partial benefits at retirement? If you were to retire with full benefits, how much money would you receive monthly? What is the minimum age at which you can qualify for pension benefits? If you die before reaching retirement at age 65, would pension benefits be payable to your spouse? If you die after retirement, does your spouse continue to receive pension benefits? If so, how much? _

$------$------$------$------$------COMPANY PENSION PLANS

Many employers provide retired workers with a pension, provided they have worked a certain number of years with the company and attained a certain age. Some of these programs require employees to contribute to the program, while

4.

5.

6.

7.

8.

DISCUSSION CHAPTER 8
1. 2. 3. 4. 5. 6. 7. 8. 9.

QUESTIONS

Which form of investment is recognized as ownership, stocks, or bonds? Why? How would you invest in either a stock or a bond? What is a mutual fund? How does a mutual fund differ from a money market mutual fund? A Certificate of Deposit, or CD, has a higher interest rate than normal, why? When investing in Real Estate, commercial or industrial, what benefits does the buyer receive? What could be a problem with investing in "collectibles?" When considering a tax shelter as an investment, you should seek counsel of a qualified tax advisor. Why? What should be the most important consideration before making any investment?

28

ABOUT YOUR RETIREMENT

Too many Americans falsely equate retirement planning with thoughts about how they will spend their free time, rather than how they will pay for it. Yet the foundation for an effective retirement plan rests with a thorough understanding of what one's financial needs will be, and how those needs will be met. In general, the following axioms should be remembered when you're planning your retirement financing: You will need to have enough income to meet your expenses each year throughout your life. At retirement age your income tax bracket should be significantly lower; this affects the way you look at your investments. Very few people can meet their retirement income needs from Social Security and pension payments alone. Most people overestimate the monthly benefits they will receive from a company pension plan at retirement because they are unaware of the plan's requirements and restrictions. The first step to establishing a solid retirement program is to review the most common sources of retirement income. Generally speaking, most people rely on one or more of the following for their retirement financing.

CHAPTER 9

If you become totally disabled before you are 59%, you may withdraw your IRA funds without paying a penalty. Otherwise, the IRS imposes a 10 percent tax penalty on the amount withdrawn before you reach 59%. In addition, the amount withdrawn will be taxed at your Personal Tax Rate in the year of the withdrawal. Without question, IRAs are one of the most exciting personal financial innovations around. For the first time ever, every wage earner - regardless of whether he or she is covered under a company pension or profit sharing plan - can take advantage of the benefits of tax-deferred savings. You can establish an IRA account with virtually any financial institution. With most banks, there is no fee or minimum contribution, and arrangements can be made for monthly payments into an IRA. In addition, many employers are now offering their employees the opportunity to establish an IRA through monthly payroll deductions. On the following page is a sample Individual Retirement Account chart prepared by the American Bankers Association that shows how funds would accrue based on an interest rate of 12 percent compounded annually.

INDIVIDUAL RETIREMENT ACCOUNTS

Beginning January 1, 1982, all working individuals were given the opportunity to set up their own retirement program, even if they were already covered by a company pension, by opening an Individual Retirement Account, or IRA. These retirement savings plans allow a working individual to contribute up to $2,000 per year into an account which then earns them interest, much like a savings account. Working individuals with nonworking spouses can contribute up to $2,250 in an IRA. The annual contribution to an IRA is fully tax deductible. Moreover, the earnings are tax-deferred until you begin to withdraw funds at retirement when you are presumably in a lower tax bracket. You may begin to withdraw funds from an IRA without penalty at age 59%, and you must begin withdrawing funds by age 70%.

.p..

29

1 week) ($43.27/week)

304,415 170.715 135.146 151,924 10.673 341,429 270,293 303,848 240,333 682,859 512,144 608,158 405,439 607,695 480,665 360,499 768.216 540.585 683.657 540.7 341.505 383.046 31,220 11,567 66,167 84.187 5.650 ,799 48 18,1,087.792 58,578 13,515 74,667 1,217,661 1,024.515 1,149.137 140 117.155 132.334 168.374 149.334 103,603 106,579 11.300 189,699 36.280 205,881 41.753 27.029 47,884 234.310 23.133 29,482 24.823 284.548 224.001 91,503 155,404 47.089 54.750 62,440 159,868 95.767 71,052 1.220,847 813,898 542,599 1.369,869 913,246 1,536.773 1,366.020 683,010 426.823 379.398 336.001 298,668 123,187 93,945 54,058 175.733 560 $ 241.732 429,571 $27,375 2,676 ,374 49 1.288.714 383.521 483,463 430.664 968,993 862,922 1.718,285 859,142 861.327 725,195 575.281 120.166 106.791 3,558 4.545 13,634 213,583 20,450 14,230 9.089 455.772 427.166 320.374 7,115 16,009 480,561 271.299 35,526 20.877 45,751 23,942 51,801 40.349 94.849 15,696 6.888 8.274 9,827 16.549 109,499 121.048 124,879 19.655 13.776 137.254 107.738 207.206 31,393 22,599 264,668 252,561 81,629 183.005 233,107 62.785 83,507 82,125 181,572 80,699 60,816 40.544 140,489 263,599 52,050 34.699 44,223 39,309 608,831 1.723.706 1.532,183 766,091 27,551 37.235 378.842 336.7 72.559 54,420 70.633 93,660 142.105 71.826 46,266 25,424 30.995 198,501 2.520 1.680 1.120 191.760 1,187 $ 1,085.197 10,706 2 4.749 645,995 966.926 767.042 1,933,070 3,562 1,890 3 7,559 18.178 20,663 161.397 33,097 297.751 62.630 16,950 5,353 12,044 8.029 5.342 2.240 8.503 5.669 SAMPLE215,332$500 INDIVIDUAL RETIREMENT $1 ,000 $1 ,500 $2,250 $2,000 Figures Are Rounded to the Nearest Dollar. Year Interest Rate: 12% Compounded Annually.

ACCOUNT CHART*

Source: American Bankers Association Based on an approximate yield of 12%. This rate is not intended to be a statement of the actual interest rate available or guaranteed end financial results.

KEOGH PLANS
Keogh plans are similar to Individual Retirement Accounts except that you must be selfemployed to qualify for one. And, unlike IRAs, the maximum yearly contribution allowable to a Keogh plan is 15 percent of your income up to a maximum of $15,000 per year. Annual Keogh contributions are fully tax deductible, and the interest earned remains tax-deferred until time of withdrawal. The age and withdrawal requirements are the same as for IRAs. Banks and other financial institutions can also establish Keogh plans. On the following page is an Individual Retirement Account/Keogh record that you may find helpful.

10

INDIVIDUAL RETIREMENT ACCOUNT/KEOGH

Interest Date Rate MaturityAccumulated AmountWhere Placed of Date Amt. of Contribution Maturity TOTAL

RECORD

DEFERRED ANNUITIES
These plans allow you to deposit your savings with an insurance company in return for a guaranteed rate of interest each year and an agreement that upon retirement you will be paid a set monthly income for the rest of your life. The interest earned is tax-deferred until the time of withdrawal, at which time it is taxed as regular income.

INVESTMENTS AND SAVINGS FOR RETIREES

Most retirees look to their investments and savings nest egg to provide them with some portion of their retirement income. In general, retirees should seek investments that produce relatively high earnings at relatively low risk. Growth stocks that pay small dividends, tax shelters, and other investments attractive to younger people as a means to gain long-term appreciation or tax advantages are generally less attractive to the retiree, who seeks income and security. Retirees often use the interest (and portions of the principal) from savings accounts and the cashvalue of life insurance policies as the basic cash pool to meet their income needs.

PLANNING YOUR RETIREMENT

The form on the following page has been designed to help you use the information in this chapter. Again, althOugh it may seem premature to plan for your retirement at this stage in your life, this planning will be invaluable to you in setting not only tomorrow's financial goals, but also today's.

31

RETIREMENT

INCOME

PLANNER
Not Factor In Inflation) years yea rs

(Note: Use Current Figures-Do

payment,

2. 3.

1. Your Estimated Annual Money (assumeCount78 income Cushion Expectancy: but $ Can Subtract lineLife ExpectancyYouNeeded age On Your to Insurance expenses$ six AdditionalofAnnualfrom Retirement Savings,MeetReaching Life (or Needs) Retirement Amount Income(lack of Your toUntil for At Retirement: your Policies Income of Gap Estimated Years ValueExpenses: Age Retirement Your Anticipated Current from lineofseven: retirement Investments, cover for women, Number men,Retirement Needs: age 83 To determine, expenses,line history: medical,line three by number of many from enteredaccording five: but your and want some subtract will Convert to line will remembering i.e., money will Otherto linemultiplyduring budget as a guide, probably - that years draw on (use monthly twoas adjustyear):Assets you dollar retirement:on at eachthat oncurrent to familysuch amount Cashone:Retirement be increased) you

If line 7 is larger than line 6, you should be able to meet your retirement needs. If the amount on line 7 is slightly smaller than line 6, the interest income you receive on your savings and other cash items may be enough to meet your retirement needs. If line 7 is considerably smaller than line 6, you will need to save or accumulate the difference to meet your retirement needs.

DISCUSSION CHAPTER 9
1. 2. 3. 4. 5. 6.

QUESTIONS

Have you planned for your retirement? How? Do you know what an Individual Retirement Account, or IRA, is? Do you know what a Keogh Plan is? What investments besides your company pension, if you have one, and social security, will you use for your retirement? When is the best time to plan for retirement? At retirement, do you want your investments to reflect liquidity and low risk or growth potential and high risk? Why?

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ESTATE PLANNING
Estate planning - planning for the management and disposition of your assets upon your death - is one of the most important and most overlooked aspects of financial management. Unfortunately, too many people confuse estate planning with morbidity and end up playing a type of financial Russian roulette, leaving their family's future to chance. The will is the keystone of estate planning. If you die without a will or with a will that is not properly drawn up, the state will distribute your estate in accordance with its own laws rather than your wishes. In addition, you will lose the privilege of naming your executor (which could cost your estate a great deal of money) and the privilege of naming a guardian for any children who are still minors when you die. You also run a grave risk of saddling your family with long court proceedings and high estate taxes. Although it is legal to write your own will, there is no guarantee that it will stand up in court, particularly if there is anything complex about your estate. You best bet is to consult your banker and your lawyer when drawing up a will, changing a will or making a new will. It's a small price to pay for making sure that your wishes are carried out.

CHAPTER 10
Your letter should include the following information: The location of your will. (Do not keep the only copy of your will in your safe deposit box, because it may be sealed upon your death.) Funeral and burial instructions. The location of all your important documents. The location of your safe deposit box, its key, and a list of its contents. A list of special benefits, such as death or funeral benefits. A list of insurance policies and where they are located. The location of all of your proofs of property ownership, including real estate deeds and stocks and bonds. A list of all debts and instructions for handling them.

CREATING A TRUST
As part of their overall estate plan, many people create a trust to provide expert investment management, financial or tax protection for their estate or educational funds for their children. Stated simply, a trust is an arrangement where an individual or a bank trust department gains title to - and usually manages - property for the benefit of someone else. Trusts can be set up for someone when he or she is still alive (a living trust) or to become effective when someone dies (a testamentary trust). Many people create testamentary trusts to: manage their estates until their minor child becomes of age; provide professional investment management for a beneficiary who is inexperienced in handling financial matters; save inheritance taxes. Living trusts are used by many people who are seeking professional, secure management of their investments. In addition, many older people create living trusts as a method of managing their investments now and in the future, when they feel

NAMING AN EXECUTOR
An executor is the person or qualified corporation, such as a bank or trust company, that you name in your will to settle your estate. Executors should be chosen very carefully, because the individual, bank, or trust company you name should be fully competent to handle fairly complex money matters and should be willing to spend a good deal of time to carry out your wishes.

LETTER OF LAST INSTRUCTIONS

Once you have named an executor, it is important to write him or her a letter of last instructions to be opened after your death. This letter should contain all the necessary information your executor will need to begin carrying out your wishes.

~~

they may no longer be able to handle such affairs themselves. In addition, living trusts are often created as a way to pass assets on to an heir and avoid probate, which eliminates substantial costs. In essence, because the proper handling of an estate can be extremely complicated, a trustee is used to provide experienced and competent investment management. Since both living and testamentary trusts involve complex concepts, neither should be created without first consulting a lawyer, tax expert and a bank trust officer. The fee for trust management varies, depending on the type of service offered and the geographical location of the trustee or bank. Often, the annual management fee is based on the total value of the trust assets.

DISCUSSION CHAPTER 10
1. 2. 3. 4. 5. 6.

QUESTIONS

Do you and your wife have a will? An executor to the will? Do you feel personally threatened by not having a will? Explain. In the event of your and your wife's untimely death, will your children be adequately taken care of? Have you consulted with a lawyer and a banker or other financial advisor regarding the estate laws in your state? Do you know what a trust is? Do you know the difference between a living trust and a testamentary trust? Do you have a Letter of Last Instruction itemizing what should be done by your executor?

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A GLOSSARY OF FINANCIAL TERMS

Like many other industries, the financial industry has a language of its own. The following are some of the words - and their definitions you may encounter in the course of your personal financial and retirement planning.

CHAPTER 11
CREDIT - An advance of cash, merchandise or commodity in exchange for a promise to pay a definite sum at a future date, usually with interest. CREDIT CARD - A card that gives the holder the right to purchase or borrow cash or merchandise against a line of credit that has been established for the card holder by the card issuer. CURRENCY - Technically, any form of money that serves as a circulating medium, including both paper money and metallic money (coins). DEBIT CARD - A card issued by a financial institution to its customers that when used by the card holder credits or debits the card holder's personal account with the financial institution. DEVALUATION - An increase in the price of gold in terms of a national currency, i.e., the value of local currency falls in terms of gold. DISCOUNT RATE - The interest rate a commercial bank pays when it borrows from a Federal Reserve Bank. DIVIDEND - A payment to stockholders, usually made on a quarterly basis, based on a company's earnings. EARNINGS - The amount of money a company has made after subtracting its costs, expenses and taxes. ELECTRONIC FUNDS TRANSFER SYSTEM (EFT) - A banking system in
which funds are debited and credited to accounts by an electronic communications network, eliminating the need for monetary exchange via cash or checks.

AMORTIZATION -

The gradual repayment of a debt through equal periodic payments sufficient to meet current interest and to liquidate the debt at maturity. to

ANNUITY - An amount payable according contract over a set time or an indefinite period, such as for a stated number of years or for life. BALANCE SHEET -

The financial statement of a company that lists its assets, liabilities, and net worth as of a given date. A term used on Wall Street to indicate a decreasing trend in the price of common stocks. An investor who describes himself as "bearish" foresees a decrease in stock market values.

BEAR MARKET -

BENEFICIARY - The person named as recipient of the inheritance of a will or of the proceeds from an insurance policy, retirement plan, etc. BOOK VALUE - The value of a company or business as determined by taking its net worth and dividing it by the number of stock shares outstanding. BULL MARKET - A term used on Wall Street to indicate an increasing trend in the price of common stocks. An investor who describes himself as "bullish" foresees an increase or continuing increase in stock market values. CAPITAL GAl N - The profit realized from the sale of a capital asset. (A negative profit from the sale of an asset is termed a capital loss.)
The sum total of the money that has been invested in a corporation or business, including shareholder investments and the company's reserves or surplus funds.

EQUITY - The value of a business or property when all liens or debts are subtracted. ESTATE - All property of a person, living or dead, including cash, securities, real estate, life insurance policies, debts, and receivables. EXECUTOR - A person or institution named by a will to settle an estate. An executor's responsibilities include presenting the will to a court for probate, gathering all assets, collecting debts, paying bills, managing the assets, distributing the estate to the heirs, etc.

CAPITALIZATION -

COLLATERAL - Specific property, often securities, given by a borrower to a lender as a pledge for the payment of a loan or other obligation. COUPON - A "promise of payment" coupon that is attached to a bond. When detached and surrendered to the issuer, it is exchanged for the promised interest payment.

FIDUCIARY - An individual or a trust institution charged with the duty of acting for the benefit of another party. Examples of fiduciary relationships include a guardian and his ward, an agent and his principal, an attorney and his client, one partner and another partner, or a trustee and his beneficiary. FISCAL POLICY - Use of a government's spending and revenue-producing activities to achieve specific economic goals. GUARDIAN - A person or institution, generally named by a court, to care for the property of a minor or incompetent. Banks are usually guardians of property, while other persons are named guardians of the person and that person's needs. INSURANCE - A contract whereby for a fee one party agrees to pay a sum to another in the event the latter suffers a particular loss. INTEREST money or credit. The sum paid for the use of

TANGIBLE PROPERTY - Property which can be touched or realized with the senses, such as a chair, as opposed to intangible property, such as a promissory note.
A trust established under the terms of a will and taking effect upon the creator's death.

TESTAMENTARY TRUST -

TR UST - An arrangement by which an individual or a corporation as a trustee holds the title to property for the benefit of one or more persons, usually under the terms of a will or a written agreement. TRUST DEPARTMENT - The department of a bank that provides trust services. TR USTEE - An individual or institution who generally holds legal title to property and administers it for the benefit of another. USURY - The legal limit on the rate of interest that can be charged for a loan. YIELD - The annual return on an investment. Yields are expressed as a percentage of the investment's cost or present price. For example, a stock selling at $5 per share that pays $1 per share in annual dividends has a 20 percent yield.

LlaUIDITY - The ability to convert non-cash assets (stocks, bonds, real estate, etc.) to cash. Assets that can be quickly converted to cash are said to have high liquidity. LIVING TRUST - A trust created during the creator's lifetime, which provides benefits during the creator's lifetime. (Compare with testamentary trust.) MARKET RATES - Rates of interest resulting from the demand for, and supply of, funds in the money market. MONETARY POLICY - Management by a central bank of a nation's money supply to ensure the availability of credit in quantities and at interest rates consistent with specific objectives. PRICE-EARNINGS RATIO -The relationship between the price of a stock and the company's per-share earnings. For example, a stock selling at $75 per share, with earnings of $5 per share, has a priceearnings ratio of 15. PRIME RATE - The interest rate that banks charge on business loans to their best corporate customers at a given time. RATE OF RETURN - Income earned on any investment, expressed as a percentage of the investment's price. SINKING FUNDS - Money that a company has contracted to set aside periodically to purchase or redeem its securities. STOCK SPLIT - The process of dividing a company's stock shares. For example, a 2-for-1 stock split means that two shares of stock will be created for every one share that previously existed.

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PERSONAL FINANCIAL PLANNING RESOURCE/REFERENCE BIBLIOGRAPHY

Bailard, Thomas E., David L. Biehl and Ronald W. Kaiser; Personal Money Management; Science Research Associates Blodgett, Richard E.; The New York Times Book of Money; Quadrangle Bridwell, Rodger w.; The Battle for Financial Security; New York Times Books Eder, George J.; What's Behind Inflation and How to Beat It; Prentice-Hall George, Richard; The New Consumer Survival Kit; Little, Brown and Company Goldberg, Richard H.; Planting Your Money Tree; Chatham Square Hardy, C. Colburn; Funk and Wagna/l's Guide to Personal Money Management; Mackevich, Gene; The Woman's Money Book; Bantam Quinn, Jane Bryant; Everyone's Money Book; Dell Publishing Co. Randle, Paul A. and Philip R. Swenson; Managing Your Money; Wadsworth, Inc. Funk and Wag nail

Simons, Gustave and Alice Simons; Money and Women; Popular Library Sprinkel, Beryl W. and Robert J. Genitski; Winning with Money: A Guide for Your Future; Dow Jones-Irwin Stein, Ben; Moneypower: How to Make Inflation Make You Rich; Harper and Row Book of Personal Money Management; Prentice-Hall

Stillman, Richard J.; Money Wise: The Prentice-Hall

VanCaspel, Venita; Money Dynamics for the 1980's; Reston Publishing Walker, Glen; Credit Where Credit is Due Rinehart and Winston The United States Jaycees, Communication A Legal Guide to Your Credit Rights and How to Assert Them; Holt, Dynamics, Cat. No. 696-1

The United States Jaycees, Leadership Dynamics, Cat. No. 675-1 The United States Jaycees, Personal Dynamics, Cat. No. 682-1 The United States Jaycees, Time Dynamics, Cat. No. 687-1

INVESTMENTS AND RETIREMENT PLANNING REFERENCE/RESOURCE BIBLIOGRAPHY

Blume, Marshall E. and Jack P. Freedman, (ed.); Encyclopedia Branch, Ben; Fundamentals of Investing; Wiley Casey, Douglas R.; Crisis Investing; Harper and Row Clay, William C., Jr.; The Dow Jones-Irwin Guide to Estate Planning; Bantam Books of Investments; Warren, Gorham and Lamont, Inc.

Cohen, Jerome B. et al; Guide to Intelligent Investing; Dow Jones-Irwin Gordon, George B.; You, Your Heirs and Your Estate; Farnsworth Graham, Benjamin; The Intelligent Investor; Harper and Row Hardy, C. Colburn; ABCs of Investing Your Retirement Funds; Medical Economics Hardy, C. Colburn; Dun & Bradstreet's Guide to Your Investments; Harper and Row Jehle, Faustin F.; Complete and Easy Guide to Social Security and Medicare; Dell Johnson, Timothy E.; Investment Principles; Prentice-Hall Klein, Michael J.; Planning for Tomorrow; A Step-by-Step Guide to a Successful Retirement; McGraw-Hili

Levitt, Arthur, Jr.; How To Make Your Money Make Money; Dow Jones-Irwin Little, Jeffrey B. and Lucien Rhodes; Understanding Wall Street; Liberty Publishing

Porter, Sylvia; Sylvia Porter's New Money Book for the 80's; Doubleday Rukeyser, Louis; How to Make Money in Wall Street; Doubleday Smith, Thurman L.; Investors Can Beat Inflation; Liberty Publishing Tobias, Andrew: The Only Investment Guide You'/J Ever Need; Bantam Books Whitman, Martin and Shubik, Martin; The Aggressive Conservative Investor; Random House

NOTE: Many of these books do not take into account recent changes in tax and estate laws. Nevertheless, the general information provided and concepts discussed remain valid.

PROGRAM OPTIONS
Financial Planning lends itself to many uses. It is an excellent personal workbook, a guide to family financial planning, a text for meaningful group discussion, and a follow-up manual for lecture series.

CHAPTER

12

GROUP DISCUSSION
To use the manual most effectively in a group discussion, note the following steps: 1. Distribute a manual to each participant. 2. Allow time at the beginning of each meeting for a personal review of the chapter or topic to be discussed. 3. Ask each person to make notes of the items they are especially interested in. Be sure to bring these out in the discussion. 4. Using the discussion questions at the end of each chapter (plus any questions of your own), allow participant a chance to talk. 5. Strive to keep the conversation flowing. Don't allow yourself to become "the teacher." 6. You may wish to use a tape, book, film, or guest speaker to stimulate discussion. Sample Agenda (2 hours) Informal call to order Introduction of subject matter Discussion period Tape, film, or guest speaker Discussion period Evaluation of session Adjournment Time 10 40 20 40 10 min. min. min. min. min.

to your group might bring them extra business, so most of them wil be anxious to help you out. Tell them exactly what you want them to do and how much time they should plan to take. Always allow time for questions and answers. (Be sure to practice your usual courtesy for guest speakers.) SUGGESTED SPEAKERS Financial Counselor Life Insurance Salesman Multi-purpose Salesman Attorney Banker Insurance POSSIBLE TOPICS Budgeting, overcoming debts Term vs. cash value insurance Auto, home & other insurance Importance of a will, types of property ownership, etc. Use of bank services (savings, checking, credit cards, trusts) Types of loans, obtaining credit Home buying and real estate ownership. Types and costs of investments The stockmarket

Loan Officer Real Estate Broker Investment Counselor Stock Broker

Caution: A person's finances are very private. Don't try to pry into personal situations. If someone voluntarily shares his personal financial circumstances with the group, okay, but don't encourage such sharing. Keep the discussion on the subject.

LECTURE SERIES
Many well-qualified speakers on the subject of finance are available in most communities. You may wish to contact them and arrange for them to address your group about their specialty. Speaking

And many, many more. Be creative, check local resources. You may find more potential speakers than you have time to use. List according to preference the subjects you want covered and contact speakers in that order. Your financial planning program can be as long or as brief as you wish. Let the members of your group determine what subjects they want to cover and how long the program should last. With this approach, you will be able to provide a valuable learning experience for all of them. Upon completion of your program, you may wish to present to each participant a diploma. The U.S. Jaycees offers such a diploma through its products catalog.

ACKNOWLEDGMENT
Financial Planning has been prepared for your use by the American Bankers Association in cooperation with The United States Jaycees. The preparation of a majority of this workbook by the American Bankers Association has proven invaluable and is deeply appreciated. This book also includes an excerpt from the book Preparing Your Personal Financial Plan, copyright 1973, Minnesota Jaycees, reprinted with permission.

AMERICAN BANKERS ASSOCIATION

1 120 Connecticut Avenue, N W. Washington, D.C. 20036

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