Savings Fitness

A Guide to Your Money and Your Financial Future PPT Developed by Karissa Berndt USU Family Finance Student

Financial Planning for Women March 2007

Todays Program
 Provides a general overview of saving & investing  Focus on retirement but principles apply to all goals  Details are in the Savings Fitness booklet  PPT & links available at www.usu.edu/fpw

Program Objectives
      Identify your goals Distinguish between savings and investing Develop net worth statement & savings plan Learn to manage debt Understand risk-return relationship Begin or increase saving/investing
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How to manage financial challenges and afford a secure retirement?

 Write your goals on a 3x5 card  Sort the cards into two stacks:
 Goals in the next 5 years or less  Goals in 5 years or more

 Sort the cards in order of priority  Make retirement a priority!  Write on each card what you need to do to accomplish that goal
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Beginning Your Savings Fitness Plan

 Current financial resources:
 Net worth: the total value of what you own (assets) minus what you owe (liabilities)
 Assets
 Possessions, vehicles, home, bank accounts, investments, etc.

 Liabilities
 Remaining mortgage on your home, any loans/debts, etc.

 Subtract your liabilities from your assets.

 Goal: a positive net worth, which grows each year

 Review your net worth annually (at tax time)

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Saving vs. Investing

 Short term goals
 < 5 years

 Long term goals

 5 years or more

 No risk of loss of principal  No or low real return after taxes & inflation  Steady but slow growth

 Trade potential short term loss for long term gains  Positive real return after subtracting taxes & inflation  Volatility
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Estimate How Much You Need to Invest for Retirement

 Worksheets & software programs can help you estimate how much you need to invest.
    kiplinger.com (click on Retirement) moneymag.com (click on Retirement) usnews.com (click on Retirement Calculator) asec.org (click on Ballpark Estimate Worksheet)
 See FPW website for PPT on Ballpark Estimate

 nasd.com (click on Investor Services, then Financial Calculators)

 Planning for a Secure Retirement  http://www.ces.purdue.edu/retirement/
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How Much Retirement Income Will I Need?

 Need to replace 70 to 90 percent of preretirement income  Lower the income, the higher the % that needs to be replaced  It depends on the kind of retirement you want to enjoy

How Long Will I Live In Retirement?

    Average male life expectancy: age 78 Average female life expectancy: age 82 Consider your health and family history Expect to live longer than previous generations!

 Planning for a Secure Retirement  http://www.ces.purdue.edu/retirement/

 Module 1b Life Expectancy Calculators
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What Savings Do I Already Have?

 Social Security retirement benefits  A pension that provides a fixed amount of retirement income each month  Nest egg ! the desired total income/year  (Social Security  any pension income)
 Nest egg examples- Retirement plan accounts at work, IRAs, annuities, and personal savings

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What Adjustments Must Be Made For Inflation?

 The cost of retirement will go up every year due to inflation  The average annual inflation rate is 3.1%
 In 1980 the inflation rate was 13.5%  In 1998 it reached a low of 1.6%

 Assume a higher, rather than a lower, rate of inflation

 Its safer to plan on 4% than 3.1%
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One Simple Trick

Spend Less Money Than You Earn!
 Start with a spending plan or budget
 Income
 Add up monthly income: wages, average tips or bonuses, alimony payments, etc.

 Expenses
 Add up monthly expenses: mortgage or rent, car payments, food bills, entertainment, etc.  Include savings as an expense!

 Subtract income from expenses

 Consult USU Family Life Center, 797-7224

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Spending Plans Cont.

 What if expenses exceed income?  Cut Expenses (nickel & dime vs. BIG expenses)
    clipping grocery coupons bargain hunting (thrift stores, etc.) changing phone or cable to a cheaper plan Real savings: housing & transportation!

 Increase Income
 work a part-time second job  turn a hobby into income  jointly decide that another family member will work
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Adopt Savings Rules

 Americans who follow rules save more*
       Pay yourself first Put savings/investing on auto pilot Save your tax refund Save unexpected money (i.e., windfall, gifts) Save all change Save $ you saved on grocery & gas (receipts) Other ideas?
*Rha, Montalto,& Hanna (2007). The Effect of Self-Control Mechanisms on Household Saving Behavior. Financial Counseling and Planning, 17(2), 3-16.
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Avoid Debt & Credit Problems

 How much debt is too much debt?
 [monthly debts (credit card payments, car loan payments, student loan payments, etc.)  mortgage] z by the money you bring home each month.  The result is your debt ratio.  Keep this ratio at 10% or less  Total mortgage and non-mortgage debt should be no more than 36% of your take-home pay.
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Whats the Difference Between Good Debt and Bad Debt?

 Good debt - provides a financial pay off
 buying or remodeling a home (within reason!)  investing in education  advancing your own career skills

 Bad debt - borrowing for things that do not provide financial benefits, or that dont last as long as the loan
 Depreciating assets: vehicles  vacations, clothing, furniture, dining out
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Handle Credit Cards Wisely

 Use only 1 or 2 cards, not the usual eight or nine  Dont charge big-ticket items.
 Save or find less expensive loan alternatives

 Shop for the best interest rates, annual fees, service fees, and grace periods  Pay off the card each month,
 If you cannot pay in full, pay more than minimum

 Still have problems? Leave the cards at home

 USU FLC 797-7224
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How to Climb Out of Debt

 Work with your creditors directly to try and work out payment arrangements
 Request lower APR on credit card

 USU Family Life Center Housing & Financial Counseling

 can help you set up a plan to work with your creditors and reduce your debts  PowerPay Debt Analysis: https://powerpay.org/
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Investing for Retirement

 Once youve reduced unnecessary debt and created a spending plan, youre ready to begin investing for retirement.  Participate in your employers retirement plan  Invest in an Individual Retirement Account

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Where to Save/Invest?
 Cash Equivalents - very little risk; very low return
    Savings accounts Money market mutual funds Certificates of deposit U.S. Treasury bills

 Suitable for short term goals only

 Your money wont grow  Taxes & inflation negate any growth!
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Bonds
 Corporate or Government Bonds
 You loan money to a U.S. company or a government body in return for its promise to pay back what you loaned with interest

 Small % of your long term investments

 Conservative  Low growth potential
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Stocks
 You own a part of a U.S. or international company  High potential for growth in the long run  Short term volatility  Must be willing to accept the ups & downs along the road to inflation-beating growth

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Mutual Funds
 Pools your money with money of other investors and invests it.  A stock mutual fund, for example, invests in stocks on behalf of funds shareholders.  Easier to invest and to diversify.  Ideal for your Individual Retirement Account (IRA)  See FPW PowerPoints on website
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Where to Put Your Money

 For goals that are at least 5 years in the future:
     stocks bonds real estate foreign investments mutual funds

 Not insured by the federal government - there is the risk that you could lose some of your money  The longer you have until retirement, the more risk you can afford.

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Why Take Risk At All?

 The greater the risk, the greater the potential return
 a diversified portfolio of stocks & bonds will earn significantly more than a savings account.  No/low risk = no growth  Historic Average Annual Returns  U.S. Treasury Bills: 3.8%  Government Bonds: 5.3%  Large-Company Stocks: 11.2%

 Inflation averages 3.1%  Taxes reduce investment returns

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Reducing Investment Risk

 Diversification
 Distributing your money among several investments, rather than investing in individual companies.  You can do this by investing in:
 mutual funds  index mutual funds

 Diversification will greatly decrease your risk of losing money.

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Why Diversify?
 At any given time one investment might do better than another.  The factors that can cause one investment to do poorly may actually cause another to do well.  By diversifying into different types of assets, you are more likely to reduce risk, and actually improve return, than by putting all of your money into one investment.  Dont put all your eggs in one basket!
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Reducing Investment Risk Cont.

 Asset Allocation - investing among different categories of investments (FPW PPT)
 Put some money in cash, some in bonds, some in stocks, and some in other investments  The choices you make about what % to have in these major categories defines your investment strategy.

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Employer-Based Retirement Plans

 Does your employer provide a retirement plan?
 If sograb it! Employer-based plans are the most effective way to invest for your future.  Youll enjoy tax benefits.  Two types of employer-based plans :
 defined benefit  defined contribution
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Defined Benefit Plans

 Pay a lump sum upon retirement or a guaranteed monthly benefit.  The payout is typically based on a set formula
 such as: (# of years you have worked for the employer) v (a percentage of your highest earnings)

 Usually the employer funds the plan--commonly called a pension plan.  Most are insured by the federal government.
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Defined Contribution Plans

 401(k) plans are the most common type  Does not guarantee a specified amount for retirement  The money you have available to help fund your retirement depends on:
 how long you participate in the plan  how much you invest  how well the investments perform

 More common than traditional pension plans.

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Vesting Rules
 Money that you put in a retirement plan and earnings on those contributions, always belongs to you.  Employees dont always have immediate access to the money their employer invests in their fund.  Once you are vested you own all of your employers contribution.  Some plans vest in stages, others after fixed period of employment.  Know your employers vesting rules.

 Dont leave before you are vested!

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What If You Cant Join An EmployerBased Plan?

 If possible, take a job with a plan  Encourage your employer to offer a plan  Invest in an IRA (see FPW PPTs)  Build your personal savings  Consider an annuity (April 11 FPW)
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What If You Are Self-Employed?

 SEP (Simplified employee pension plan)  SIMPLE IRA  IRA  Annuities

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Coping With Financial Crisis

 Establish an Emergency Fund
 This can lessen the need to dip into retirement savings for a financial emergency

 Insure Yourself
 Having adequate insurance will protect your financial assets  Insurance coverage:
      Health Disability Homeowners or Renters (PPT on FPW website) Automobile Umbrella liability Life (if someone else depends on your income)
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Monitor Your Progress

 Financial planning is not a one-time process, so make sure to do the following:
 Periodically review your spending plan  Monitor the performance of your investments
 make adjustments as necessary

 Contribute more toward retirement as you earn more  Update your insurance to reflect changes in income or personal circumstances  Keep your finances in order

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April 11 FPW
 Making Your Money Last for a Lifetime: Why You Need to Know About Annuities  Check FPW web http://www.usu.edu/fpw/ for related PowerPoint presentations
     Asset allocation IRA picks 2005; Mutual Funds 2006 What is an IRA? Ballpark E$timate Taking the mystery out of retirement planning
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Questions?