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Savings Fitnes

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Title: Savings Fitnes


1
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
2
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

3
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

4
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

5
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)

6
Saving vs. Investing
  • Short term goals
  • lt 5 years
  • No risk of loss of principal
  • No or low real return after taxes inflation
  • Steady but slow growth
  • Long term goals
  • 5 years or more
  • Trade potential short term loss for long term
    gains
  • Positive real return after subtracting taxes
    inflation
  • Volatility

7
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/

8
How Much Retirement Income Will I Need?
  • Need to replace 70 to 90 percent of
    pre-retirement income
  • Lower the income, the higher the that needs to
    be replaced
  • It depends on the kind of retirement you want to
    enjoy

9
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

10
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

11
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

12
One Simple TrickSpend 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

13
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

14
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.
15
Avoid Debt Credit Problems
  • How much debt is too much debt?
  • monthly debts (credit card payments, car loan
    payments, student loan payments, etc.) ?
    mortgage ? by the money you bring home each
    month.
  • The result is your debt ratio.
  • Keep this ratio at 10 or less
  • Total mortgage and non-mortgage debt should be no
    more than 36 of your take-home pay.

16
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

17
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

18
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/

19
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

20
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!

21
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

22
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

23
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

24
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.

25
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

26
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.

27
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!

28
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.

29
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

30
Defined Benefit Plans
  • Pay a lump sum upon retirement or a guaranteed
    monthly benefit.
  • The payout is typically based on a set formula
  • such as ( of years you have worked for the
    employer) ? (a percentage of your highest
    earnings)
  • Usually the employer funds the plan--commonly
    called a pension plan.
  • Most are insured by the federal government.

31
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.

32
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!

33
What If You Cant Join An Employer-Based 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)

34
What If You Are Self-Employed?
  • SEP (Simplified employee pension plan)
  • SIMPLE IRA
  • IRA
  • Annuities

35
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)

36
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

37
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 Etimate
  • Taking the mystery out of retirement planning

38
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