Financial Tools

1
Money Management

• Financial Tools
• You Need to Know
• to Survive

2
What We Will Cover Today

• Where does your money go?
• Your cash reserves.
• What are your goals?
• How money works.
• Asset allocation.

3
Keys to Success
You must know the seven keys to success

• Develop a budget
• Define specific goals
• Know how money works
• Establish cash reserves
• Develop a financial plan
• Pay yourself regularly
• Take immediate action

4
Where Does Your Money Go?
It is important to

• Develop a spending plan
• Track your monthly expenses
• Note the little expenses
• Stick to your budget

5
Where Does Your Money Go?
The latte effect

• Latte 3 Cookie 1
• Lunch 6
• Soda 1
• Magazine 2
• Total 13

• Week 78 Month 339
• Year 4,060

6
Where Does Your Money Go?
The latte effect

• Week 78 Month 339
• Year 4,060
• Invest 2,500

7
Where Does Your Money Go?
A TYPICAL FAMILY
TAXES 25
INSURANCE 8
COST OF LIVING/ DEBT REPAYMENT 65
SAVINGS/INVESTMENTS 2
Your Monthly Spending
Cost of Living/Debt Repayment . . . . . . . . .
. Taxes . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . Insurance . . . . . . .
. . . . . . . . . . . . . . . . . . . .
Savings/Investments . . . . . . . . . . . . .
. . . . .
8
Your Cash Reserves
The need

• Emergencies
• Planned expenses
• Investment opportunities
• Minimize the need to use credit

9
Your Cash Reserves
What to look for

• Interest paying
• Liquidity/check writing
• Low risk
• No withdrawal penalties

10
Your Goals
To better attain your goals

• Think about your short term goals
• Think about your intermediate term goals
• Think of your long term goals
• Put them to paper
• Develop a plan
• Work with a motivator

11
How Money Works
The Rule of 72
72
Number of Years to Double


Interest Rate
6 doubles in years 8 doubles in years
12
How Money Works
The Magic of Compound Interest
150,000 100,000 50,000 0
Investing 100/month 8 compounded monthly
Years
5 10 15 20 25
13
How Money Works
Tax-Deferred Compounding
350,000 300,000 250,000 200,000 150,000 100,
000 50,000 0
361,887
Taxed Every Year Tax-Deferred
Based on a 10 annual rate of return
216,364
209,960
139,563
35,062
29,904
Years
10 25 30
14
How Money Works
A Tale of Two Investors
1,019,169
1,019,169
Prudent Polly Procrastinating Pete
Assumes 10 annual rate of return
805,185
805,185
78,000
16,000
Years
Return figures are for illustrative purposes
only and do not represent the past or future
performance of any actual investment.
15
How Money Works
Guaranteed Rates of Return
1000 Interest 3
30 1030 Tax
30 -9
1021 Inflation 3
-30
991
Also known as Going broke safely
16
How Money Works
Dollar Cost Averaging - When is the Best Time to
Invest?
17
How Money Works
Dollar Cost Averaging
3/doz 12 eggs 4/doz 12 eggs 2/doz 12
eggs 9 36 eggs
3 12 eggs 3 9 eggs 3 18 eggs 9 39 eggs
18
How Money Works
Dollar Cost Averaging - When is the Best Time to
Invest
A
B
19
How Money Works
Investing 100/month
Dollar Cost Averaging - When is the Best Time to
Invest
14
A
17
20
20
B
20
How Money Works
Investing 100/month
Dollar Cost Averaging
11
10
11
14
14
14
13
13
A
Total Shares 174 x 10 1,740
17
17
20
20
B
21
How Money Works
Investing 100/month
Dollar Cost Averaging
11
10
11
14
14
14
13
13
A
Total Shares 174 x 10 1,740
17
17
20
20
B
33
40
40
22
How Money Works
Investing 100/month
Dollar Cost Averaging
11
10
11
14
14
14
13
13
A
Total Shares 174 x 10 1,740
17
17
20
20
25
25
20
B
33
33
33
40
35
40
40
66
Total Shares 410 x 5 2,050
23
How Money Works
The Three Worst Enemies To Your Money
Debt
Inflation
Taxes
24
Asset Allocation
What is Asset Allocation?

• Process of efficiently developing a diversified
  portfolio by mixing different classes of
  financial assets in varying proportions.
• Process whereby an investor constructs a
  portfolio reflective of goals, time frame and
  level of risk tolerance to meet financial
  objectives.
• The art of balancing risk and reward to meet
  objectives.

25
Asset Allocation
Why Do We Use Asset Allocation?

• Increases diversification
• Potentially lowers volatility
• Potentially lowers risk
• Potentially increases return
• Potentially delivers consistent returns over time

26
Asset Allocation
A History

• WWII Normandy invasion
• Markowitz and the University of Chicago
• Markowitz, Miller and Sharpe win the Nobel Prize
  in 1990

27
Asset Allocation
The Power of Diversification
28
Asset Allocation
The Power of Diversification
29
Asset Allocation
The Power of Diversification
30
Asset Allocation
The Power of Diversification
31
Asset Allocation
The Power of Diversification
32
Asset Allocation
The Power of Diversification
33
Asset Allocation
The Power of Diversification
34
Asset Allocation
The Costs of Volatility
10
10
10
?
-10
Year 1 Year 2 Year 3 Year 4 Year 5
35
Asset Allocation
The Costs of Volatility

• If you start with 100,000

• and gain 10 and lose 10
• and gain 20 and lose 20

36
Asset Allocation
Typical Asset Classes

• Stocks
• Bonds
• Cash Equivalents
• Real Assets

37
Asset Allocation
Start By Creating a Portfolio for You

• Set your objectives
• Set your time horizon
• Set your investment parameters
• Rebalance

38
Asset Allocation
You may be a conservative investor if
You prefer low-volatility investments You are not
comfortable with a large exposure to stocks You
desire an extremely stable income stream or
growth pattern You are concerned about the
possible loss of principal You have a short-term
investment time frame
39
Asset Allocation
You may be moderate conservative if
You want to preserve the future purchasing power
of your capital, but not in a high-risk
situation The amount of risk you are willing to
take to outpace inflation is slight Your
objective is more income-oriented than
growth-oriented You want to achieve some growth,
but at a minimal risk
40
Asset Allocation
You may be a moderate investor if
One of your priorities is preserving the future
purchasing power of your capital You are willing
to take a modest amount of risk to outpace
inflation You desire a modest but stable growth
pattern You are comfortable with experiencing
possible short-term decreases in your portfolio
value in exchange for the potential of long-term
gains
41
Asset Allocation
You may be moderate aggressive if
You are striving for capital appreciation You are
open to the idea of equity investing You desire
above-average long-term growth You are willing to
accept market swings You have an intermediate- to
long-term investment time horizon
42
Asset Allocation
You may be an aggressive investor if
You are trying to achieve maximum capital
appreciation You are comfortable with, or perhaps
have a past history of, equity investing You
desire significantly higher long-term growth You
are willing to accept significant market
swings You have a long-term investment time
horizon
43
Asset Allocation
Tolerance for risk is just one of many factors
that will dictate the portfolio that is right
for you. Others include
Personal financial profile Financial goals Time
horizons Investment objectives
44
Asset Allocation
100 Stocks
100 Stocks
90 Stocks, 10 Bonds
90 Stocks, 10 Bonds
75 Stocks, 25 Bonds
75 Stocks, 25 Bonds
50 Stocks, 50 Bonds
50 Stocks, 50 Bonds
Return
Minimum Risk Portfolio 25 Stocks, 75 Bonds
Minimum Risk Portfolio 25 Stocks, 75 Bonds
10 Stocks, 90 Bonds
10 Stocks, 90 Bonds
100 Bonds
100 Bonds
Risk (Standard Deviation)
Risk is measured by standard deviation. Return is
measured by arithmetic mean. Risk and return are
based on annual data over the period of
1970-1995. Portfolios presented are based on
Modern Portfolio Theory. For illustrated purposes
only.
Source Ibbotson, Associates.
Past performance is no guarantee of future results
45
Asset Allocation
Asset allocation is not a perfect investment
method. However, short of a crystal ball, it is
the best way to

• Potentially maximize returns
• Spread and minimize risk
• Potentially lower volatility
• Increase diversification
• Potentially deliver consistent returns over time

46
In Closing
Who do you think will be better off in the future?
The Jones, who save todays money for tomorrow,
or The Smiths, who spend tomorrows money today?
47
The Next Step
Homework

• Develop a budget for your house

48
The Next Step
Homework

• Develop a budget for your house
• Track your expenses

49
The Next Step
Homework

• Develop a budget for your house
• Track your expenses
• Calculate monthly spending percentages

50
The Next Step
Homework

• Develop a budget for your house
• Track your expenses
• Calculate monthly spending percentages
• Come up with a financial plan

51
The Next Step
Homework

• Develop a budget for your house
• Track your expenses
• Calculate monthly spending percentages
• Come up with a financial plan
• Have sufficient reserves

52
The Next Step
Homework

• Develop a budget for your house
• Track your expenses
• Calculate monthly spending percentages
• Come up with a financial plan
• Have sufficient reserves
• Diversify your holdings