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Unformatted text preview: Personal and Family Financial Management 15 Suggestions
January 2011 National Advisory Council Professor and Academic Director, H. Taylor Peery Institute of Financial Services Marriott School of Management Brigham Young University Ned C. Hill Ned C. Hill President Gordon B. Hinckley
Priesthood Meeting, October 3rd, 1998
s s s Story of Pharaoh’s dream of the seven fat cattle and the Story seven lean cattle seven “…I want to make it very clear want that I am not prophesying, that I am not predicting years of famine am in the future. But I am suggesting in that the time has come to get our the houses in order. There is a portent houses of stormy weather ahead to which stormy we had better give heed.” we “So many of our people are living So on the very edge of their incomes. In fact, some are living on borrowings.” In President Gordon B. Hinckley (cont.)
s s s s “I urge you, brethren, to look to the condition of urge your finances.” your “I urge you to be modest in your expenditures; urge discipline yourselves in your purchases to avoid debt to the extent possible.” debt “Pay off debt as quickly as you can, and free Pay yourselves from bondage.” yourselves “That’s all I have to say about it, but I wish to say That’s it with all the emphasis of which I am capable.” it President Gordon B. Hinckley
General Conference, October 7th, 2001 “The economy is particularly vulnerable. We have The been counseled again and again concerning selfbeen reliance, concerning debt, concerning thrift. So reliance, many of our people are heavily in debt for things that are not entirely necessary.” that s “I urge you as members of this Church to get free urge of debt where possible and to have a little laid aside against a rainy day.” aside President Gordon B. Hinckley President
“I am satisfied that money is the am root of more trouble in marriage than all other causes combined.” than “ There would be fewer rash There decisions, fewer unwise i nvestments, fewer consequent l osses, fewer bankruptcies if husbands and wives would counsel together on such matters and unitedly seek counsel from Cornerstones Cornerstones each other.”of a Happy Home [ pamphlet, 1984] each New Dollar Bill Released by the T reasury Last Week Elder Joseph B. Wirthlin
April Conference, 2004
s s “Remember this: debt is a form of bondage. It is a Remember financial termite. When we make purchases on credit, they give us only an illusion of prosperity. We think we own things, but the reality is, our things own us.” things “Some debt—such as for a modest home, Some expenses for education, perhaps for a needed first car—may be necessary. But never should we enter into financial bondage through consumer debt without carefully weighing the costs.” without Net Worth—Helps You Think About Debt
s s Net worth = Assets - Liabilities Assets
x x Market value (not purchase price) Real and financial Credit card and other consumer debt Mortgages Net worth helps you do stuff in the future Track over time--should be growing Identifies assets that could be used to reduce debt s Liabilities
x x s Why do this?
x x x Net Worth—A Picture Liabilities Assets Net Worth Impact of Credit Card Purchase
Flat Screen TV Credit Card Debt Liabilities Assets Net Worth Impact of Credit Card Purchase
Flat Screen TV Credit Card Debt Liabilities Assets Net Worth How do you balance this? What Adds to Net Worth?
Flat Screen TV Credit Card Debt Liabilities Net Worth Assets Net Worth Must Shrink! Avoid Unproductive Debt Suggestion 1
It Makes Net Worth Shrink Productive debt Productive Home Education Minimum transportation Business
Be careful—any debt here can become unproductive Unproductive debt Consumer goods Vacations Car Most credit card debt Some Facts about Debt & Credit Cards
s s s s Average household has 13 credit cards 65% of card holders do not pay off total balance each month People tend to spend 12% more when they use their credit cards People (compared to cash). (compared Over 40% of US families spend more than they earn (Federal Over Reserve) Reserve) Origin of Most Debt Problems?
Spending Problems Debt Income Expenditures Suggestion 2 Control Your Spending
s Step 1: Write down your cash flows
x x x 2-3 months back Find all expenditures—including cash purchases Find expenditures—including Determine total assets and liabilities What do we want to accomplish? Agree on a budget for future cash flows Use computer or any other method (envelopes) s Step 2: Agree on goals
x x s s s Step 3: Track cash flows--compare budget to actual
x Step 4: Review monthly—talk it over! Step 5: Make adjustments B U D G E T for _____________, 2 01 0 INCOME Wages/Salaries (after taxes) Other income Educational Loans Total income EXPENDITURES Church donations Savings Food Tuition, books, etc. Mortgage or rent Utilities Transportation Debt payments Insurance Medical Clothing Other Total expenditures PLANNED ACTUAL PLANNED ACTUAL Why You Should Have a Spending Plan
Communicate with spouse and family Communicate s Find out what you are spending s Extract more money for saving and Extract investing investing s Get out of debt s Prepare for the future s Keep money from slipping through your Keep fingers fingers
s 500+% If You Must Borrow, Suggestion 3 Be Careful Where!
s s s s s Finance companies Credit cards Banks Credit unions “Pay Day Lenders” 30 25 20 15 10 5 0 FC CC B CU PD S Suggestion 4 Reduce Unproductive Debt
s Plastic surgery Plastic s Reduce spending s Use assets to pay off Use debt debt s Make a plan to retire X% of Make debt/month & STICK TO IT debt/month s Talk to a credit counselor if needed Suggestion 5
s Protect Your Family Insurance
x Life x Health x Car x Disability x Home owners/renters Emergency cash s Food storage
s Term Life -- Pure Death Benefit
s s s s No savings component About 1/10th to 1/5th the cost of permanent Expires at age 65 (usually) Many employers offer term insurance as Many part of its benefits package part
x x Base amount Can purchase additional if desired Decreasing Term (premiums stay same) Constant Term (premiums increase over time) s Two types
x x Permanent Life -- Death Benefit Plus Savings Component
x Part of premiums go to building “cash value”
3 Can borrow against it x x x x x x x The other part goes to death benefit Premiums stay constant over time Does not expire Most policies give fixed rate of return on the Most cash value cash More expensive per $ of insurance coverage Often used for estate tax purposes Variants: universal life, variable life Insurance--Makes Up for Low Net Worth Problems
s If you have low or negative net worth?
x x Heirs may have difficulties Severe cash flow problems s Insurance creates an instant estate--it becomes an Insurance instant it asset if you die asset
Assets Cash from Insurance Liabilities Net Worth Added Net Worth Insurance--Makes Up for Low Net Worth Problems
s If you have low or negative net worth?
x x Heirs may have difficulties Severe cash flow problems s Insurance creates an instant estate--it becomes an Insurance instant it asset if you die asset
Liabilities Assets Net Worth What Kind and How Much?
Start with term insurance (6-10 times Start annual income) annual s Group is least costly but what if you leave? s Have some for non-employed spouse
Your net worth should build up over time s As it does, you may need less and less life insurance s However, life insurance can be used as a tool to pass part of the estate on to heirs (this is where permanent insurance comes in).
s Suggestion 6 Prepare for Retirement
Yes, Even When You Are Young! s s s Some Retirement Myths Some “I’ll live on Social Security benefits”
x SS will replace only 24% of your income “Someone else will take care of me” “Better be safe and invest conservatively” Biggest regrets for retirees Biggest
x x Didn’t take full advantage of tax deferred Didn’t investments investments Didn’t start earlier to save for retirement Why Start Saving Early?
Remember: Social Security provides only Remember: about 24% of a typical family’s preretirement income. s Can you live on just 24%? s You’ll need other sources of income
x x x Retirement plan from employer Retirement Personal retirement savings Personal Equity in a home Equity Bill starts saving for retirement at age 20 Joe starts saving for retirement at age 40 ($2,000 per year at 8%)
1000000 900000 800000 700000 600000 500000 400000 300000 200000 100000 0 Example $903,800 20 Start 40 Start $172,702
20 25 30 35 40 45 50 55 60 65 Bill has accumulated over 5 times what Joe did by 65! How Does This Work?
Compound interest s Bill started earlier--compound interest has Bill more time to work its miracle more s If someone had put $1 in an account back in If 1776 at 8% interest how much would the account have in it today? account
s $61,339,000 !! Suggestion 7 Save Wisely Every time you get paid: • Pay the Lord first (10%) • Then pay your future self (10%) • Live on the rest (80%) How Much Will I Need in Retirement?
Money Magazine Survey People Estimate: 53% Actual: 71% People 53% 71% s One third of retirees support children and One grandchildren grandchildren s Health care costs generally higher s You’ll want to serve missions, visit You’ll grandchildren, etc. grandchildren,
s So you may need much more than 71% Saving Builds Net Worth Over Your Lifetime
700 600 500 400 300 200 100 0 -100 20 25 30 40 50 60 65 70 Life Cycle Savings Suggestion 7A
Save 20% Retirement Save 10% Borrowing To Heirs
80 Age What Should I Invest In?
s Principle: risk-return trade-off
x High risk--high return x Low risk--low return s What?
x Stocks -- ownership in a company (risky) x Bonds -- loan to a company/government (less Bonds risky) risky) x Deposit accounts -- (insured, no risk)
x Mutual funds x Tax-deferred investing Best and Worst Total Returns
54% (since 1926)
Stocks: S&P 500 U.S. T-bills 20% 15% 9% 17% 8% 3% 0.4% 0% 0% -1% One year holding period -43% 10-year holding period 20-year holding period Chances of Beating Inflation
100 90 80 70 60 50 40 30 20 10 0 S&P500 Bonds T-bills One-year 5 Years 10 Years 20 Years Holding Period Chances of Loss
30 25 20 15 10 5 0 One year 5 years 10 years 20 years S&P 500 Bonds T-bills Suggestion 8
s Invest to Match Your Time Horizon Short period (5 years or less)—put your Short money in less risky investments like savings accounts and secure bonds savings s Longer period (10-20 or more years)—put Longer your money in stocks your Two Forms of Retirement Plans
1. DEFINED BENEFIT PLAN
x Employer defines how retirement benefit is computed x Example: Years worked x 1.5% x Last 5 years ave. salary
3 Example: 20 yrs x .015 x $70,000 = $21,000/yr x Must qualify (minimum number of years worked) x Employer responsible for funding the plan, investing the money and making sure the funds are there for retiring employees x Many employers are dropping these plans Two Forms of Retirement Plans
2. DEFINED CONTRIBUTION PLAN (401k)
x Employee puts X% of monthly salary into the plan x Employer may match some portion of the contribution (THIS IS FREE MONEY!) x Example: You put in 8%, employer adds 4% x What do you actually invest in? Examples:
Short-term government securities (MMMF) 3 Relatively safe bonds 3 Index fund 3 Growth fund 3 International fund
3 Suggestion 9
s s s s s s Use Tax-Advantaged Investing Wherever Possible 401(k)--retirement plans x Employer may participate x Loan provisions x Various investment options IRAs Roth IRAs (not tax-deductible—but no taxes Roth when you take money out in retirement) Keogh Plan (various types, up to 30% of self-emp Keogh inc) inc) SEP Plan (up to 25% of self-empl income) 403(b)--retirement (employees of govts, ed, relig.)
x Virtually same as 401(k) How It Works
Employer Match $ (if 401k)
Yo u de cid Mutual Fund, or other investment
Value Fund Growth Fund
Money Market Fund 10%
et hi sm ix Your $ Tax-adv. “Vehicle”
Plan Set up through 10% Corp. Bond Fund 20%
Govt. Bond Fund
Internl. Equity Fund 401(k) SEP Roth IRA IRA Etc. Employer Broker Broker Broker 60% Real Estate Fund S&P Index Fund May be 1000’s of possibilities The Taxes in Tax-advantaged Investing
s s Say your income is $50,000 one year. You put $5,000 that year into your firm’s 401(k).
x x Your $5,000 automatically comes out of your salary each month Your and goes—at your direction—into whatever mutual funds are available through the plan. available You leave it there until you retire. s s s s Your taxable income that year is $45,000—not $50,000. The $5,000 grows for many years. You will pay ordinary income taxes when you take out the You ($5,000 + the increase). ($5,000 If your employer matches 1:1, you’d be putting your If $5,000 + employer’s $5,000 into the fund! $5,000 Suggestion 10 Diversify! Never put all or even most of your Never eggs in one basket! eggs
Do n’t Ma Be dof a B f In ern ves ie tor ! Diversifying
Mutual funds help you do this s Index funds do this at lowest cost s Be cautious about employer stock or partnership plans where you are locked into the fortunes of your company for the bulk of your retirement (e.g., Arthur Andersen, Enron)
s Suggestion 11 Do Your Legal Planning As a start: provide for guardianship of minor As children children Some states (UT) allow holographic wills
x x x x x x All in your own handwriting Date at top, signature at bottom Name a guardian, alternates, disposition of assets No notary or witnesses Caution: Consult attorney about language Caution: Use only if you don’t have significant assets Caution: or a complicated family situation or Avoid “Get Rich Quick” Suggestion 12 Schemes Case Study: the Ponzi Scheme
End of January, 2006 Student reports finding this card in the Tanner Building Reverse side claims: Invest $6 to $6,000 Earn 44% over 12 days New economic paradigm! What is the Annual Return? (1 + .44) 365/12 – 1 = 6,600,000%! Ponzi Scheme—How it Works Etc., etc.
KEY: Return comes from new investors and not from any real economic activity. Impact on Investors
s At least 300,000 investors s At least $500M invested s Personal tragedies for many families
x Mission savings x Some mortgaged homes s In a typical Ponzi scheme—80-90% of In investors lose everything! investors s Criminal processes underway Tri-energy, Inc
s Three men in S. California took in $50M from 500 people
x x x x Promised returns of 100% to 1,000% in 60 days! Preyed upon LDS and born-again Christians Conference calls often included prayer Investors talked about all the good they would do with their money $1,050/toz. x 14.583 toz/lb x 2,000 lb/ton x 20,000 tons = $612 B Amount of all gold in US reserves at Ft. Knox is only 8,134 tons! s Investment: 20,000 ton gold deal: Israel to Saudi Arabia
x x s s Also invested in a Kentucky coal mine and unspecified “humanitarian projects” Plan collapsed in 2005—almost all money lost
x x One investor in Utah committed suicide The three are now serving sentences: 9 yrs, 12 yrs, 20 yrs Online Source: Bloomberg Wade Cook Financial Corporation
x x x x “Double your money every 2.5 to 4 months” “Earn 20%—even in down markets!” Wall Street Money Machine and many other books First real estate, then stocks, then options Over $100M on seminars Net worth at one time = $200M Real-time illustrations in seminars were faked Own portfolio did poorly Others didn’t achieve even close to the promised results Set up charitable trust to benefit LDS Church
3 3 s Made lots of money
x x s Problems
x x x x No money paid to the Church from trust Instead bought the trust bought horses, twin Cadillacs, 40-acre estate, part of oil rig, etc. s Outcome
x x x x FTC and 14 state attorneys general required him to return money, cease claims Convicted in 2007 of tax evasion Sept. 2008, began serving 88 month sentence His wife was sentenced to 18 months for making false statements How to Recognize a Scam
s Is promised return unusually high?
x x x Remember the risk-return trade-off: High return = high risk No one can promise more than an FDIC insured rate! No promise Does the investment make sense to you? Is the person registered, are references OK? s Do the facts check out? Do facts
x x s s s s Is product significantly above (or below!) reasonable Is market price? market Does sale require pressure tactics? Does pressure Does seller emphasize “affinity”, e.g., BYU or Church Does connections? connections? Is most of the product purchased by end users or by other Is distributors? distributors Top 10 Scams to Avoid
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. “Easy” business opportunities Ponzi schemes Neighbor or relative in trouble pleas Health, diet and gasoline saving products Corrupt sales schemes Many investment seminars Phishing scams—“Your account is in trouble.” Windfall scams—“You’ve just won!!” Commodity and foreign currency scams Some multi-level plans Warren Buffet’s Rule: If You Don’t Understand It, Don’t Invest in It! Multi-Level Marketing Tests
Is the product sold primarily to other Is distributors or to actual customers? distributors s Is the product really of value in the Is marketplace? marketplace? s Is the price reasonable for the product? s Are the real risks fully disclosed?
s Read a Good Personal Finance Suggestion 13 Book—or Two
s s s s s Tyson, Personal Finance for Dummies, 4th Edition Tyson, Personal Benna, Bucci, Caher, et al, Managing Your Money Benna, All-in-one for Dummies All-in-one Engel and Hecht, How to Buy Stocks, 8th Edition Engel How Lynch and Rothchild, Learn to Earn Lynch Learn Stanley and Danko, The Millionaire Next Door Stanley The Check Out These Websites
s http://providentliving.org/media/training/peacehea (lds.org > Home and Family > Family Finances) s http://personalfinance.byu.edu/ (lds.org > Home and Family > Family Finances > Other resources > Personal Finance) Suggestion 14 Keep Track of Your Finances
s s s s s Organize and know how to read your financial Organize documents (insurance, retirement, bank and investment statements) investment Create financial reports for your family (assets and Create liabilities) liabilities) Know your monthly cash inflows and outflows Learn to use the Web for financial information Develop a plan to get you to where you’d like to Develop be financially in 5 years, 10 years be Computers and the Internet Can Help
Qu ic ken
Mana ger F oo! Yah nc e ina Onl i ne Bank i ng
Tur boT ax Mone y Suggestion 15
x x Protect Your Identity Identity theft is on the rise
Shred financial documents Don’t give out account #’s, CC #’s, PINs, etc. over phone (unless you originated the call to known party) s s s s s Be aware of phishing Don’t fall for “awards” or any other gimmick in which you have to send in a check Protect your computer with anti-virus/antispyware programs Don’t give out SSNs Keep informed—new scams are created every day! alt He u ns hI e nc ra Life Insurance W Protection
Budgeting/Planning Debt Management Managing Taxes Home Buying ill sa nd Tr Steps against Identity Theft Other Insurance us ts Garbage
Consumer debt Gambling Derivatives Start-ups Scams Rainy Day Fund Tax-advantaged (Safe, liquid) Retirement Fund Food Storage Other Investments (Index Funds) Tithes and Offerings SelfSufficiency Spiritual Understanding: Stewardship and Faith Conclusions
s Make decisions that build net worth over time
x x Avoid unproductive debt Develop an attitude of saving not spending s s s Wise financial management empowers you to Wise serve more capably: family, community, church Read a good book or two on personal finance Surely we will be held accountable for how we Surely manage our resources manage ...
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This note was uploaded on 04/07/2011 for the course BUS M 382 taught by Professor Cherylmcbetg during the Winter '11 term at BYU.
- Winter '11