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Unformatted text preview: An Orderly Financial House An Andrew Holmes A ndrew With special thanks to Ned Hill, Barrett Slade, Bryan Sudweeks, and m friends and y With colleagues at BY U’s Marriott School colleagues President Gordon B. Hinckley President …I am suggesting that the time has am come to get our houses in order. come There is a portent of stormy weather ahead to which we had weather better give heed…. better “To the Boys and to the Men,” Conference, Oct. 1998 President Gordon B. Hinckley President The economy is particularly vulnerable. We The have been counseled again and again concerning self-reliance, concerning debt, concerning thrift. So many of our people are heavily in debt for things that are not entirely necessary. things “The Times in Which We Live,” Conference, Oct. 2001 New Dollar Bill Released by the Treasury Last Week Treasury New Dollar Bill Released by the Treasury Last Week Treasury President Gordon B. Hinckley President “I am satisfied that money is the root of am more trouble in marriage than all other causes combined.” causes “There would be fewer rash decisions, There fewer unwise investments, fewer consequent losses, fewer bankruptcies if husbands and wives would counsel together on such matters and unitedly seek counsel from each other” seek Cornerstones of a Happy Home [pamphlet, 1984] Cornerstones Life Insurance e nc a ur s In h alt He nd T Other Insurance Budget/Plan Taxes Home Buying Rainy Day Fund Tax-advantaged Tax-advantaged (Safe, liquid) Retirement Fund Retirement Tithing W ill sa Offerings Food Storage SelfSufficiency ru s ts Garbage: Consumer Debt Gambling Derivatives Identity Theft Other Other Investments Investments ( Index Funds) Attitude Priorities Priorities While Balancing the Budget (behavior, relationships, values, human capital): capital): 1. Settle the Sacred(tithes and offerings), Settle 2. Manage the Misfortune(basic life, health, disability, auto, and home insurance), 3. Discharge the Debt (credit cards, bondage, FICO), 3. Discharge 4. Anticipate the Adversity (rainy-day fund, food storage, will), A nticipate 5. Snatch the Match (401k, 403b, 457, SEP, Keogh, SIMPLE), Snatch 6. Fund the Favored(IRA, Roth IRA, 529, Annuities), Fund 7. Stuff the Savings (diversify across assets and time), Stuff But Possess a Purpose and Preserve a Perspective Tithing Tithing “Pay an honest tithing. I often wonder if Pay we realize that paying our tithing does not represent giving gifts to the Lord and the Church. Paying tithing is discharging a debt to the Lord. The Lord is the source of all our blessings, including life itself.” including N. Eldon Tanner, “Constancy Am Change,” Conference Oct. 1979 id Tithing Tithing “Tithing is not income insurance.” Grant McQueen Tithing Tithing “Bring ye all the tithes into the Bring storehouse, that there m be ay m in m house, and prove eat ine m now herewith, saith the Lord e of hosts, if I will not open you the windows of heaven, and pour you out a blessing, that there shall not be room enough to receive it.” receive Malachi 3:10 Tithing Tithing “ The payment of tithing is a commandment, a commandment with a promise that we will ‘prosper commandment prosper in the land.’ This prosperity consists of more than in .’ material goods -- it may include enjoying good health and vigor of mind. It includes family solidarity and spiritual increase. As you discharge this obligation to your Maker, you will find great, great happiness, the like of which is known only by those who are faithful to this commandment.” those N. Eldon Tanner, “Constancy Am Change,” Conference, Oct. 1979 id President Hinckley on Tithing President “Now, do not get me wrong. I am not here to say that if you pay an Now, honest tithing you will realize your dream of a fine house, a Rolls Royce, and a condominium in Hawaii. The Lord will open the windows of heaven according to our need, and not according to our greed. If we are paying tithing to get rich, we are doing it for the wrong reason. The basic purpose for tithing is to provide the Church with the means needed to carry on His work.” Church Ensign, May 1982, p. 40. Tithing Tithing “Pay your tithing as a Pay declaration that possession of material goods and the accumulation of worldly wealth are not the uppermost goals of your existence.” your J effrey R. Holland, “Like A Watered Garden,” Conference, Oct. 2001 Conference, Tithing, How Much? Tithing, “The simplest statement we know of is the The statement of the Lord himself, namely, that the members of the Church should pay 'one-tenth of all their interest annually,' which is understood to mean income. No one is justified in making any other statement than this.” this.” First Presidency letter to stake presidents and bishops, March 19, 1970 quoted in A Companion To Your Study of the New Testament, p. 308. Companion Offerings Offerings “I think we should be very think generous and give instead of the amount we saved by our two meals of fasting, perhaps much, much more-perhaps ten times more where we are ten in a position to do it.” in Spencer W. Kimball, Conference, April 1974 Offerings Offerings “Respecting how much a man of Respecting property shall give annually, we have no special instructions to give; he is to feed the hungry, to clothe the naked, to provide for the widow, to dry up the tear of the orphan, to comfort the afflicted, whether in this church or in any other, or in no church at all, wherever he find them .” wherever 1842 1842 J oseph Smith, Times and Seasons, 15 March oseph Times 15 Offerings Offerings “Then shall the righteous answer him, saying, Lord, Then when saw we thee an hungred, and fed thee? or thirsty, and gave thee drink? thirsty, When saw we thee a stranger, and took thee in? or naked, When and clothed thee? and Or when saw we thee sick, or in prison and came unto Or thee? thee? A nd the King shall answer and say unto them, Verily I say And unto you, Inasmuch as ye have done it unto one of the least of these my brethren, ye have done it unto me.” of Matthew 25:37-40 Offerings Offerings “…such a fast would be a cure for such every practical and intellectual error; vanity would disappear, love for our fellows would take its place, and we would gladly assist the poor and the needy.” and J oseph F. Smith, “Observance of Fast Day,” The Joseph Improvement Era, Dec. 1902 Improvement Offerings Offerings “Y eah, I made that.” Grant McQueen, Bishop’s Storehouse, 1987 Self-Sufficiency Self-Sufficiency “A nd again, verily I say unto you, that every And man who is obliged to provide for his own family, let him provide, and he shall in nowise lose his crown; and let him labor in the church.” church.” D&C 75:28 Self-Sufficiency Old Definition: “Did you make the nails?” Old New Definition: “I teach them to contribute New more than they consume.” Self-Sufficiency Self-Sufficiency Human Capital Financial Capital • Marketable skills • Marketable assets • Invest in yourself • Invest in securities Self-Sufficiency Self-Sufficiency Human Capital Financial Capital • Marketable skills • Marketable assets • Invest in yourself • Invest in securities Self-Sufficiency Self-Sufficiency Self-Sufficiency Self-Sufficiency For updates go to: stats.bls.gov/emp/emptab7.htm For stats.bls.gov/emp/emptab7.htm Self-Sufficiency -- Human Capital Self-Sufficiency “I n times of change, learners inherit the earth In while the learned find themselves beautifully while equipped to work in a world that no longer exists.” exists.” Eric Hoffer Self-Sufficiency “Can we see how critical self-reliance becom when es Can looked upon as the prerequisite to service, when we also know service is what Godhood is all about. Food for the hungry cannot come from empty shelves. Money to assist the needy cannot com from an e em purse. Support and understanding cannot pty come from the emotionally starved. Teaching cannot come from the unlearned. And most important of all, spiritual guidance cannot come from the spiritually weak.” weak.” Marion G. Rom ney, “The Celestial Nature of Self-Reliance,” Conference, Oct. 1982 Self-Sufficiency “Self-reliance, the height and Self-reliance, perfection of man, is the reliance on God.” on Ralph Waldo Emerson Attitude A ttitude “...the Lord gave the ...the greatest success formula I know when He said: ‘Seek ye first the kingdom of God and his righteousness, and all these things shall be added unto you.’” (Matt. 6:23) 6:23) N. Eldon Tanner, “Constancy Am Change,” Conference, Oct. 1979 id Attitude “The worst fear I have about The members of this church is that they will get rich in this country, forget God and His people, wax fat, and kick themselves out of the church and go to Hell... But my greater fear for them is that they cannot stand wealth...” stand Brigham Y oung, The Man and His Works (1936) Brigham (1936) Attitude A ttitude “Now when Jesus heard these Now things, he said unto him, Y et thou lackest one thing: sell all that thou hast, and distribute unto the poor, and thou shalt have treasure in heaven: and com e, follow m follow e. “A nd when he heard this, he was And very sorrowful: for he was rich.” very Luke 18:22-23 Attitude A ttitude Wealth is not a sign of righteousness • While financial blessings may be a result of While righteousness, more often than not, the blessings are spiritual blessings • The true sign of righteousness is the The conforming of our life to the example of Jesus Christ Christ Attitude A ttitude “Out of the experience of nearly a quarter of Out a century in organizing and reorganizing scores of stakes, I can say that the financial worth of a man was the least of all considerations in selecting a stake president.” president.” President Gordon B. Hinckley, “Tithing: An Opportunity to Prove Our President Faithfulness,” Ensign, May 1982 Ensign Brigham Y oung on Attitude Brigham “There is any amount of property, and gold and silver in the earth and There on the earth, and the Lord gives to this one and that one—the wicked as well as the righteous—to see what they will do with it, but it all belongs to him. He has handed over a goodly portion to this people, and, through our faith, patience and industry, we have made us good, comfortable homes here, and there are many who are tolerably well off, and if they were in many parts of the world they would be called wealthy. But it is not ours, and all we have to do is to try and find out what the Lord wants us to do with what we have in our possession, and then go and do it. If we step beyond this, or to the right or to the left, we step into an illegitimate train of business. Our legitimate business is to do what the Lord wants us to do with that which he bestows upon us, and dispose of it just as he dictates, whether it is to give all, one-tenth, or the surplus.” or Discourses of Brigham Y oung Money and Attitude Money A wise man should have money in his wise head, but not in his heart. head, --Jonathan Swift Money and Happiness Money Life Insurance e nc a ur s In h alt He nd T Other Insurance Budget/Plan Taxes Home Buying Rainy Day Fund Tax-advantaged Tax-advantaged (Safe, liquid) Retirement Fund Retirement Tithing W ill sa Offerings Food Storage SelfSufficiency ru s ts Garbage: Consumer Debt Gambling Derivatives Identity Theft Other Other Investments Investments ( Index Funds) Attitude President Gordon B. Hinckley’s President Counsel On Debt “I urge you as urge members of this Church to get free of debt where possible and to have a little laid aside against a rainy day.” “The Times in Which We Live,” Ensign, Nov. 2001 The Ensign, Counsel From a Prophet Counsel Pop Quiz: Fill In the Blank Fill in the blank: Heber J. Grant: “If there is any one thing that will Heber one bring peace and contentment into the human heart, and into the family, it is ” What do you think is the “one thing”: prayer, virtue, What you honesty, FHE, scripture study, church attendance, chastity, children (note: peace!), marriage, service, love, sex, leisure, companionship, cool cars, sports, a big screen,…? big Counsel From a Prophet Counsel Heber J. Grant: “If there is any one thing that will Heber bring peace and contentment into the human heart, and into the family, it is to live within our means. And if there is any one thing that is means And grinding and discouraging and disheartening, it is to have debts and obligations that one cannot m eet.” have Counsel From a Non-Prophet Counsel "Annual income 20 pounds, annual expenditure 19 "Annual and 6, result happiness. Annual income 20 happiness Annual pounds, annual expenditure 20 pounds ought and 6, result misery." misery." Charles Dickens Charles Appropriate vs. Inappropriate Debt A ppropriate • • • • Home Mortgage Education Business? Transportation? Some debt—such as for a modest home, expenses for Some education, perhaps for a needed first car—may be necessary. But never should we enter into financial bondage through consumer debt... bondage Elder Joseph B. Wirthlin. General Conference, April 2004 Hinckley on Mortgages Hinckley Appropriate to borrow “I recognize that it may be necessary to borrow to get a recognize home, of course. But let us buy a home that we can afford and thus ease the payments which will constantly hang over our heads without mercy or respite for as long as 30 years.” our “To the Boys and to the Men,” Ensign, Nov. 1998 To Nov. Be modest in your wants “Y ou do not need a big home with a big mortgage as you begin your lives together…Y ou may have to borrow money to begin ownership of a home. But do not let it be so costly that it will preoccupy your thoughts day and night.” that “L iving Worthy of the Girl Y ou Will Someday Marry,” Ensign, May 1998 Living M ay Hinckley on Education Hinckley “Perhaps some college Perhaps students need to borrow to complete their education. If you do, see that you pay it back. And do so promptly, even at the sacrifice of some comforts that you might otherwise enjoy.” otherwise “Thou Shalt Not Covet,” Ensign, Mar. 1990 Thou M ar. Hinckley on Business Debt Business Be Prudent “Prudent borrowing may, of course, be necessary and Prudent proper in the management of business. But be wise, and do not go beyond your ability to pay.” and “Thou Shalt Not Covet,” Ensign, Mar. 1990 Thou M ar. “We are witnessing in society tremendous business We failures to a degree and an extent we have not seen in a long while. Many of these are the fruits of imprudent borrowing, of debts so large they cannot be paid.” be “I Believe,” Ensign, A ug. 1992 Believe,” Ensign, Hinckley on Transportation Hinckley “The modern automobile is a wonderful machine. The I n some societies it is almost a necessity. But when I see persons borrowing heavily to buy cars with exorbitant prices, I wonder what has happened to our values. To satisfy our desires, we go into debt, dissipate our resources in the payment of high interest, and become as slaves working to pay it off.” “Thou Shalt Not Covet,” Ensign, Mar. 1990 Thou M ar. Inappropriate Debt I nappropriate • Consumer Goods • Vacations • Expensive Cars • Credit Card Debt Self-Test: Self-Test: Do I have too Much Debt? • Can I pay off my credit card balance completely each Can month? month? • Do I skip some bills to pay others? • I f I lost my job today, do I have enough in liquid assets to If pay living expenses for at least three months? pay • Do my spouse and I often argue about money? • Do I receive calls from creditors about overdue bills? • Have I postponed medical or dental appointments Have because I can’t afford them right now? because • A m I using an increasing percentage of my monthly Am income to pay off debts? income Sometimes we find ourselves Sometimes in a financial pit By Patty Slade We have to stop digging We By Patty Slade Elder Ashton’s Debt Elimination Calendar Debt Debt-Elimination Calendar May start with debt with May highest interest rate or earliest payoff earliest Currently owe Currently minimums of $60, $70, $50, $75, and $235 $235 Save and pay an extra Save $50 per month $50 March April May June July August Sept. Oct. Nov. Dec. Jan. Feb. March Credit Card 110 110 110 110 Dept. Dentist Piano Store Loan 70 50 75 70 50 75 70 50 75 70 50 75 180 50 75 180 50 75 180 50 75 230 75 230 75 305 305 Auto Loan 235 235 235 235 235 235 235 235 235 235 235 540 Lord’s Council on Getting out of Debt L ord’s A nd inasmuch as you are diligent And and humble, and exercise the prayer of faith, behold, I will soften the hearts of those to who you are in debt, until I shall send means unto you for your deliverance. unto Doctrine and Covenants 104: 80 Reducing Unproductive Debt Reducing • Plastic surgery Plastic • Reduce spending • Use assets to pay off debt • Reduce interest rate – Consider a home equity loan – Use another lower cost source of borrowing • Make a plan -- stick to it • Talk to a reputable credit counselor if reputable Talk needed needed Credit Counseling Services Credit • National Foundation for Consumer Credit • American Consumer Credit Counseling • American Debt Management Services • Debt Counselors of America Q: How Many Payments? Q: Q: How Many Payments? Q: A: With 21% APR, 103.2 payments or 8.6 years Stereo $999.74 Interest $1,167.56 Total $2,167.30 Reducing Your Balance Reducing Initial balance Percentage of the initial balance you will pay each month Interest Rate* Number of months to pay your debt (7.76 Years) $ 2,000 2% 18% 93.11 J. Reuben Clark on Interest (1938) J. Interest never sleeps nor sickens nor dies; it never goes to Interest the hospital; it works on Sundays and holidays; it never takes a vacation; it never visits nor travels; it takes no pleasure; it is never laid off work nor discharged from employment; it never works on reduced hours; . . . it is as hard and soulless as a granite cliff. Once in debt, interest is your companion every minute of the day and night; you cannot shun it or slip away from it; you cannot dismiss it; it yields neither to entreaties, demands, or orders; and whenever you get in its way or cross its course or fail to meet its demands, it crushes you. meet What are the Costs? • Annual fee • Over-limit fee • L ate payment fee Late • Cash advance fee Cash • Finance charges – About ¼of credit cards don’t have grace period – I f you don’t com pletely pay off previous m onth’s If balance, the grace period doesn’t apply (the balance could be one penny) could What Rate are the Paying? What RC Willey Sears Old Navy Mervyns Dillards JC Penney Meier and Frank 21.00% 24.15% 19.80% 22.30% 24.15% 21.00% 21.60% Home Equity L oan Home Equity Line of Credit Visa Platinum Visa Gold 6.5% 7.0% 8.0% 12.25% Survey conducted on Dec. 13, 2005, rates on right column are from Utah Community Credit Union Be careful where you borrow! Be 30 • • • • • Finance companies Credit cards Banks Credit unions Savings 25 20 15 10 5 0 FC CC B CU S Credit Cards Credit Interesting Tidbits • A n American typically carries from one to three credit An cards, and owes $1,828 (WSJ). cards, • An average household has eight credit cards. • Only 35% of cardholders pay off the total balance each Only month. month. • Twenty-five percent of college students owe more Twenty-five than $10,000 on their cards (Fidelity). than Credit Reports Credit • Three major credit reporting agencies (check all 3) – Experian—www.experian.com (888-397-3742) – Equifax—www.equifax.com (800-685-1111) – Trans Union—www.tuc.com (800-916-8800) • Almost ½ contain inaccurate info • Free copy of report if denied credit • Dispute inaccuracies by requesting investigation (Agencies have Dispute 30 days to respond) 30 • May file statement presenting your point-of-view (100 words) (100 May • Fair Credit Act 1996 allows consumer law suits Credit Reports, Continued Credit • Bankruptcy remains for 10 years, other negative Bankruptcy information for 7 years information • Pay off credit cards before closing account • Be careful about retail store discount promotions • Risk scoring • Limit inquiries • Credit repair services often encourage illegal Credit activities activities Credit Reports, Continued Credit • Free Credit Report – AnnualCreditReport.com A nnualCreditReport.com – 877-322-8228 • Cheap FICO score – myfico.com • Opt out – 1-888-5OP-TOUT or 1-888-382-1222 • Do Not Call – www.donotcall.gov Credit Reports, Continued Credit • FICO score (between 300 and 850) • Factors that determine risk score: – Payment History—What is your track record? – Amounts Owed—How much is too much? – Length of Credit History—How established is your? – New Credit—Are you taking on more debt? – Types of Credit Used—Do you have a healthy mix? • L imit authorized inquires (prescreen by creditors Limit has no impact) has Gambling Gambling The pursuit of a game of chance may seem like harmless fun. But there attaches to it an intensity that actually shows on the faces of those who are playing. And in all too many cases this practice, innocent, can lead to an actual addiction. The Church has which appears which been and is now opposed to this practice. If you have never been involved in poker games or other forms of gambling, don't start. If you are involved, then quit now while you can do so. while President Gordon B. Hinckley, Gambling, 175th Annual General Conference, President Gambling Priesthood Session, April (2005). Priesthood Gambling Gambling There can be no question about the moral ramification of gambling. A s it has in the past, The Church of Jesus Christ of L ater-day Saints stands opposed to gambling, including governmentincluding sponsored lotteries. Ezra Taft Benson, Gordon B. Hinckley, and Thom S. Monson, First Presidency as, Ezra Statem ent, 26 Septem 1986, see Concerning Gambling pam ber phlet (1988) Concerning Gambling vs. Investing Gambling Investments: - positive expected return (stocks) or - eliminate or transfer existing risk (insurance) Gambling: - negative expected return or - creates a risk Gambling vs. Investing Gambling • Gambling makes a miserable Gambling investment, for example in roulette: roulette: – House has 5.26% edge – Statistical certainty: you will lose Statistical money over time money • Compare this to investing in Compare stocks: stocks: – – 12.6% average return over last 50 years High probability that you will earn money High over time over Gambling Gambling “The spirit of gambling is a The progressive thing. Usually it begins modestly; and then, like many other hazardous habits, it often grows beyond control. At best it wastes time and produces nothing. At worst it becomes a ruinous obsession and fosters false living by encouraging the futile belief that we can continually get something for nothing.” Evans, “On Taking a Chance,” Improvement Era, vol. 49 (December nothing.” Richard L. Richard Improvement Gambling Gambling “Whenever we as Latter-day Whenever Saints engage in any kind of conduct that is inconsistent with the companionship of the Spirit of the Lord, we pay an enormous price…There can be no price…There question that gambling dulls the spiritual sensitivities of those who participate in it.” those Dallin H. Oaks, “The Evils of Gam bling,” Ensign, Nov. 1972 Dallin Ensign Derivatives Derivatives • Examples: Options, futures, swaps • “Zero sum game” – Money-losing proposition over time • • • Extremely volatile Placing bets against the pros Appropriate use in hedging Derivatives Derivatives • Extremely complex Black-Scholes Options Pricing Model • I nappropriate for virtually all non-professional Inappropriate investors investors • Better idea: stick to what you know Derivatives Derivatives “Don’t invest in speculative ventures” N. Eldon Tanner, “Constancy Amid Change,” Conference Oct. 1979 “Different people understand Different different businesses. The important thing is to know which ones you do understand and when you’re operating within your circle of Warren Buffett, Berkshire Hathaway Annual Meeting competence.” competence.” Want a second fulltime Job? I’m Andy! Believe me now! MyNO, I’m Andy! name is Andy Holmes. Do not What the… listen to this suit Hey, man. wearing I’m He Andy! is a liar!! …Get your identity Get your identity stolen!!! stolen! Hi, I’m Andrew L. Holmes... Hi, I’m Andrew Lee Holmes... A Word on Identity Theft: What is it? is Identity theft occurs when someone uses: Identity • our name Y • Address • Social Security number (SSN) • Bank or credit card account number •Other identifying information without your Other knowledge to commit fraud or other crimes knowledge How do they get your identity? How •Frombusinesses From -by stealing records or bribing an employee •Rummagethrough trash, aka “dumpster diving” Rummage -including un-shredded pre-approved credit card apps!! -including • Steal credit and debit card numbers -as your card is processed, aka “skimming” • Pose as landlord or employer to obtain credit report • Steal mail, then complete a change of address •Poseas a legitimate business person or government Pose official to obtain information official How do they get your identity? How •Use personal information shared on the Internet Use -on unsecured sites -on •Buy personal information from inside sources Buy inside •Call credit card issuer, pretend to be you, and ask to Call change mailing address on accounts change • Steal mail, then complete a change of address •Poseas a legitimate business person or government Pose official to obtain information, e.g. Credit Reports …Then??? • Establish phone or wireless service in your name • Open bank accounts in your name and write bad checks • Purchase vehicles by taking out auto loans in your name • Create counterfeit checks or authorize electronic transfers in your name transfers •Filefor bankruptcy in your name to avoid paying debts File incurred in your name or to avoid eviction incurred • job or file fraudulent tax returns in your name Get What should you do to prevent it? What • Protect your SSN • Minimize the number of credit card accounts open • Check monthly statements for unusual activity •Destroy, i.e. shred unwanted credit card offers before Destroy, discarding them •Never give out personal information over the phone to Never someone you do not know someone •Haveyour mail stopped by the Post Office when leaving Have town town • Use Passwords on Credit/Bank accounts What if it happens to me? What • Contact the police • Call all your creditors • Call the Identity Theft Hotline 801-579-1400 •Contact all major credit reporting agencies: Contact TransUnion, Equifax, and Experian TransUnion, • State by State protection information is available: http://www.identity-theft-protection.com /states.htm http://www.identity-theft-protection.com Life Insurance e nc a ur s In h alt He nd T Other Insurance Budget/Plan Taxes Home Buying Rainy Day Fund Tax-advantaged Tax-advantaged (Safe, liquid) Retirement Fund Retirement Tithing W ill sa Offerings Food Storage SelfSufficiency ru s ts Garbage: Consumer Debt Gambling Derivatives Identity Theft Other Other Investments Investments ( Index Funds) Attitude Personal FinancePOW • You are to create a personal retirement plan. This You should, at a minimum, include: 1) assumptions about at include: investment return and inflation, 2) the amount of money needed to retire at a reasonable range of ages (i.e., at 55, 60 , and 65), and 3) the monthly savings required to reach your goals. • You should also articulate an investment program that You includes: 1) savings vehicle (i.e., Brokerage account, IRA, etc) with justification and 2) asset allocation (percent to stocks, bonds, etc). • If you are married or engaged, this exercise is to be If completed with your spouse/intended spouse (it might also be a good way to get a “wished for” prospect thinking in the right direction!). thinking Rainy Day Fund Rainy “…we must all eventually learn to discipline we ourselves, our appetites, and our economic desires. How blessed is he who learns to spend less than he earns and puts something away for a rainy day.” away N. Eldon Tanner, “Constancy Amid Change,” Conference, Oct. 1979 Rainy Day Fund Rainy “For age and want, save while you For may; no morning sun lasts a whole day.” day.” --Benjamin Franklin --Benjamin Rainy Day Fund Rainy Insured but low interest rates -Checking Account -Savings Account and Money Market Acct. -Certificates of Deposit .25% vs. .5%?? Not insured and higher interest rates -Money Market Mutual Funds -Treasury Bills -Certificates of Deposit -Commercial Paper Rainy Day Fund--How Much? Rainy Salary Consideration The higher the salary, the bigger the rainy day The fund (i.e., five month’s salary) five Net Worth Consideration Net The higher your net worth, the smaller the rainy The day fund (i.e., three month’s salary if you own three stocks and bonds) stocks Retirement Retirement “Buying a lottery ticket every week Buying doesn’t count as retirement planning.” doesn’t Ric Edelman Ric Prepare for Retirement Prepare Some Retirement Myths • “I’ll live on Social Security benefits” – SS will replace only 25% of income • “Someone else will take care of me” • “Better be safe and invest conservatively” • “I can use my retirement funds for other things” Speaking of Someone Else Caring For Us… For Would you like to see my family’s Christmas card photo? What would you expect from a Mormon family with 5 kids? Santa hats? Denim? Strange People Strange Strange People Strange What celebrity does my wife look like to you? Be honest. Strange People Strange Strange People Strange Whadda ya think? Paula Abdul, or… I Married Michael Jackson!! Married Strange People Strange Michael Jackson Lives!!! With me!!???!! Sources of Retirement Money Sources – Social Security Social – Pensions – Real Assets – Financial Savings – TOTAL 25% 25% 21% 13% 12% 71% Albert Einstein A lbert “Compound interest is the Compound eighth wonder of the world.” eighth Start Early! Start $4,000 per year for 20 years Age Jack Jill 20 $4,000 $0 21 $4,000 $0 22 $4,000 $0 : : : 38 $4,000 $0 39 $4,000 $0 40 $0 $4,000 41 $0 $4,000 : : : 57 $0 $4,000 58 $0 $4,000 59 $0 $4,000 Am ount Inv. $80,000 Value $80,000 Start Early! Start $4,000 per year for 20 years Age Jack Jill 20 $4,000 $0 21 $4,000 $0 22 $4,000 $0 : : : 38 $4,000 $0 39 $4,000 $0 40 $0 $4,000 41 $0 $4,000 : : : 57 $0 $4,000 58 $0 $4,000 59 $0 $4,000 Am ount Inv. $80,000 $80,000 Value $229,100 Start Early! Start $4,000 per year for 20 years Age Jack Jill 20 $4,000 $0 21 $4,000 $0 22 $4,000 $0 : : : 38 $4,000 $0 39 $4,000 $0 40 $0 $4,000 41 $0 $4,000 : : : 57 $0 $4,000 58 $0 $4,000 59 $0 $4,000 Am ount Inv. $80,000 $80,000 Value $229,100 $1,541,270 How Does This Work? How • Compound interest (interest on interest) (interest Compound • J ack started earlier--compound interest has Jack more time to work its miracle more • I f the Manhattoes (who sold Manhattan to the If Dutch West India company for trade goods worth $24) had invested in an account in 1626 at $24) 8% interest how much would the account have in it today? $24(1.08)384 have $164,033,801,073,000 !! How Much Will I Need in Retirement? How Money Magazine Survey • Estimates: 53% A ctual: 71% Estimates: 53% 71% • One third of retirees support children and One grandchildren and many support parents grandchildren • Health care costs generally higher • Biggest regrets for retirees: – Didn’t take full advantage of tax deferred Didn’t investments investments – Didn’t start earlier to save for retirement Life Cycle Savings L ife (000’s) 700 600 500 400 Retirement Soc. Sec. & Pension Save 20% 300 200 100 Save 10% Borrowing To heirs 0 -100 20 25 30 40 50 60 65 70 80 Age How Much Will I Need? How Use a worksheet to estimate how much you will need to save each month to achievement your retirement savings goal goal AARP Calculator A ARP Personalfinance.byu.edu Social Security--How much will I get? Social • Annual SS report near birth date • Benefit amounts vary depending on: • Lifetime earnings • Age at retirement • Nonworking spouses get benefits equal to 50% of their Nonworking working spouses benefit working • I f both spouses worked, each is eligible for benefits If based on own earnings or based on 50% of spouse’s benefit, whichever is greater benefit, SS Benefits Calculator When Can I Retire With Full Social Security Benefits? Security Those Born In 1937 or earlier 1938 1939 1940 1941 1942 1943 to 1954 1955 1956 1957 1958 1959 1960 and later Can Retire With Full Benefits At 65 years 65 years, 2 months 65 years, 4 months 65 years, 6 months 65 years, 8months 65 years, 10 months 66 years 66 years, 2 months 66 years, 4 months 66 years, 6 months 66 years, 8 months 66 years, 10 months 67 years SS Benefit Assuming Y ou Are 62 And Retire At 651/2 (estimated in year-2003 dollars) 65 Current Earnings PIA Assuming Age 62 (monthly) Single Person (annual) Spouse same age or dependent child $20,000 $736 $8,832 44% $13,248 66% $25,000 $832 $9,984 40% $14,976 60% $30,000 $928 $11,136 37% $16,704 56% $35,000 $1,025 $12,300 35% $18,450 53% $40,000 $1,121 $13,452 34% $20,178 50% $45,000 $1,217 $14,604 32% $21,906 49% $50,000 $1,313 $15,756 32% $23,634 47% $55,000 $1,410 $16,920 31% $25,380 46% $60,000 $1,506 $18,072 30% $27,108 45% $65,000 $1,558 $18,696 29% $28,044 43% $70,000 $1,603 $19,236 27% $28,854 41% $75,000 $1,649 $19,788 26% $29,682 40% $80,000 $1,693 $20,316 25% $30,474 38% $85,000 $1,738 $20,856 25% $31,284 37% $87,000 $1,755 $21,060 24% $31,590 36% The taxable maximum for 2003 is $87,000. See www.ssa.gov to estimate The www.ssa.gov What Should I Invest In? What • Principle: risk-return trade-off – High risk--high return – Low risk--low return • What? – – – EY aK s is i Th e!! slid Stocks -- ownership in a company (risky) Bonds -- loan to a company/government (less risky) Deposit accounts -- (insured, no risk) • How? – Mutual funds – Tax-advantaged investing Important Distinction Vehicle vs. Engine V ehicle • IRA •Stocks • SEP •Bonds • Keogh •Cash • SIMPLE • 401k Three Kinds of Retirement Plans Three Employer Funded Pension Employer Plan (Defined Benefit Plan Defined Plan) Plan Individual Retirement Accounts A ccounts Employer Sponsored Retirement Employer Plan (Defined Plan Defined Contribution Plan) Contribution Three Kinds of Retirement Plans Three Employer Funded Pension Employer Plan (Defined Benefit Plan Defined Plan) Plan Individual Retirement Accounts A ccounts Two Flavors: Traditional and Roth! Employer Sponsored Retirement Employer Plan (Defined Plan Defined Contribution Plan) Contribution Defined Benefits Plan Defined • Employees don’t contribute to plan • Employee receives promised or Employee defined payout at retirement defined • Payout is generally based on formula – Formula variables include: – Age at retirement – Salary level – Y ears of service Example of Payout Formula (BY U) Example • Final salary (i.e., Calculate average of five Final highest annual salaries within the last ten years) years) • M ultiply final salary by 1.5% and by years Multiply in service in Ex: $60,000 x .015 x 25 yrs =$22,500 Ex: or 37.5% of final salary or Defined Contribution Plans Defined • Employer contributes to a fund • Generally employee also contributes to fund • Employer has no obligation to provide fixed Employer amount when you retire amount • Pension is determined by: – How much is invested – How much it grows Types of Defined Contribution Plans Types Salary Reduction Plans Salary [401(k), 403(b), & 457] • 60 million employees participate in 60 401(k) plans 401(k) • Employees contribute before tax Employees dollars reducing their taxable income • Earnings accumulate tax deferred Salary Reduction Plans (cont’) • Employers may match employee contributions • 89% of 401(k) plans have matching contributions • Example: BYU 401(k) Plan Employee Employer Total Contribution Contribution Contribution 1% 1% 2% 2% 2% 4% 3% 3% 6% 4% 3.5% 7.5% 5% to 21% 4% 9% to 25% Salary Reduction Plans (cont’) Employees direct the funds into different Employees investment options (you choose the engine) •Fixed income •Equities •Money market Contribution Limits Contribution • For a 401(k) plan the employee contribution For cannot total over 25% of compensation. cannot • Before tax employee contribution cannot Before exceed $15,500 (2008) exceed – “catch-up” for those over age 50. Traditional 401(k) Tax Considerations Traditional • Retirement income taxed as ordinary income Retirement when withdrawn AFTER age 59.5 when • 10% penalty rule applies for early withdrawals 10% before 59 ½ , with some exceptions before • M andatory annual distributions begins after age Mandatory 70 ½ 70 • Possible high tax bracket (winners curse) Payout/Distribution Options Payout/Distribution • Lump Sum Distribution – Pro: Control over investing, spending, gifting – Con: Tax due imm ediately – Con: No assurance of lifetim income e • A nnuity (can purchase contract inside or Annuity outside) outside) – Pro: Stable payments usually for life – Con: Generally no COLA – Con: Tax due on amount received each year Payout/Distribution Options (cont’) Payout/Distribution • Periodic Payments – Pro: Regular payments at regular intervals – Pro: Relatively large paymentts – Con: No assurance of lifetime income – Tax rate may be high due to high income • IRA Rollover (Be careful, don’t touch funds) – Pro: Defer taxes until you withdraw funds – Pro: Can direct investment – Pro: Enjoy tax deferred growth – Con: Begin withdrawals at 70 ½ or penalty Retirement Plans: When Do Y ou Pay Tax? (IRA and 401k) Traditional Traditional Roth Also consider SEP, Keogh, or SIMPLE plan for self-employed or small businesses or What are the characteristics of traditional IRA’s? traditional • Contribution is often tax-deductible – income limits if you participate in ESP (e.g., 401k), $85,000* joint AGI A GI – income limits for spouse of ESP participant, $159,000* joint AGI • Choice of investment engine • Contributions and gains are taxed when the Contributions money is withdrawn (Lower rate?) (Lower • M aximum contribution is about $5,000 per Maximum year year – I ndexed starting 2009 Indexed * Start(under 70½ w/ earned of the • Not all are eligible (under phase-out income or spouse) When can withdrawals be made? When • After 59 ½ for whatever purpose • Prior to 59 ½withdrawals are subject to federal Prior penalties (10%) unless money is used for: penalties – – – – – Qualified education expenses First-time home purchase ($10,000) Death or disability Annuity payments Medical expenses greater than 7.5% of AGI • Federal law requires that you begin withdrawals Federal by April 1st of the year after you reach 70 ½ by What are the characteristics of a Roth IRA ? Roth • Contributions are not tax-deductible tax-deductible • Can contribute if in ESP or over age 70½ Can • income limits apply • Contributions can always be withdrawn tax Contributions and penalty free (Earnings if over 59½and Roth >5 years) (Earnings • Earnings grow tax-free tax-free Earnings • Pass tax-free to heirs (5-year required distribution) (5-year Pass • Avoids Winners Curse (70½ ) Roth vs. Traditional? • FVIFA = future value interest factor of an annuity • Traditional FV: Pre-tax savings (FVIFA) (1-t) • Roth FV: Pre-tax savings (1-t) (FVIFA) • How does order impact multiplication? • Only difference depends on tax rate forecast! • “Soft issues” favor Roth Traditional vs. Roth IRA Traditional Summary Traditional IRA Yes Tax-deductible contribution Roth IRA No Maximum total a nnual contribution to all IRA programs *$5,000 or 100% of earned income. *Maximum contribution for a marred c ouple is $10,000, or $5,000 each. *$5,000 or 100% on earned income. *Maximum contribution for a married c ouple is $10,000, or $5,000 each. Eligibility Must be under age 70 1/2 and have earned income, Limits if ESP Any age with earned income not exceeding AGI limits. Spousal IRA's * Deductibility is subject to AGI limits. *Contributions from non-earning s pouses are based on earnings of employed spouse *Subject to AGI limits. *Contributions from non-earning spouse are based on earnings of employed s pouse Tax-free withdrawals No Yes Age to begin required m inimum 70 1/2 distributions None IRA Tax Law Changes (Bush 2001) I RA • I RA annual contribution lim will increase as it IRA follows: follows: Y ear 2007 2008 2009 IRA I RA Contribution Contribution Limit L imit $4,000 $5,000 $5,000+ index Food Storage Food “We reaffirm the previous counsel the Church We has always given, to acquire and maintain a year’s supply--a year’s supply of the basic commodities for us…” commodities Spencer W. Kimball “…the righteous will have listened to prophets the and stored at least a year’s supply of survival food…” food…” Ezra Taft Benson, Conference, Oct. 1973 Food Storage Food “Church members can Church begin their home storage by storing the basic foods that would be required to keep them alive if they did not have anything else to eat.” else First Presidency, Jan 20, 2002 Food Storage Food “Members should be prudent and not Members panic or go to extremes in this effort.” panic First Presidency, Jan 20, 2002 Food Storage Food Suggested amounts per adult for 1 year: Grains 400 lbs. Legumes 60 lbs. Powdered milk 16 lbs. Cooking oil 10 qts. Sugar or honey 60 lbs. Salt 8 lbs. Water (2 weeks) 14 gals. Which Comes First? Rainy Day or Food Storage Storage “The rainy day fund can be turned into: The rent, utilities, medicine, transportation, and FOOD.” FOOD.” “Money grows and is easy to store and Money move.” move.” The Gospel According to Andy Nevertheless, the Holmes’ need to store food. Other Investments Other Investment options: Bank Savings Bills and Bonds Stocks Real Estate Annuities Mutual Funds (bills, bonds, stocks, & real estate) (bills, Mutual What can we learn from the past? Indices of Capital US Markets: 1995-2000 Indices of U.S. Capital Markets: 1951 to 2000 Data Source: Ibbotson Associates, Stocks, Bonds Bills, and Inflation, 2001 Yearbook $1000 $100 CPI $6.57 $10 $1 50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 Year End Indices of Capital US Markets: 1995-2000 Indices of U.S. Capital Markets: 1951 to 2000 Data Source: Ibbotson Associates, Stocks, Bonds Bills, and Inflation, 2001 Yearbook $1000 $100 T-bill $11.62 CPI $6.57 $10 $1 50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 Year End Indices of Capital US Markets: 1995-2000 Indices of U.S. Capital Markets: 1951 to 2000 Data Source: Ibbotson Associates, Stocks, Bonds Bills, and Inflation, 2001 Yearbook $1000 $100 T-bond $16.38 T-bill $11.62 CPI $6.57 $10 $1 50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 Year End Indices of Capital US Markets: 1995-2000 Indices of U.S. Capital Markets: 1951 to 2000 S&P 500 $370.09: (56x!) Data Source: Ibbotson Associates, Stocks, Bonds Bills, and Inflation, 2001 Yearbook $1000 $100 T-bond $16.38 T-bill $11.62 CPI $6.57 $10 $1 50 52 54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 Year End Annualized Returns from the Last Half-Century Stocks (S&P 500) 12.6% Bonds (Long-term T- Bonds) 5.8% Money Market (Treasury Bills) 5.0% Inflation (CPI) 3.8% 347x 93x S&P 500 Small Cap T-bond T-bill CPI 12.00% 14.52% 5.89% 4.75% 3.71% Long-Term Return on the Stock Market L ong-Term The Long-term Return on the Stock Market Stock market risk-premium = Stock 7.25% = 7.25% market return - risk free return market 12.00% 4.75% … but the U.S. in the last half-century has been “lucky” compared to other developed markets and time periods. to Going forward, the expected stock market risk-premium is about Going 5.0 percent. With the risk-free rate at about 4.0 percent, the long5.0 term expected return on stocks is about 9 percent per year (standard deviation of 20 percent per year) (standard Managing Stock Risk Managing EY aK 1. Diversity Across Stocks s is i Th e!! slid 2. Diversity Across Time What does this mean? Buy and Hold What an Index Fund an (write this down – tattoo it on the back of your hand – repeat it in your sleep) of Managing Stock Risk Managing I was kidding about was the tattoo thing! the A verage annual standard deviation (%) Diversify Across Stocks Diversify 49% - 24% - Diversifiable Risk 19% - Total Risk Nondiversifiable Risk 1 10 20 25 Number of stocks in portfolio Diversify Across Time Diversify Even a diversified portfolio is risky in a given Even month or year. However, given enough time, the probability of a loss becomes manageable the Best and Worst Total Returns Best (1926-2000) 54% S&P 500 U.S. T-bills 15% 0% One-year holding period -43% Best and Worst Total Returns Best (1926-2000) 54% S&P 500 U.S. T-bills 20% 15% 0% One-year holding period -43% 9% 0% -1% 10-year holding period Best and Worst Total Returns Best (1926-2000) 54% S&P 500 U.S. T-bills 20% 15% 0% One-year holding period -43% 9% 0% -1% 10-year holding period 17% 8% 0.4% 3% 20-year holding period Index Funds I ndex Ten-Year Annualized Return on the 30 Largest Mutual Funds Ten-Year Investor return for calendar years 1995 to 2004; largest funds as of year-end 1994 Investor 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Fidelity Magellan Investment Company of America Washington Mutual Investors Vanguard Windsor American Century Ultra Janus Fidelity Growth and Income Fidelity Contrafund Vanguard Windsor II Fidelity Equity-Income II Fidelity Equity-Income MSDW Dividend Growth Putnam Growth and Income American Mutual Growth Fund of America 10.16 13.04 13.54 12.81 10.40 9.32 11.04 13.82 13.71 11.65 11.94 9.62 10.76 11.93 14.79 Average mutual fund return: 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Fidelity Growth Opportunity AXP New Dimensions Pioneer II American Centuary Growth Lord Abbett Affiliated American Century Select AIM Weingarten Putnam Voyager Putnam Growth and Income B Fidelity Blue Chip Growth Fidelity Destiny T. Rowe Price Equity Income Fidelity Independence Waddell & Reed Fidelity Growth Company 10.78% 6.81 10.64 8.98 8.73 12.89 9.50 6.16 9.10 9.94 8.82 6.76 13.00 10.63 10.37 12.57 Ten-Y ear Annualized Return on the 30 Largest Mutual Funds Investor return for calendar years 1995 to 2004; largest funds as of year-end 1994 Investor 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Fidelity Magellan Investment Company of America Washington Mutual Investors Vanguard Windsor American Century Ultra Janus Fidelity Growth and Income Fidelity Contrafund Vanguard Windsor II Fidelity Equity-Income II Fidelity Equity-Income MSDW Dividend Growth Putnam Growth and Income American Mutual Growth Fund of America 10.16 13.04 13.54 12.81 10.40 9.32 11.04 13.82 13.71 11.65 11.94 9.62 10.76 11.93 14.79 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Average mutual fund return: Vanguard 500 Index fund return: Fidelity Growth Opportunity AXP New Dimensions Pioneer II American Centuary Growth Lord Abbett Affiliated American Century Select AIM Weingarten Putnam Voyager Putnam Growth and Income B Fidelity Blue Chip Growth Fidelity Destiny T. Rowe Price Equity Income Fidelity Independence Waddell & Reed Fidelity Growth Company 10.78% 12.0% 6.81 10.64 8.98 8.73 12.89 9.50 6.16 9.10 9.94 8.82 6.76 13.00 10.63 10.37 12.57 Ten-Y ear Annualized Return on the 30 Largest Mutual Funds Investor return for calendar years 1995 to 2004; largest funds as of year-end 1994 Investor 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Fidelity Magellan Investment Company of America Washington Mutual Investors Vanguard Windsor American Century Ultra Janus Fidelity Growth and Income Fidelity Contrafund Vanguard Windsor II Fidelity Equity-Income II Fidelity Equity-Income MSDW Dividend Growth Putnam Growth and Income American Mutual Growth Fund of America 10.16 13.04 13.54 12.81 10.40 9.32 11.04 13.82 13.71 11.65 11.94 9.62 10.76 11.93 14.79 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Fidelity Growth Opportunity AXP New Dimensions Pioneer II American Centuary Growth Lord Abbett Affiliated American Century Select AIM Weingarten Putnam Voyager Putnam Growth and Income B Fidelity Blue Chip Growth Fidelity Destiny T. Rowe Price Equity Income Fidelity Independence Waddell & Reed Fidelity Growth Company Average mutual fund return: 10.78% Vanguard 500 Index fund return: 12.0% Funds outperforming the index: 9 out of 30 (30%) 6.81 10.64 8.98 8.73 12.89 9.50 6.16 9.10 9.94 8.82 6.76 13.00 10.63 10.37 12.57 Index Funds Have Low Fees I ndex Performance comes and goes, but Performance costs roll on forever. costs --Jack Bogle Value of $100,000 investment 33% of your 33% retirement to manager manager The Futility of Trying to Time the Market The Period of Investment NYSE/AMEX /NASDAQ /NASDAQ Return Annualized Annualized Value of Value $10,000 Invested in Jan. 1985 Jan. January 2, 1985 - December 30, 2005 + 12.48% $118,089 Less the 10 biggest days +9.81% $71,389 Less the 20 biggest days + 7.84% $48,827 Less the 30 biggest days + 6.13% $34,854 Less the 40 biggest days + 4.60% $25,695 Data Source: CRSP Value-Weighted Index Data with Dividends with Q: What Should I Invest In? Q: A : What is your A: risk tolerance and investment horizon? horizon? Asset Allocation Breakdown During the Early Y ears A sset Source: Stocks, Bonds, Bills & Inflation 1999 Yearbook. 2000 I bbotson Associates, Inc. Source: Stocks, 1926-1998 Stock/bond mix Annual compound return Years with loss (out of 73) 80/20 10.4% 19 1964-1998 Stock/bond mix Annual compound return Years with losses(out of 35) Bonds 20% Stocks 80% 80/20 11.6% 8 Approaching Retirement – The Golden Y ears A pproaching Source: Stocks, Bonds, Bills & Inflation 1999 Yearbook. 2000 I bbotson Associates, Inc. Source: Stocks, 1926-1998 Stock/bond mix Annual compound return Years with loss (out of 73) 60/40 9.5% 16 1964-1998 Stock/bond mix Annual compound return Years with losses(out of 35) Bonds 40% Stocks 60% 60/40 10.8% 7 During the Retirement Y ears During Source: Stocks, Bonds, Bills & Inflation 1999 Yearbook. 2000 I bbotson Associates, Inc. Source: Stocks, 1926-1998 Stock/bond/Treasury Bill mix 40/40/20 Annual compound return 8.0% Years with loss (out of 73) 14 1964-1998 Stock/bond/Treasury Bill mix Annual compound return Years with losses(out of 35) Treasury Bills 20% Bonds 40% Stocks 40% 40/40/20 9.6% 6 During the Late Retirement Y ears During Source: Stocks, Bonds, Bills & Inflation 1999 Yearbook. 2000 I bbotson Associates, Inc. Source: Stocks, 1926-1998 Stock/bond/Treasury Bill mix 20/60/20 Annual compound return 6.8% Years with loss (out of 73) 12 1964-1998 Stock/bond/Treasury Bill mix Annual compound return Years with losses(out of 35) Treasury Bills 20% Stocks 20% Bonds 60% 20/60/20 8.7% 5 “Will you please get to the point!” • Bottom line wisdom for someone under 45 (or 50): – Asset allocation – mostly (80-85%+ equities ) – Fund: broad index (Vanguard Total Market I ndex or Fund: similar) similar) – Remainder? Index bond fund •How: How: – “M atch” first (401K, 403B, etc) – broadest equity Match” option option – Call provider (Vanguard, Fidelity, etc) – open account Call (IRA) and make allocation decision (80/20) (IRA) Andy’s day-trading buddy A ndy’s – $500,000 in stocks X 2% $10,000 Andy’s day-trading buddy A ndy’s – – – – – – $500,000 in stocks X 2% $10,000 250 days X 1 trade X $15 - 3,750 $0.125 X 100 shares X 250 trades - 3,125 Gross Trading Profit 3,125 Tax @ 39.6% - 1,237 Net Profit $ 1,888 Andy’s day-trading buddy A ndy’s Trading Profit Trading 10 hours/week X 52 weeks 10 hours hours $1,888 $1,888 520 Equals $3.63 per hour! Not to mention the costs of an office, computer, Not internet fee, real time data fee, and … internet …THE FACT THAT HE DIDN’T BEAT THE MARKET Life Insurance e nc a ur s In h alt He nd T Other Insurance Budget/Plan Taxes Home Buying Rainy Day Fund Tax-advantaged Tax-advantaged (Safe, liquid) Retirement Fund Retirement Tithing W ill sa Offerings Food Storage SelfSufficiency ru s ts Garbage: Consumer Debt Gambling Derivatives Identity Theft Other Other Investments Investments ( Index Funds) Attitude ed! ed ! ne ers ass nte fter cl olu e a V em Se Events This Week Events TUE. OCT. 11 INVESTMENT BANKING CLUB MEETING— HOW TO NETWORK YOUR WAY ON TO WALL STREET— 7PM, 260 TNRB FRI. OCT. 14 FINANCE SOCIETY CFA PANEL—12PM, 280 TNRB FRI. OCT. 14 JP MORGAN INVESTMENT BANKING INFO SESSION—STEVE RIDGE, A VICE PRESIDENT IN JP MORGAN’S INVESTMENT BANK, WILL BE HOLDING AN INFORMATION SESSION— 6PM, 260 TNRB REMINDER—CHECK ERECRUITING FOR FULL-TIME RECRUITING, A NUMBER OF TOP-TIER FINANCE JOBS HAVE BEEN POSTED Budgeting Budgeting Budgeting Budgeting “Our pioneer forebears lived by the adage, Our ‘fix it up, wear it out, make it do, or do without.’” without.’” Gordon B. Hinckley, “I Believe,” Ensign, Aug. 1992 Budgeting Budgeting “Y ou can’t save money by spending.” spending.” Grant McQueen Budgeting Budgeting Make Saving Easy Make Spending Hard Budgeting Budgeting - The root cause of most family financial The problems is bad behavior not bad math problems - Good governance, communication, and Good controls are essential controls - Budgeting is about values (priorities) not Budgeting money money The Millionaire Next Door The • “The foundation stone of wealth The accumulation is defense, and this defense should be anchored by budgeting and planning.” (Stanley & Danko) Danko) • “Planning is typically found to be a Planning strong habit among people who have demonstrated propensity to accumulate wealth.” (Stanley & Danko) wealth.” Spending Traps Spending • Impulse Impulse Buying •Failure to Plan (Costco vs. convenience) • Hidden Price Tags (computers need a screen, printer, software, internet) Hidden • Sales Tricks (bait and switch) Sales • Per Use Costs (RV used twice a year) Per • Conspicuous Consumption (Polo ponies and Nike swooshes) Conspicuous • Delayed Price (Disneyland, captive audience—breakfast and pictures) Delayed • Perfected Visions (Cruise—people get sick, it rains, not all are sexy) Perfected • Upgrades and Extras Upgrades Budgeting Budgeting “Wherefore, do not spend money for Wherefore, that which is of no worth, nor your labor for that which cannot satisfy … and come unto the Holy One of I srael, and feast upon that which perisheth not…” perisheth Jacob the brother of Nephi, 2 Nephi 9: 51 Budgeting Budgeting Q: What is the cost of a soft drink at lunch? A: $20/month * 12 months/year * 40 years = $9,600 $9,600 ÷ (1-.4) = $16,000 before tax and tithing income $9,600 Q: What is the future value of investing $20 per month Q: for 40 years at 8%? for A: $69,820 Shaker Hymn Shaker ‘Tis the gift to be simple ‘Tis the gift to be free George Fox “Simple Gifts” by Joseph Brackett, Jr. in 1848 Who owns whom? Grant McQueen Grant We’re Number one! We’re The Budgeting Process The Traditional Approach Income Tithing Expenses Personal Goals A vailable for Savings Savings The Budgeting Process The “I t is amazing to me that so many people work It all of their lives for the grocer, the landlord, the power company, the automobile salesman, and the bank, and yet think so little of their own efforts that they pay themselves nothing.” efforts L . Tom Perry, “Becoming Self-Reliant,” Ensign, Nov. 1991 Nov. The Budgeting Process The A Better Approach Income Pay the Pay Lord L ord Pay Y oursel f Expenses Personal Goals Other Savings Personal Balance Sheet Personal • Basic characteristics – Point in time – Assets • Value of what you own • Ordered by level of liquidity – Liabilities • Debts you owe – Net worth • Difference between assets and liabilities Personal Balance Sheet Continued Personal Balance Sheet for Joe and Jain Jones, April 2002 ASSETS Current Assets Cash Savings Account Checking Account Certificate of Deposit Total Current Assets Property Home Furnishings/Appliances Stereo System Clothing Television and VCR Personal Computer Market Value of Vehicles Market Value of Home Total Property Investments Vanguard Mutual Fund Individual Retirement Account SEP Retirement Plan Total Investments Total Assets LIABILITIES Current Liabilities $140 $3,700 $1,700 $3,000 Credit Card Debt Short-Term Consumer Loan Total Current Liabilities Long-Term Liabilities Mortgage Car Loan Total Long-Term Liabilities $8,540 $23,000 $800 $4,000 $1,200 $3,000 $27,000 $250,000 Total Liabilities $4,200 $3,800 $8,000 $185,000 $23,000 $208,000 $216,000 NETWORTH Total Assets - Total Liabilities $309,000 $4,300 $18,050 $6,000 $28,350 $345,890 $129,890 Income Statement I ncome • Basic characteristics – Considers a period of time – How money has come and gone – Excellent m onitoring mechanism – Difference between income & expenses Difference provides opportunities for savings/investments savings/investments Income Statement Continued I ncome Income Statement for Joe Appraiser January 1, 2000 - December 31, 2000 INCOME EXPENSES Regular Income: Salary/Appraisal Earnings $90,000 Other Income: Dividends Interest Income Total Income $375 $400 $90,375 F ixed Expenses Mortgage Payment Car Payments Auto Insurance Homeowners Insurance Life Insurance Income Taxes Social Security Taxes Tithing Offerings Property Taxes Savings Program Total Fixed Expenses Variable Expenses Food Clothing Car (fuel, oil, tires, etc.) Utilities Entertainment Telephone Medical Care/Medication Personal Care (hair, laundry) Gifts Total Variable Expenses Total Expenses Net Gain (+) or Net Loss (-) $19,200 $5,000 $1,200 $1,000 $600 $20,600 $5,100 $9,000 $750 $1,520 $8,945 $72,915 $5,000 $2,500 $2,000 $3,000 $1,200 $970 $1,700 $840 $250 $17,460 $90,375 $0 Tax (Credit vs. Deduction) Tax Tax Credit Tax Deduction A $1 credit saves $1 in saves taxes taxes A $1 deduction $1 saves $1 x t in saves taxes taxes i.e., $1,000 child tax credit is worth $1,000 i.e., $3,000 tithing deduction is worth deduction about $3,000 x .25 = $750 $750 Dollar-for-dollar Percentage Percentage Tax Ideas Tax • • • • • • Itemize deductions (if >$10,900 standard deduction, joint in 2008) (if Child Tax Credit ($1,000 per child under 17) ($1,000 Hope and Lifetime Learning education credits Tax preferred savings (i.e., IRA, Roth IRA, 401k, SEP) (i.e., Donation of appreciated securities “Cafeteria Plans” (Flexible Spending Accounts: pay for heath, drugs, and childcare with pretax dollars) and • Education savings plans (i.e., 529 plan and Coverdell Ed. IRAs) (i.e., • Estate Taxes (46 percent over $2.0 million until 2009) ($3.5 mill. after 2009) 2009) Taxes (itemize deductions) Taxes • • • • • • • • Charitable Contributions (tithing, offerings, missions, BY U!!!) Mortgage Interest (2nd home, 2nd mort., equity line of credit, points) (2 Mortgage State Income Taxes (or sales tax option in 2007 and perhaps beyond) (or State Real Estate and Personal Property Taxes Medical and Dental (>7.5% of AGI, timing, limits) (> timing, Medical Casualty and Theft Losses (>10% of AGI, after insurance) (> Casualty I nterest on qualified student loans (up to $2,500) (up Interest NOT: social security tax, federal tax, sales tax, social consumer interest, fees to governments, fees to lenders… lenders… Taxes (education credits) Taxes • HOPE – Up to $1,800 credit Up per eligible student per – Only for first 2 years Only of postsecondary ed. of – Only for 2 years per Only eligible student eligible – A t least ½ -time for at At least one semester least • Lifetime Learning – Up to $2,000 credit Up per return per – A ll years of All postsecondary ed. postsecondary – Unlimited number of Unlimited years years – For one or more For courses courses Mutually exclusive in a given year Taxes (529 “College” Savings Plans) Taxes • State Tax Incentives – Contributions are deductible ($3,240 for couples per child) for UT ($3,240 taxes taxes – Earnings are exempt from state income tax (if used for qualified higher education expenses) higher • Federal Tax Incentives (10% penalty for non-qualified withdrawals) (10% Federal – Earnings are exempt from federal income tax – Gift limit of $12,000 <College limit of $55,000 (w/control) • Rollover to other family members (w/o penalty) • Utah Ed. Savings Plan is Outstanding – Nine investment options (Vanguard Funds) – Minimum payment per month of $25 • Life Insurance e nc a ur s In h alt He nd T Other Insurance Budget/Plan Taxes Home Buying Rainy Day Fund Tax-advantaged Tax-advantaged (Safe, liquid) Retirement Fund Retirement Tithing W ill sa Offerings Food Storage SelfSufficiency ru s ts Garbage: Consumer Debt Gambling Derivatives Identity Theft Other Other Investments Investments ( Index Funds) Attitude Insurance I nsurance “I t is most important to have It sufficient medical, automobile, and homeowner’s insurance and an adequate amount of life insurance.” insurance.” Insurance I nsurance • What insurance is: is What – A way to protect your assets from major unforeseen expenses • What insurance isn’t: isn’t What – A service to pay for minor losses you could easily afford to service pay yourself pay • M ultiple claims often lead to higher premiums or Multiple worse worse – Example: some insurers won’t renew your homeowner’s Example: policy if you’ve had more than three claims in two years policy Insurance I nsurance rules of thumb thumb – The more you earn, the The more you need more • Take assets into consideration as Take well well – Higher deductibles can Higher save a lot of money save • M ake sure your “rainy day” Make savings are sufficient to cover any losses any Life Insurance L ife • Term life -- pure death benefit – No savings component – About 1/10th the cost of cash value – Gets more expensive as you get older – Expires at age 65 or 70 (usually) – Provisions (renewability & convertability) Provisions (renewability Life Insurance L ife • Cash value life -- death benefit plus Cash savings (bonds, stock market, etc.) savings – Builds cash value – Does not expire (“whole life” insurance) – L ow but guaranteed minimum rate of Low return on cash value return – Much more expensive relative to term – Types: Whole Life, Universal Life, Types: Variable Life V ariable Whole Life: Pros and Cons Whole • Expensive (less death Expensive • Budgeting premiums benefit per premium dollar) benefit • No unaffordability and No Poor uninsurabililty problems • Poor returns on savings uninsurabililty component component • Cash value (forced Cash • High sales commission High savings) savings) • Can borrow or withdraw Can cash value cash • Earnings grow tax Earnings deferred deferred (over 100 % of first year premium and around 20% of lifetime premium lifetime Universal Life Insurance • Combines term insurance with tax-sheltered Combines investment accounts earning money market rates investment • Many different types • Flexibility with changing death benefit and premiums • Selling point is that cash value will increase to a point Selling to cover premiums for death benefit, however this is often not realized. often • Premiums may be skipped if cash value is high Premiums enough however premiums may then increase in later years years • High commissions Variable Life Insurance V ariable • Similar concept as universal life insurance but Similar owner of policy can decide how to invest the money in the savings component. money • There is no minimum return guaranteed • The amount of the death benefit is often related to The policy investment returns. policy • The insurance firm generally determines which The funds (mutual funds) you can invest in. funds • Earning grow tax-deferred Earning What Kind and How Much? What • Term insurance generally best to start off • 6-10 (???) times annual income • Convertible term if you think you may want Convertible cash value insurance later cash • Group is least costly (but what if you Group leave?) leave?) • Have some for non-employed spouse • Children? At most a small amount Term Insurance May Be Best If: Term • Y our primary life insurance need is to replace income that is earned during your working years. years. • Y ou have limited funds to purchase the level of protection that you need (e.g., 6 to 10 times annual salary). annual • Y ou have insurance protection needs that are easily quantifiable (e.g., mortgage, partnership buyout, etc.). buyout, • Grant likes term! (w/ renewability Cash Value Insurance May Be Best If: • Y our needs for life insurance are permanent or long term. long • Y ou have concerns regarding insurability and affordability later in life. affordability • Y ou intend to keep your coverage for a while and would not want premiums to increase with your age. your • A fter bills are paid and savings are met, you After still have disposable income. still • The concept of tax-deferred cash value The accumulation appeals to you (Limits on IRAs and 401k). and Do You Know? • Q: What’s the most expensive thing you can do in America? Do You Know? • Q: What’s the most expensive thing you can do in America? • A: Get sick without health insurance. Do You Know? • Q: What’s the most expensive thing you can do in America? • A: Get sick without health insurance. • P.S. The second most expensive thing is a divorce! So take care of your relationships!!! Health Insurance Health • Traditional Indemnity (Fee-for-Service) – Quite expensive, becoming less common in Quite group plans group – Most often seen today in individual plans Health Insurance Health • Managed Care – HMO: Health Maintenance Organization. • Most restrictive, generally may use in-network Most services only. services – PPO: Preferred Provider Organization. • Typically covers treatment anywhere, but with Typically lower co-payments for in-network services. lower – POS: Point of Service. • A type of HMO plan with PPO features. In-network type services typically cheaper than a PPO, out of network services covered, but with markedly higher co-payments. co-payments. Homeowners’ Insurance • Property Coverage – Can cover structures, attachments, personal property they contain, and “loss of use” expenses. • Liability Coverage – Protects you from liability for injuries that take place on Protects insured property. insured • Caveats – Standard policies do not cover home-based businesses. Standard not – Don’t own your home? Y our landlord is not liable for loss of Don’t not your personal property. Renters insurance is available for this purpose. this – Standard policies do not cover earthquakes or floods. Auto Insurance • Liability Coverage – Pay others for bodily injury and property damage for Pay which you are responsible which • Medical Coverage – Covers medical bills for you and your passengers • Uninsured Motorist Coverage – Pays what you would have received from another Pays motorist had they had their own insurance motorist • Vehicle Damage Coverage – Collision—pays for damage caused by collision or Collision—pays rollover rollover – Comprehensive—pays for loss when car is stolen or Comprehensive—pays damaged by vandalism, fire, etc. damaged Auto Insurance • How much coverage do you need? – Typically more than the baseline state Typically requirements requirements – Commonly-recommended minimums: Commonly-recommended minimums • $100,000 per person/$300,000 per accident liability $100,000 coverage coverage • $5,000 medical coverage – even if you have health insurance, your passengers may not • $50,000 property damage coverage – Those with larger-than-average incomes or asset Those bases require more coverage bases Prepare a Will Prepare • Especially if you – Have children – Have a complex family situation – Have significant assets • Do this now: Holographic will for students – Done in own hand – Signed and dated – Deal with children and assets • Why not have an attorney prepare your will? Y ou May Need a Trust •Enter your own up-to-date Enter information here because I know nothing about trusts! nothing Powers of Attorney Powers • Conventional, assign someone to : – Handle specific financial affairs – i.e., sell car and pay bills while on mission • Durable, appoint someone to: – M ake financial or medical decisions if Make incapacitated incapacitated • L iving Will or Advance Directive to Living Physicians: Physicians: – Outlines medical procedures allowed – Authorizes termination of artificial life support Documents For Safe Deposit Box Documents • Wills and Trusts (Husband and Wife) • Birth Certificates (Husband, Wife, Children, Adopted Children) • Citizenship Papers and Passports (Husband, Wife, Children, Citizenship Adopted Children) A dopted • Marriage Certificate • Adoption Papers • Military Service Papers • Divorce Papers • Death Certificates • Probate Records • Real Estate Deeds and Papers • Names/Phone Numbers for: Attorneys, Accountants, Investment Names/Phone Counselors, and Insurance Agents Counselors, Documents (continued) Documents • Living Wills (Husband and Wife) L iving • Durable Powers of Attorney (Husband and Wife) Durable • Healthcare Powers of Attorney (Husband and Wife) Healthcare • Organ Donor certificates (Husband and Wife) Organ • Prepaid Funeral Plans and burial plot deeds (Husband and Wife) Wife) • Obituary and Funeral Instructions (Husband and Wife) Obituary • Federal and State Tax Returns (at least 3 years) Federal • I nvestment and Insurance Records (Most Recent Y ear-End Statements) Statements) • Personal Loan Documents, Service Contracts, and Warrantees Personal Priorities Priorities While Balancing the Budget (behavior, relationships, values, human capital): capital): 1. Settle the Sacred(tithes and offerings), Settle 2. Manage the Misfortune(basic life, health, disability, auto, and home insurance), 3. Discharge the Debt (credit cards, bondage, FICO), 3. Discharge 4. Anticipate the Adversity (rainy-day fund, food storage, will), A nticipate 5. Snatch the Match (401k, 403b, 457, SEP, Keogh, SIMPLE), Snatch 6. Fund the Favored(IRA, Roth IRA, 529, Annuities), Fund 7. Stuff the Savings (diversify across assets and time), Stuff But Possess a Purpose and Preserve a Perspective Spencer W. Kimball Spencer “Do it” ...
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