Description
Now that we have studied personal financial planning, it is time for you to summarize, in writing, your goals and vision for your life. This is an opportunity for you to think about the future, and how to apply the material that you have learned to help achieve your goals and vision. This should be a summary of actions that you plan to take to achieve your goals.Remember “SMART” goals: Specific, Measurable, Achievable, Relevant, and Time-bound.Attached is an example of a write up on vision and goals. It should give you some ideas, but remember that everyone is unique and has individual goals.Also, review Lecture 26 Setting Personal Goals to help you get ideas of actions that you can take to help you set and achieve your goals.
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Setting Personal Goals
Lecture 25
Fin 250
Personal Finance
1
Financial Planning
• This Course has focused on the
complex issues of developing a
personal financial plan
• First, envision your future life, your
goals and vision?
• Then, use the material from this
course to help you achieve your goals
and vision.
2
Taking Control of your
Financial Future
Address issues that you face as you
enter the work force and begin your
financially independent life
• Specific near term issues
• General longer term issues
• Tools for immediate and long term
value
3
Vision, Goals and Goal Planning
Assignment
• For this assignment, you need to write about
your goals and vision for your life.
• Attached to the assignment is a very good
write up by a student, it is an example of a
well thought out vision and goal statement.
4
Most people do not like dealing with finances,
in fact, many hate facing financial issues
• People feel inadequate,
uninformed and fearful of
making mistakes
• They are busy with their
careers and families
• There are many demands on
their time
• Financial decisions seem
postponable
5
Net Result
• Conscious or
unconscious decision to
neglect your finances
• People do not dedicate
the time and focus that
financial decisions
deserve
6
How to Overcome the Neglect of
Financial Issues
• Simplicity, consistency
and effective use of
time
• Avoid big mistakes
• Recognize conflict of
short term and long
term goals
• Controlling emotions
• Who to rely on?
• Empowerment
– If you can make a few big
and fundamental
decisions, the day-to-day
decisions will be easier
7
Set Goals for the Sections of your
Personal Financial Plan
•
•
•
•
•
•
•
•
•
Introduction
Financial Statements
Budgets and Spending Plans
Tax
Use of Credit & loan reduction strategies
Insurance
Investments
Retirement
Wills and Estate Planning
8
Save your Plan in a Three Ring
Binder
I. Introduction
II. Goals and Vision
III. Financial Statements
IV. Budget and Spending Plans
V. Tax
VI. Credit use
VII. Debt Reduction Strategies
VIII. Insurance
IX. Investments
X. Retirement Planning
XI. Estate Planning
9
Introduction
• What are you going to do to achieve
your ”dream job”?
• Have you updated your resume?
• After having almost completed this
course, are there changes that you
would make to your introduction?
10
Goals and Vision
• Now that we have studied personal
financial planning, it is time for you to
summarize, in writing, your goals and
vision for your life.
• This is an opportunity for you to think
about the future, and how to apply the
material that you have learned to help
achieve your goals and vision.
• This should be a summary of actions
that you plan to take to achieve your
goals.
11
Critical Habits
• Financial Routine
– Pay bills on time
– Reconcile checking accounts
monthly
– Organize your financial records
– Review your Credit Record
• Always save; spend less than you earn
– Use automatic savings programs
through employer or financial
institution
• Improve your financial literacy
– Read magazines, newspapers and
other literature
12
Financial Statements
• Balance sheet
• Income and expense statement
• Budget
• Project budget forward (cash flow)
• Update
– Every 1 to 3 years
– With Key Life Events
13
Personal financial organization
• Records to Keep
– Tax records- 3 year statute of limitations
– Investment records- keep track of date and cost basis and
sales price (capital gains/losses)
– Credit card statements- any tax implications and to be able
to prove purchase of warranties
– Utilities and such- no real reason to keep, but most people
keep them for a year
• Physical system: Folders by topic
• Computer system: many providers
– (Don’t forget to backup)
14
Tips: Personal financial organization
Handling
the mail
• Look at it immediately and check all bills
for unknown transactions
• Sort it into bills, reading material and toss
the rest
Bill
Paying
Options
• Pay immediately
• Use on-line banking and arrange
payment
• Establish a couple dates during each
month to pay bills (i.e. 15th and 30th)
15
Budgets and Spending Plans
• Review your own spending
• Or use tools like Mint.com or your Bank
16
Increase Saving through Smart Spending
• Do not be an impulse shopper
• Take advantage of sales
– Examples:
• Business attire, wait for
seasonal sales to purchase
these items
• End of model year automobile
sales and consider demos
• Internet Pricing Models
– Different prices on different days
17
Tax
Taxes will probably be the largest
expense item over your lifetime
• It is critical to understand the system
– Be able to calculate taxable income
– Apply concept of marginal tax rates
– Understand deductibles and tax credits
– Know your tax brackets
– Keep good, organized records
• Use the 4th quarter to plan for taxes
– Accelerate or defer income
– Accelerate or defer expenses
18
Taxes
• Do your own taxes
• Social security tax:
6.2% for up to $147,000
– Understanding how your
taxes are calculated is
of wages for 2022
critical
• Medicare: 1.45% on all
• Using software can
wages
make it easier
• Utilize Professionals,
but understand the
return
19
Gifting Appreciated Stock: Example
You own 100 shares of ABC with a cost basis of $25/share and a
market value of $100/share. Your Marginal Tax Bracket is 35%.
1. Give the 100 shares to charity: 100x$100= $10,000 gift
– Income Tax savings from gift: $10,000×0.35=$3,500
– No Capital Gains tax
or
2.
If you would have sold the stock, the capital gains tax would be
$7,500×0.15=$1,125. If you gifted the after tax proceeds, the gift
would have been ($10,000-$1,125=$8,875
– Income Tax savings from gift: $8,875×0.35=$3,106.25
– Capital Gains tax: $1,125
– Net reduction of income taxes of $3,106.25-$1,125=$1,981.25
20
Credit Use
Cars and Homes
• Start early to save for a down payment &
closing costs
• Determine, in advance, how much you can
borrow
• For mortgages, consider getting pre-qualified
• Use payroll deduction or automatic savings
transfer programs
• Shop for best rates and terms
21
Credit Scores Count
• Establish a good credit history
– Approval of credit
– Better rates
• Check your credit history
periodically (monthly-Annually)
– www.annualcreditreport.com
– www.creditkarma.com
• Be careful of identity theft
– Passwords
– Social Security Number
22
Debt Reduction Strategies
• Student Loans
• Research your options
• Develop a strategy
• Credit Cards
– Have only a few cards
– Pay attention to fees, rates and rewards
– Pay monthly balance in full to avoid the high interest
rates if you can
– If not, pay more than the minimum payment
• Debt Reduction Strategies
– Avalanche
– Snowball
23
Mortgages
What Type of Mortgage?
Conventional mortgage: A mortgage offered by a lender who
assumes all the risk of loss; typically requires a down payment of
at least 20 percent of the value of the mortgaged property.
FHA mortgage insurance A program under which the Federal
Housing Administration (FHA)offers lenders mortgage insurance
on loans having a high loan-to-value ratio; Its intent is to
encourage loans to home buyers who have very little money
available for a down payment and closing costs.
VA loan guarantee A guarantee offered by the U.S. Veterans
Administration to lenders who make qualified mortgage loans to
eligible veterans of the U.S. Armed Forces and their unmarried
surviving spouses.
24
15 to 30 year Fixed Rate or
Adjustable Rate Mortgage (ARM)
• Fixed Rate
– Normally higher than ARM
rate
• ARM
– Although rate starts lower,
there is a chance it will
reset at a higher rate
– Often popular with firsttime buyers; increases
buying power
– How long do you plan on
living in this home?
25
Buy
• Finance
• Cash purchase
Automobiles
Lease
• Usually offers
• Lower monthly payments
• Lower down payment
• But at the end of the lease,
You do not own a car
26
Insurance
Protect yourself, family and assets
• Homeowners or
Rental
• Auto
• Health
• Life
• Disability
• Umbrella
• Consider the level of
deductibles: premium
expense vs. self insurance
• ILIT for life insurance
• Pay for disability with after
tax dollars
• Umbrella (additional liability
coverage) is inexpensive
27
Insurance may be offered in your
Employee Benefits
• Study the Employee Benefits material like you study
for Final Exams
• Review each category and make wise choices
– Life Insurance
– Disability Insurance (pay with after-tax $)
– Health Insurance
– Spending Accounts; health, dependent care,
transportation, parking (may be able to fund expenses with
pre-tax $)
– Other benefits
28
Investments
• Open a brokerage account
– Learn about mutual funds, ETFs and stocks
• Asset Allocation
– Risk tolerance and time horizon
– Build a diversified portfolio
– Rebalance and review allocation targets
– Use tactical adjustments to invest in your views
29
Strategic Asset Allocation Frameworks
HPM Strategic Portfolio Allocations
Conservative
Moderate
Cash
Annualized Return
Growth
Fixed Income
Equity
Aggressive
Real Assets
Conservative
Moderate
Growth
Aggressive
4.8%
6.1%
7.2%
8.2%
Volatility (Std. Dev)
5.0%
9.0%
13.0%
17.0%
Best 1-year
14.9%
24.8%
34.9%
45.2%
Worst 1-year
-4.7%
-10.4%
-16.0%
-21.3%
Cumulative Value of $1
$1.26
$1.34
$1.42
$1.48
1) Private Equity and Hedge Funds are allocated separately and on a case-by-case basis. These are implementation vehicles used for accessing traditional and specialty strategies, and allocation is drawn
from other asset classes. Suitability is unique to each client, including liquidity preferences and minimum investments.
2) Annualized Returns and Volatility are based on 5-7 year forward looking projections and are not guaranteed. Best and Worst 1-year and Cumulative Value of $1 data is based on a five year timeframe.
Best and Worst 1-year data is calculating statistically using at 95% confidence level.
3) No assurance can be given that any portfolio or investment described herein would yield favorable investment results.
page 30
Asset Allocation
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Retirement Planning
Start Early
• Retirement
– Analysts estimate that people want 60% -80% of
their pre-retirement earnings during retirement
– Estimate your future earnings (assumptions on
inflation and life expectancy required)
– Use Time Value of Money calculations
– Save through employer’s plan(s) and individually
– Future of Social Security?
34
Retirement Plan Investments
• The most common mistakes
1. Not participating in the plans or investing too
little
2. Starting late
3. Too conservative of an asset allocation
4. Having concentrations in your employer’s stock
• Be aware of expenses in Mutual Funds and
ETFs
35
Enroll in 401(k) Plan
• Roth or Traditional
– Do you think your marginal income tax rate will be higher
in the future? (General Guideline)
• YES- Roth
• NO- Traditional
• An individual can contribute up to $20,500 in 2022
• Understand your employer’s matching provision
– Try to contribute enough to get the maximum match
• How much to contribute
– Pick a percentage that works for you and try to increase by
1% each year until you achieve the maximum
36
Estate Planning
The Five Essential Estate Planning Documents
Will
A legal document that transfers assets pursuant to your wishes
Trust
A Legal Entity that holds title to your assets
Durable Power of Attorney
A document that allows an agent to act on your behalf for
personal property
Health Care Power of Attorney
A document that allows an agent to make health care
decisions for you while you are unable to do so
Living Will
This is the document that allows someone to “pull the plug”
(or not) in the event of a medical catastrophe. In Illinois, it is
now incorporated into the Health Care Power of Attorney.
37
Basic Estate Documents
• Will
• Health Care Power of Attorney
• Durable Power of Attorney
Freewill.com
You can draft a will for free on this website
These sites cost money to draft documents
6 best online will makers of 2020 by Investopedia
https://www.investopedia.com/best-online-will-makers-4843732
38
Miscellaneous Tips
39
First Financial Institution(s)
• Checking and Savings accounts
– Each bank has several checking account plans
• Direct deposit: Saves time
• Convenient ATM(s): home and work
• Fees; What does it take to eliminate fees
• Online Banking
– Automatic bill paying
• Brokerage accounts
– Dividend Re-Investment Programs (DRIP)
– Automatic investment plans
40
Other Firsts
• First apartment
– Understand the terms of your lease
– Financial risk of roommates
• First car
– New or used; utilize resources to comparison shop
– Buy or Lease
– Check for best loan terms
• First credit card
– You may already have one; make sure the limit is high
enough for business travel
– Consider affinity programs (i.e. United, Starwood,
discounts, etc.)
– Insurance & extended warranty benefits
41
First Move
• It can be a pain, especially to a new city/state
– Some firms pay relocation expenses
– There may be tax deductions (Keep records)
– Consider commuting time, safety of neighborhood,
convenience of shopping, social activities, churches and
other personal interests
– Moving to another state? Driver’s license and car
registration
– Make sure that it fits your budget
42
Longer Term Issues
• Debt
– Borrow for things of long-term
value
• Education
• Home
• Auto
– Do not borrow for vacations and
probably not for gifts
43
44
Normal Yield Curve
45
Yield Curve
WSJ April 18, 2023
46
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