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Learning Objectives

  • C-1: Outline the six steps for controlling your assets.
  • C-2: Explain how to build a financial base, including investing in real estate, saving money, and managing credit.
  • C-3: Explain criteria for selecting investment options and how to invest in stocks, bonds, mutual funds, and ETFs.
  • C-4: Explain how buying appropriate insurance can protect your financial base.
  • C-5: Outline a strategy for retiring with enough money to last a lifetime.

Profile: Lauryn Williams

  • Background: Born in 20, professional track and field athlete.
    • Achievements: Won medals at both Summer and Winter Olympics.
  • Transition to Finance: After retiring from sports, became a certified financial planner.
  • Founding Worth Winning: A financial planning firm specifically aimed at helping athletes.
    • Services: Budgeting and retirement planning.

The Need for Personal Financial Planning

  1. Financial Planning Begins with Making Money:

    • Importance of educational major in financial outcomes.
    • Business education historically correlates with higher income.

  2. Six Steps to Controlling Your Assets:

    • Step 1: Take an inventory of your financial assets.
    • Step 2: Keep track of all your expenses.
    • Step 3: Prepare a budget.
    • Step 4: Pay off your debts.
    • Step 5: Start a savings plan.
    • Step 6: Borrow only to buy assets that increase in value or generate income.

  3. Balancing Expenses:

    • Balancing income with expenses is crucial for saving and investing.
    • Consequences of failing to balance can lead to inadequate retirement funds.

  4. Preparing a Budget:

    • Typical household budget includes:
      • Mortgage or rent.
      • Utilities.
      • Food.
      • Clothing.
      • Vehicles.
      • Furniture.
      • Life and care insurance.
      • Medical care.
      • Taxes.

Cost-Saving Choices

  • Starbucks Caffè Latte: $3.00/day for 20 days = $60.00.
  • Service Station Cappuccino: $0.70/day for 20 days = $14.00.
  • Monthly Savings: $60.00 - $14.00 = $46.00.
  • Example of lunch:
    • Fast-food lunch: $5.00/day for 20 days = $100.00.
    • Bringing lunch: $2.00/day for 20 days = $40.00.
    • Savings: $100.00 - $40.00 = $60.00.
  • Bottled Water: $1.50 for 20 days = $30.00.
    • Refill water bottle for $0.
    • Savings: $30.00.
  • Total monthly savings: $174.00.
  • Total savings through 4 years of college (48 months): $8,352.00.

Building Your Financial Base

  1. Tips for Building a Financial Base:

    • Live frugally.
    • If married, try to live on one income.
    • Consider a more affordable home as a first major investment.
    • Avoid living beyond your means.

  2. Five Rules of Frugality:

    • Be cautious with credit card use.
    • Seek inexpensive forms of entertainment.
    • Cut back on non-essential items.
    • Shop with a clear list and purpose.
    • Compare prices and utilize coupons.

  3. Real Estate:

    • Viewed as a relatively secure investment.
    • Housing serves as an immediate investment.
    • Mortgage payments are generally fixed unlike rent.
    • Home buying as a mechanism to encourage savings.
    • Core criteria for real estate investment: Location, location, location.

  4. Tax Deductions and Home Ownership:

    • Interest on home loan and real estate taxes are tax-deductible.
    • Home ownership is often more cost-effective than renting.

  5. Understanding Housing Market Trends:

    • The fluctuation of housing prices, with significant changes observed from 2000-2012.

  6. Affordable Housing Calculation:

    • Monthly mortgage payments should ideally not exceed 28% of monthly income.
    • Example calculations show affordability based on various income categories.

Credit Management

  1. Learning to Manage Credit:

    • Importance of credit cards in personal finance, but must be used carefully.
    • Risks include accrued debts, hacking, and fraud susceptibility.
    • Suggestion to switch to debit cards if credit is not manageable.

  2. New Consumer Credit Card Protections:

    • Issuers can only raise interest rates under limited circumstances.
    • Age requirement of 21 years for obtaining a credit card without a cosigner.

  3. Steps to Maintain a Good Credit Score:

    • Pay bills and full credit card balances punctually.
    • Keep low outstanding balances.
    • Regularly monitor credit reports.
    • Avoid excessive credit applications.
    • Retain older accounts to benefit score.
    • Avoid personal bankruptcy filings.

  4. Credit Score Ranges:

    • 760 to 850: Excellent
    • 700 to 759: Great
    • 660 to 690: Fair
    • 620 to 659: Poor
    • 619 and under: Very Poor

Investing Strategies

  1. Criteria for Investment Options:

    • Investment Risk:
      • Risk refers to the possibility of losing part or all of an investment.
    • Yield:
      • The income returned on an investment, including interest or dividends.
    • Duration:
      • The time period until an investment matures or is paid off.
    • Liquidity:
      • The ease with which an investment can be converted into cash.
    • Tax Consequences:
      • The tax implications associated with an investment, which may affect returns.

  2. Risk Diversification:

    • Reduce risk by creating a diversified portfolio.
    • Portfolio strategy may be influenced by a financial planner's guidance.

  3. Investing via Online Brokers and Robo-Advisors:

    • Online Brokers: Investors conduct their research and manage trades independently.
    • Robo-Advisors: Utilize algorithms for automated investment decisions.
    • Considerations of advantages and disadvantages are necessary.

  4. Investing in Stocks:

    • Bulls: Investors who believe prices will rise.
    • Bears: Investors expecting price declines.
    • Capital Gains: Profit realized when a stock is sold higher than its purchase price.
    • Growth Stocks: Higher risk but potentially higher returns.
    • Income Stocks: Typically maintain dividends aligning with inflation.
    • Penny Stocks: High-risk stocks, often associated with small companies.

  5. Investing in Bonds:

    • U.S. Government Bonds: Backed by federal credit and considered secure.
    • Corporate Bonds: More risky than government bonds but offer higher yields.
    • Risk vs. Return Consistency: Generally, higher risk bonds yield higher interest.

  6. Investing in Mutual Funds and ETFs:

    • Mutual Funds: Pool investments from multiple investors to purchase a diversified set of assets.
    • Index Funds: Designed to track a specific market index, like the S&P 500.
    • ETFs: Similar to mutual funds but trade on exchanges like stocks, offering more liquidity.

Protecting Your Financial Base: Insurance

  1. Life Insurance Types:

    • Term Insurance: Provides pure insurance for a specified period; lower cost when purchased young.
    • Whole Life Insurance: Combines savings with insurance covering until age 100.
    • Variable Life Insurance: Investments linked to market performance of high-yielding assets.

  2. Analyzing Insurance Needs by Life Stage:

    • Children young with education costs, mortgages high relative to income lead to higher initial insurance needs.
    • Needs may decline as children grow older and financial obligations decrease.

  3. Annuities:

    • An annuity is a financial product that promises to provide income for a specified period, possibly until death.
    • Types include fixed and variable annuities, with fixed providing guaranteed rates, while variable can fluctuate.

  4. Health Insurance:

    • Requirement under the ACA (Affordable Care Act) has changed, with mandates being removed.
    • Health Savings Account (HSA): Allows tax-free withdrawals for medical expenses, often coupled with high-deductible insurance plans.
    • Disability Insurance: Important for young people who may face long-term sickness or accidents, covering some income loss.

  5. Homeowner's or Renter's Insurance:

    • Covers personal belongings against damages or theft with options for guaranteed replacement cost or depreciated value.
    • Additional riders may be necessary for high-value possessions.

Planning for Retirement

  1. Social Security:

    • The Old-Age, Survivors, and Disability Insurance program, funded through worker taxes.
    • Challenges arising from an increasing retiree population and longevity coupled with a decreasing number of contributors.

  2. Retirement Goals and Resources:

    • Importance of establishing clear retirement objectives and the necessary financial resources to attain them.

  3. Individual Retirement Accounts (IRAs):

    • Tax-Deferred Investment Plans that save taxes for retirement; income is taxed upon withdrawal.
    • Roth IRA: Contributions are taxed, but withdrawals (including earnings) are tax-free.
    • Simple IRAs: Designed for small employees, with employee contributions matched by employers.

  4. Evaluating Retirement Portfolios:

    • Diversification is key to mitigating risks within retirement accounts.

  5. 401(k) Plans:

    • A popular employer-sponsored retirement savings plan allowing for tax-deferred contributions.
    • Advantages include tax reductions, compound growth of investments without immediate taxation, and employer matching contributions.

  6. Qualified Plans (Keoghs):

    • For self-employed individuals, functioning similarly to IRAs, allowing tax-deferred growth and varied withdrawal options.

  7. Role of Financial Planners:

    • Engagement with a certified financial planner (CFP) is advised for personalized planning and strategy implementation.
    • Estate Planning: Preparation of wills, appointing executors, and durable power of attorney to secure assets for heirs.

  8. Estate Planning Considerations:

    • Strategies to ensure asset division aligns with personal wishes and provides for descendants across generations.

Final Review Questions (TestPrep)

  1. What are the six steps you can take to control your finances?
  2. Why can real estate be a good investment?
  3. What are the advantages and disadvantages of using a credit card?
  4. Discuss the investment benefits of IRAs, qualified plans, and 401(k)s.
  5. Outline the primary steps involved in effective estate planning.