Savings Fitness - Utah State University
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Transcript Savings Fitness - Utah State University
Savings Fitness
A Guide to Your Money and Your
Financial Future
PPT Developed by Karissa Berndt
USU Family Finance Student
Financial Planning for Women
March 2007
Today’s Program
Provides a general overview of saving &
investing
Focus on retirement but principles apply to
all goals
Details are in the Savings Fitness booklet
PPT & links available at www.usu.edu/fpw
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Program Objectives
Identify your goals
Distinguish between savings and investing
Develop net worth statement & savings plan
Learn to manage debt
Understand risk-return relationship
Begin or increase saving/investing
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How to manage financial
challenges and afford a secure
retirement?
Write your goals on a 3”x5” card
Sort the cards into two stacks:
Goals in the next 5 years or less
Goals in 5 years or more
Sort the cards in order of priority
Make retirement a priority!
Write on each card what you need to do to accomplish that
goal
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Beginning Your Savings Fitness Plan
Current financial resources:
Net worth: the total value of what you own
(assets) minus what you owe (liabilities)
Assets
Possessions, vehicles, home, bank accounts, investments, etc.
Liabilities
Remaining mortgage on your home, any loans/debts, etc.
Subtract your liabilities from your assets.
Goal: a positive net worth, which grows each year
Review your net worth annually (at tax time)
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Saving vs. Investing
Short term goals
< 5 years
No risk of loss of
principal
No or low real return
after taxes & inflation
Steady but slow
growth
Long term goals
5 years or more
Trade potential short
term loss for long term
gains
Positive real return
after subtracting taxes
& inflation
Volatility
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Estimate How Much You Need to
Invest for Retirement
Worksheets & software programs can help
you estimate how much you need to invest.
kiplinger.com (click on “Retirement”)
moneymag.com (click on “Retirement”)
usnews.com (click on “Retirement Calculator”)
asec.org (click on “Ballpark Estimate Worksheet”)
See FPW website for PPT on Ballpark Estimate
nasd.com (click on “Investor Services,” then “Financial
Calculators”)
Planning for a Secure Retirement
http://www.ces.purdue.edu/retirement/
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How Much Retirement Income
Will I Need?
Need to replace 70 to 90 percent of preretirement income
Lower the income, the higher the % that
needs to be replaced
It depends on the kind of retirement you
want to enjoy
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How Long Will I Live In
Retirement?
Average male life expectancy: age 78
Average female life expectancy: age 82
Consider your health and family history
Expect to live longer than previous
generations!
Planning for a Secure Retirement
http://www.ces.purdue.edu/retirement/
Module 1b Life Expectancy Calculators
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What Savings Do I Already Have?
Social Security retirement benefits
A pension that provides a fixed amount of
retirement income each month
Nest egg the desired total income/year
(Social Security any pension income)
Nest egg examples- Retirement plan accounts at
work, IRAs, annuities, and personal savings
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What Adjustments Must Be Made
For Inflation?
The cost of retirement will go up every year
due to inflation
The average annual inflation rate is 3.1%
In 1980 the inflation rate was 13.5%
In 1998 it reached a low of 1.6%
Assume a higher, rather than a lower, rate of
inflation
It’s safer to plan on 4% than 3.1%
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One Simple Trick…
Spend Less Money Than You Earn!
Start with a “spending plan” or budget
Income
Add up monthly income: wages, average tips or bonuses,
alimony payments, etc.
Expenses
Add up monthly expenses: mortgage or rent, car payments,
food bills, entertainment, etc.
Include savings as an expense!
Subtract income from expenses
Consult USU Family Life Center, 797-7224
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Spending Plans Cont.
What if expenses exceed income?
Cut Expenses (nickel & dime vs. BIG expenses)
clipping grocery coupons
bargain hunting (thrift stores, etc.)
changing phone or cable to a cheaper plan
Real savings: housing & transportation!
Increase Income
work a part-time second job
turn a hobby into income
jointly decide that another family member will work
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Adopt Savings “Rules”
Americans who follow “rules” save more*
Pay yourself first
Put savings/investing on auto pilot
Save your tax refund
Save unexpected money (i.e., windfall, gifts)
Save all change
Save $ you ‘saved’ on grocery & gas (receipts)
Other ideas?
*Rha, Montalto,& Hanna (2007). The Effect of Self-Control Mechanisms on
Household Saving Behavior. Financial Counseling and Planning, 17(2), 3-16.
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Avoid Debt & Credit Problems
How much debt is too much debt?
[monthly debts (credit card payments, car loan
payments, student loan payments, etc.) mortgage]
by the money you bring home each month.
The result is your “debt ratio.”
Keep this ratio at 10% or less
Total mortgage and non-mortgage debt should
be no more than 36% of your take-home pay.
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What’s the Difference Between
“Good Debt” and “Bad Debt”?
Good debt - provides a financial pay off
buying or remodeling a home (within reason!)
investing in education
advancing your own career skills
Bad debt - borrowing for things that do not
provide financial benefits, or that don’t last as long
as the loan
Depreciating assets: vehicles
vacations, clothing, furniture, dining out
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Handle Credit Cards Wisely
Use only 1 or 2 cards, not the usual eight or nine
Don’t charge big-ticket items.
Save or find less expensive loan alternatives
Shop for the best interest rates, annual fees,
service fees, and grace periods
Pay off the card each month,
If you cannot pay in full, pay more than minimum
Still have problems? Leave the cards at home
USU FLC 797-7224
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How to Climb Out of Debt
Work with your creditors directly to try and
work out payment arrangements
Request lower APR on credit card
USU Family Life Center Housing &
Financial Counseling
can help you set up a plan to work with your
creditors and reduce your debts
PowerPay Debt Analysis: https://powerpay.org/
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Investing for Retirement
Once you’ve reduced unnecessary debt and
created a spending plan, you’re ready to
begin investing for retirement.
Participate in your employer’s retirement
plan
Invest in an Individual Retirement Account
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Where to Save/Invest?
Cash Equivalents - very little risk; very low return
Savings accounts
Money market mutual funds
Certificates of deposit
U.S. Treasury bills
Suitable for short term goals only
Your money won’t grow
Taxes & inflation negate any growth!
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Bonds
Corporate or Government Bonds
You loan money to a U.S. company or a
government body in return for its promise to
pay back what you loaned with interest
Small % of your long term investments
Conservative
Low growth potential
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Stocks
You own a part of a U.S. or international
company
High potential for growth in the long run
Short term volatility
Must be willing to accept the ups & downs
along the road to inflation-beating growth
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Mutual Funds
Pools your money with money of other
investors and invests it.
A stock mutual fund, for example, invests in
stocks on behalf of fund’s shareholders.
Easier to invest and to diversify.
Ideal for your Individual Retirement
Account (IRA)
See FPW PowerPoints on website
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Where to Put Your Money
For goals that are at least 5 years in the future:
stocks
bonds
real estate
foreign investments
mutual funds
Not insured by the federal government - there is the risk
that you could lose some of your money
The longer you have until retirement, the more risk you
can afford.
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Why Take Risk At All?
The greater the risk, the greater the potential return
a diversified portfolio of stocks & bonds will earn
significantly more than a savings account.
No/low risk = no growth
Historic Average Annual Returns
U.S. Treasury Bills: 3.8%
Government Bonds: 5.3%
Large-Company Stocks: 11.2%
Inflation averages 3.1%
Taxes reduce investment returns
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Reducing Investment Risk
Diversification
Distributing your money among several
investments, rather than investing in individual
companies.
You can do this by investing in:
mutual funds
index mutual funds
Diversification will greatly decrease your risk
of losing money.
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Why Diversify?
At any given time one investment might do better
than another.
The factors that can cause one investment to do
poorly may actually cause another to do well.
By diversifying into different types of assets, you
are more likely to reduce risk, and actually
improve return, than by putting all of your money
into one investment.
“Don’t put all your eggs in one basket!”
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Reducing Investment Risk Cont.
Asset Allocation - investing among different
categories of investments (FPW PPT)
Put some money in cash, some in bonds, some
in stocks, and some in other investments
The choices you make about what % to have in
these major categories defines your investment
strategy.
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Employer-Based Retirement
Plans
Does your employer provide a retirement
plan?
If so…grab it! Employer-based plans are the
most effective way to invest for your future.
You’ll enjoy tax benefits.
Two types of employer-based plans :
defined benefit
defined contribution
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Defined Benefit Plans
Pay a lump sum upon retirement or a guaranteed
monthly benefit.
The payout is typically based on a set formula
such as: (# of years you have worked for the employer)
(a percentage of your highest earnings)
Usually the employer funds the plan--commonly
called a pension plan.
Most are insured by the federal government.
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Defined Contribution Plans
401(k) plans are the most common type
Does not guarantee a specified amount for
retirement
The money you have available to help fund your
retirement depends on:
how long you participate in the plan
how much you invest
how well the investments perform
More common than traditional pension plans.
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Vesting Rules
Money that you put in a retirement plan and earnings on
those contributions, always belongs to you.
Employees don’t always have immediate access to the
money their employer invests in their fund.
Once you are “vested” you own all of your employer’s
contribution.
Some plans vest in stages, others after fixed period of
employment.
Know your employer’s vesting rules.
Don’t leave before you are vested!
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What If You Can’t Join An EmployerBased Plan?
If possible, take a job with a plan
Encourage your employer to offer a plan
Invest in an IRA (see FPW PPTs)
Build your personal savings
Consider an annuity (April 11 FPW)
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What If You Are Self-Employed?
SEP (Simplified employee pension plan)
SIMPLE IRA
IRA
Annuities
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Coping With Financial Crisis
Establish an Emergency Fund
This can lessen the need to dip into retirement savings for a
financial emergency
Insure Yourself
Having adequate insurance will protect your financial assets
Insurance coverage:
Health
Disability
Homeowners or Renters (PPT on FPW website)
Automobile
Umbrella liability
Life (if someone else depends on your income)
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Monitor Your Progress
Financial planning is not a one-time process, so
make sure to do the following:
Periodically review your spending plan
Monitor the performance of your investments
make adjustments as necessary
Contribute more toward retirement as you earn more
Update your insurance to reflect changes in income or
personal circumstances
Keep your finances in order
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April 11 FPW
Making Your Money Last for a Lifetime:
Why You Need to Know About Annuities
Check FPW web http://www.usu.edu/fpw/
for related PowerPoint presentations
Asset allocation
IRA picks 2005; Mutual Funds 2006
What is an IRA?
Ballpark E$timate
Taking the mystery out of retirement planning
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Questions?