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Personal and Family Financial Management 15 Suggestions OPAC Conference November 2009 Ned C. Hill National Advisory Council Professor and Academic Director, H. Taylor Peery Institute of Financial Services Marriott School of Management Brigham Young University
President Gordon B. Hinckley Priesthood Meeting, October 3 rd, 1998 n n n Story of Pharaoh’s dream of the seven fat cattle and the seven lean cattle “…I want to make it very clear that I am not prophesying, that I am not predicting years of famine in the future. But I am suggesting that the time has come to get our houses in order. There is a portent of stormy weather ahead to which we had better give heed. ” “So many of our people are living on the very edge of their incomes. In fact, some are living on borrowings. ”
President Gordon B. Hinckley (cont. ) n n “I urge you, brethren, to look to the condition of your finances. ” “I urge you to be modest in your expenditures; discipline yourselves in your purchases to avoid debt to the extent possible. ” “Pay off debt as quickly as you can, and free yourselves from bondage. ” “That’s all I have to say about it, but I wish to say it with all the emphasis of which I am capable. ”
President Gordon B. Hinckley General Conference, October 7 th, 2001 “The economy is particularly vulnerable. We have been counseled again and again concerning selfreliance, concerning debt, concerning thrift. So many of our people are heavily in debt for things that are not entirely necessary. ” n “I urge you as members of this Church to get free of debt where possible and to have a little laid aside against a rainy day. ”
President Gordon B. Hinckley “I am satisfied that money is the root of more trouble in marriage than all other causes combined. ” “There would be fewer rash decisions, 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. ” Cornerstones of a Happy Home [pamphlet, 1984]
New Dollar Bill Released by the Treasury Last Week
Elder Joseph B. Wirthlin April Conference, 2004 n n “Remember this: debt is a form of bondage. It is a financial termite. When we make purchases on credit, they give us only an illusion of prosperity. We think we own things, but the reality is, our things own us. ” “Some debt—such as for a modest home, expenses for education, perhaps for a needed first car—may be necessary. But never should we enter into financial bondage through consumer debt without carefully weighing the costs. ”
Net Worth—Helps You Think About Debt n n Net worth = Assets - Liabilities Assets u u n Liabilities u u n Market value (not purchase price) Real and financial Credit card and other consumer debt Mortgages Why do this? u u u Net worth helps you do stuff in the future Track over time--should be growing Identifies assets that could be used to reduce debt
Net Worth—A Picture Liabilities Assets Net Worth
Impact of Credit Card Purchase Flat Screen TV Credit Card Debt Liabilities Assets Net Worth
Impact of Credit Card Purchase Flat Screen TV Credit Card Debt Liabilities Assets Net Worth How do you balance this?
What Adds to Net Worth? Flat Screen TV Assets Credit Card Debt Liabilities Net Worth Must Shrink!
Suggestion 1 Avoid Unproductive Debt It Makes Net Worth Shrink Productive debt Unproductive debt Home Consumer goods Education Vacations Minimum transportation Business Car Be careful—any debt here can become unproductive Most credit card debt
Some Facts about Debt & Credit Cards n n Average household has 13 credit cards 65% of card holders do not pay off total balance each month People tend to spend 12% more when they use their credit cards (compared to cash). Over 40% of US families spend more than they earn (Federal Reserve)
Origin of Most Debt Problems? Spending Problems Debt Income Expenditures
Suggestion 2 Control Your Spending n Step 1: Write down your cash flows u 2 -3 months back u Find all expenditures—including cash purchases u Determine total assets and liabilities n Step 2: Agree on goals u What do we want to accomplish? u Agree on a budget for future cash flows n Step 3: Track cash flows--compare budget to actual u Use computer or any other method (envelopes) n n Step 4: Review monthly—talk it over! Step 5: Make adjustments
B U D G E T for _______, 2 0 0 9 INCOME Wages/Salaries (after taxes) Other income Educational Loans Total income EXPENDITURES Church donations Savings Food Tuition, books, etc. Mortgage or rent Utilities Transportation Debt payments Insurance Medical Clothing Other Total expenditures PLANNED ACTUAL
Why You Should Have a Spending Plan Communicate with spouse and family n Find out what you are spending n Extract more money for saving and investing n Get out of debt n Prepare for the future n Keep money from slipping through your fingers n
500+% If You Must Borrow, Suggestion 3 Be Careful Where! n n n Finance companies Credit cards Banks Credit unions “Pay Day Lenders” PD
Suggestion 4 Reduce Unproductive Debt n Plastic surgery n Reduce spending n Use assets to pay off debt n Make a plan -- stick to it n Talk to a credit counselor if needed
Suggestion 5 n Protect Your Family Insurance u Life u Health u Car u Disability u Home owners/renters Emergency cash n Food storage n
Term Life -- Pure Death Benefit u u No savings component About 1/10 th to 1/5 th the cost of permanent Expires at age 65 (usually) Many employers offer term insurance as part of its benefits package F F u Base amount Can purchase additional if desired Two types F F Decreasing Term (premiums stay same) Constant Term (premiums increase over time)
Permanent Life -- Death Benefit Plus Savings Component u Part of premiums go to building “cash value” F u u u u Can borrow against it The other part goes to death benefit Premiums stay constant over time Does not expire Most policies give fixed rate of return on the cash value More expensive per $ of insurance coverage Often used for estate tax purposes Variants: universal life, variable life
Insurance--Makes Up for Low Net Worth Problems n If you have low or negative net worth? u Heirs may have difficulties u Severe cash flow problems n Insurance creates an instant estate--it becomes an asset if you die Assets Liabilities Net Worth Cash from Insurance Added Net Worth
What Kind and How Much? Start with term insurance (6 -10 times annual income) n Group is least costly but what if you leave? n Have some for non-employed spouse n
Corollary Your net worth should build up over time n As it does, you may need less and less life insurance n However, life insurance can be used as a tool to pass part of the estate on to heirs (this is where permanent insurance comes in). n
Suggestion 6 n Prepare for Retirement Yes, Even When You Are Young! Some Retirement Myths “I’ll live on Social Security benefits” u SS will replace only 24% of your income n n “Someone else will take care of me” “Better be safe and invest conservatively” Biggest regrets for retirees u Didn’t take full advantage of tax deferred investments u Didn’t start earlier to save for retirement
Why Start Saving Early? Remember: Social Security provides only about 24% of a typical family’s preretirement income. n Can you live on just 24%? n You’ll need other sources of income n u Retirement plan from employer u Personal retirement savings u Equity in a home
Example Bill starts saving for retirement at age 20 Joe starts saving for retirement at age 40 ($2, 000 per year at 8%) $903, 800 $172, 702 Bill has accumulated over 5 times what Joe did by 65!
How Does This Work? Compound interest n Bill started earlier--compound interest has more time to work its miracle n If someone had put $1 in an account back in 1776 at 8% interest how much would the account have in it today? n $61, 339, 000 !!
Suggestion 7 Save Wisely Every time you get paid: • Pay the Lord first (10%) • Then pay your future self (10%) • Live on the rest (80%)
Saving Builds Net Worth Over Your Lifetime Life Cycle Savings (000’s) Suggestion 7 A Retirement Save 20% Save 10% Borrowing To Heirs Age
What Should I Invest In? n Principle: risk-return trade-off u High risk--high return u Low risk--low return n What? u Stocks -- ownership in a company (risky) u Bonds -- loan to a company/government (less risky) u Deposit accounts -- (insured, no risk) n How? u Mutual funds u Tax-deferred investing
Best and Worst Total Returns 54% (since 1926) Stocks: S&P 500 U. S. T-bills 20% 17% 15% 9% 0% One year holding period -43% 0% -1% 10 -year holding period 8% 3% 0. 4% 20 -year holding period
Chances of Beating Inflation % Holding Period
Chances of Loss
Invest to Match Your Time Suggestion 8 Horizon Short period (5 years or less)—put your money in less risky investments like savings accounts and secure bonds n Longer period (10 -20 or more years)—put your money in stocks n
Two Forms of Retirement Plans 1. DEFINED BENEFIT PLAN u Employer defines how retirement benefit is computed u Example: Years worked x 1. 5% x Last 5 years ave. salary F Example: 20 yrs x. 015 x $70, 000 = $21, 000/yr u Must qualify (minimum number of years worked) u Employer responsible for funding the plan, investing the money and making sure the funds are there for retiring employees u Many employers are dropping these plans
Two Forms of Retirement Plans 2. DEFINED CONTRIBUTION PLAN (401 k) u Employee puts X% of monthly salary into the plan u Employer may match some portion of the contribution (THIS IS FREE MONEY!) u Example: You put in 8%, employer adds 4% u What do you actually invest in? Examples: F Short-term government securities (MMMF) F Relatively safe bonds F Index fund F Growth fund F International fund
Use Tax-Advantaged Investing Wherever Possible 401(k)--retirement plans u Employer may participate u Loan provisions u Various investment options IRAs Roth IRAs (not tax-deductible—but no taxes when you take money out in retirement) Keogh Plan (various types, up to 30% of self-emp inc) SEP Plan (up to 25% of self-empl income) 403(b)--retirement (employees of govts, ed, relig. ) Suggestion 9 n n n u Virtually same as 401(k)
Mutual Fund, or other investment How It Works Yo u Employer Match $ (if 401 k) Value Fund de c Growth Fund 10% id et Money Market Fund hi sm ix Tax-adv. “Vehicle” Your $ Plan Employer Broker 20% Govt. Bond Fund Internl. Equity Fund Set up through 401(k) SEP Roth IRA Etc. 10% Corp. Bond Fund 60% Real Estate Fund S&P Index Fund May be 1000’s of possibilities
The Taxes in Tax-advantaged Investing n n Say your income is $50, 000 one year. You put $5, 000 that year into your firm’s 401(k). u u n n Your $5, 000 automatically comes out of your salary each month and goes—at your direction—into whatever mutual funds are available through the plan. You leave it there until you retire. Your taxable income that year is $45, 000—not $50, 000. The $5, 000 grows for many years. You will pay ordinary income taxes when you take out the ($5, 000 + the increase). If your employer matches 1: 1, you’d be putting your $5, 000 + employer’s $5, 000 into the fund!
Suggestion 10 Diversify! Never put all or even most of your eggs in one basket! Do n’t Ma Be dof a B f In ern ves ie tor !
Diversifying Mutual funds help you do this n Index funds do this at lowest cost n Be cautious about employer stock or partnership plans where you are locked into the fortunes of your company for the bulk of your retirement (e. g. , Arthur Andersen, Enron) n
Suggestion 11 Do Your Legal Planning As a start: provide for guardianship of minor children Some states (UT) allow holographic wills u All in your own handwriting u Date at top, signature at bottom u Name a guardian, alternates, disposition of assets u No notary or witnesses u Caution: Consult attorney about language u Caution: Use only if you don’t have significant assets or a complicated family situation
Avoid “Get Rich Quick” Suggestion 12 Schemes
Case Study: the Ponzi Scheme End of January, 2006 Student reports finding this card in the Tanner Building Reverse side claims: Invest $6 to $6, 000 Earn 44% over 12 days New economic paradigm!
What is the Annual Return? (1 + 365/12. 44) – 1= 6, 600, 000%!
Ponzi Scheme—How it Works Etc. , etc. KEY: Return comes from new investors and not from any real economic activity.
Impact on Investors n At least 300, 000 investors n At least $500 M invested n Personal tragedies for many families u. Mission savings u. Some mortgaged homes n In a typical Ponzi scheme— 80 -90% of investors lose everything! n Criminal processes underway
How to Recognize a Scam n Is promised return unusually high? u Remember the risk-return trade-off: High return = high risk u No one can promise more than an FDIC insured rate! u n Do the facts check out? u u n n Does the investment make sense to you? Is the person registered, are references OK? Is product significantly above (or below!) reasonable market price? Does sale require pressure tactics? Does seller emphasize “affinity”, e. g. , BYU or Church connections? Is most of the product purchased by end users or by other distributors?
Top 10 Scams to Avoid 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Easy business opportunities Ponzi schemes Many work-at-home plans Health, diet and gasoline saving products Corrupt sales schemes Many investment seminars Phishing/pharming Windfall scams Commodity and foreign currency scams Some multi-level plans
Multi-Level Marketing Tests Is the product sold primarily to other distributors or to actual customers? n Is the product really of value in the marketplace? n Is the price reasonable for the product? n Are the real risks fully disclosed? n
ce n ra I h alt He su n Life Insurance Protection Budgeting/Planning Debt Management Managing Taxes Home Buying Tithes and Offerings Self. Sufficiency ill s a nd Other Insurance Steps against Identity Theft Rainy Day Fund Tax-advantaged (Safe, liquid) Retirement Fund W Food Storage T ru s ts Garbage Consumer debt Gambling Derivatives Start-ups Scams Other Investments (Index Funds) Spiritual Understanding: Stewardship and Faith
Read a Good Personal Finance Suggestion 13 Book—or Two n n n Tyson, Personal Finance for Dummies, 4 th Edition Benna, Bucci, Caher, et al, Managing Your Money All-in-one for Dummies Engel and Hecht, How to Buy Stocks, 8 th Edition Lynch and Rothchild, Learn to Earn Stanley and Danko, The Millionaire Next Door
Check Out These Websites n n http: //providentliving. org/media/training /peaceheart/main. html (lds. org > Home and Family > Family Finances) http: //personalfinance. byu. edu/ (lds. org > Home and Family > Family Finances > Other resources > Personal Finance
Suggestion 14 Keep Track of Your Finances n n n Organize and know how to read your financial documents (insurance, retirement, bank and investment statements) Create financial reports for your family (assets and liabilities) Know your monthly cash inflows and outflows Learn to use the Web for financial information Develop a plan to get you to where you’d like to be financially in 5 years, 10 years
Qu ick e n nce T ina urb !F o. Ta o ho x Ya y Man Mone Internet Excel ager Computers and the Internet Can Help Online Banking
Suggestion 15 n Protect Your Identity theft is on the rise u Shred financial documents u Don’t give out account #’s, CC #’s, PINs, etc. over phone (unless you originated the call to known party) n n n Be aware of phishing Don’t fall for “awards” or any other gimmick in which you have to send in a check Protect your computer with anti-virus/antispyware programs Don’t give out SSNs Keep informed—new scams are created every day!
Conclusions n Make decisions that build net worth over time u Avoid unproductive debt u Develop an attitude of saving not spending n n n Wise financial management empowers you to serve more capably: family, community, church Read a good book or two on personal finance Surely we will be held accountable for how we manage our resources