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Financial Tools You Need to Know to Survive

Money Management. Financial Tools You Need to Know to Survive. What We Will Cover Today. Where does your money go? Your cash reserves. What are your goals? How money works. Asset allocation. Keys to Success. You must know the seven keys to success:. Develop a budget

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Financial Tools You Need to Know to Survive

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  1. Money Management Financial Tools You Need to Know to Survive

  2. What We Will Cover Today • Where does your money go? • Your cash reserves. • What are your goals? • How money works. • Asset allocation.

  3. Keys to Success You must know the seven keys to success: • Develop a budget • Define specific goals • Know how money works • Establish cash reserves • Develop a financial plan • Pay yourself regularly • Take immediate action

  4. Where Does Your Money Go? It is important to: • Develop a spending plan • Track your monthly expenses • Note the little expenses • Stick to your budget

  5. Where Does Your Money Go? The latte effect: • Latte: $3 Cookie: $1 • Lunch: $6 • Soda: $1 • Magazine: $2 • Total: $13 • Week: $78 Month: $339 • Year: $4,060

  6. Where Does Your Money Go? The latte effect: • Week: $78 Month: $339 • Year: $4,060 • Invest: $2,500

  7. Where Does Your Money Go? A TYPICAL FAMILY TAXES 25% INSURANCE 8% COST OF LIVING/ DEBT REPAYMENT 65% SAVINGS/INVESTMENTS 2% Your Monthly Spending Cost of Living/Debt Repayment . . . . . . . . . . % Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . % Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . % Savings/Investments . . . . . . . . . . . . . . . . . . %

  8. Your Cash Reserves The need: • Emergencies • Planned expenses • Investment opportunities • Minimize the need to use credit

  9. Your Cash Reserves What to look for: • Interest paying • Liquidity/check writing • Low risk • No withdrawal penalties

  10. Your Goals To better attain your goals: • Think about your short term goals • Think about your intermediate term goals • Think of your long term goals • Put them to paper • Develop a plan • Work with a motivator

  11. How Money Works The Rule of 72 72 Number of Years to Double ÷ = Interest Rate 6 % doubles in years 8 % doubles in years

  12. How Money Works The Magic of Compound Interest $150,000 $100,000 $50,000 $0 Investing $100/month 8% compounded monthly Years 5 10 15 20 25

  13. How Money Works Tax-Deferred Compounding $350,000 $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 $0 $361,887 Taxed Every Year Tax-Deferred Based on a 10% annual rate of return $216,364 $209,960 $139,563 $35,062 $29,904 Years 10 25 30

  14. How Money Works A Tale of Two Investors $1,019,169 $1,019,169* Prudent Polly Procrastinating Pete Assumes 10% annual rate of return $805,185 $805,185* $78,000 $16,000 Years * Return figures are for illustrative purposes only and do not represent the past or future performance of any actual investment.

  15. How Money Works Guaranteed Rates of Return $1000 Interest: 3% +30 1030 Tax: 30% -9 1021 Inflation: 3% -30 $991 Also known as… Going broke safely

  16. How Money Works Dollar Cost Averaging - When is the Best Time to Invest?

  17. How Money Works Dollar Cost Averaging $3/doz – 12 eggs $4/doz – 12 eggs $2/doz – 12 eggs $9 – 36 eggs $3 – 12 eggs $3 – 9 eggs $3 – 18 eggs $9 – 39 eggs

  18. How Money Works Dollar Cost Averaging - When is the Best Time to Invest A B

  19. How Money Works Investing $100/month Dollar Cost Averaging - When is the Best Time to Invest 14 A 17 20 20 B

  20. How Money Works Investing $100/month Dollar Cost Averaging 11 10 11 14 14 14 13 13 A Total Shares: 174 x $10 = $1,740 17 17 20 20 B

  21. How Money Works Investing $100/month Dollar Cost Averaging 11 10 11 14 14 14 13 13 A Total Shares: 174 x $10 = $1,740 17 17 20 20 B 33 40 40

  22. How Money Works Investing $100/month Dollar Cost Averaging 11 10 11 14 14 14 13 13 A Total Shares: 174 x $10 = $1,740 17 17 20 20 25 25 20 B 33 33 33 40 35 40 40 66 Total Shares: 410 x $5 = $2,050

  23. How Money Works The Three Worst Enemies To Your Money Debt Inflation Taxes

  24. Asset Allocation What is Asset Allocation? • Process of efficiently developing a diversified portfolio by mixing different classes of financial assets in varying proportions. • Process whereby an investor constructs a portfolio reflective of goals, time frame and level of risk tolerance to meet financial objectives. • The art of balancing risk and reward to meet objectives.

  25. Asset Allocation Why Do We Use Asset Allocation? • Increases diversification • Potentially lowers volatility • Potentially lowers risk • Potentially increases return • Potentially delivers consistent returns over time

  26. Asset Allocation A History • WWII Normandy invasion • Markowitz and the University of Chicago • Markowitz, Miller and Sharpe win the Nobel Prize in 1990

  27. Asset Allocation The Power of Diversification

  28. Asset Allocation The Power of Diversification

  29. Asset Allocation The Power of Diversification

  30. Asset Allocation The Power of Diversification

  31. Asset Allocation The Power of Diversification

  32. Asset Allocation The Power of Diversification

  33. Asset Allocation The Power of Diversification

  34. Asset Allocation The Costs of Volatility 10 % 10% 10% ? -10% Year 1 Year 2 Year 3 Year 4 Year 5

  35. Asset Allocation The Costs of Volatility • If you start with $100,000: • and gain 10% and lose 10% • and gain 20% and lose 20%

  36. Asset Allocation Typical Asset Classes • Stocks • Bonds • Cash Equivalents • Real Assets

  37. Asset Allocation Start By Creating a Portfolio for You • Set your objectives • Set your time horizon • Set your investment parameters • Rebalance

  38. Asset Allocation You may be a conservative investor if: You prefer low-volatility investments You are not comfortable with a large exposure to stocks You desire an extremely stable income stream or growth pattern You are concerned about the possible loss of principal You have a short-term investment time frame

  39. Asset Allocation You may be moderate conservative if: You want to preserve the future purchasing power of your capital, but not in a high-risk situation The amount of risk you are willing to take to outpace inflation is slight Your objective is more income-oriented than growth-oriented You want to achieve some growth, but at a minimal risk

  40. Asset Allocation You may be a moderate investor if: One of your priorities is preserving the future purchasing power of your capital You are willing to take a modest amount of risk to outpace inflation You desire a modest but stable growth pattern You are comfortable with experiencing possible short-term decreases in your portfolio value in exchange for the potential of long-term gains

  41. Asset Allocation You may be moderate aggressive if: You are striving for capital appreciation You are open to the idea of equity investing You desire above-average long-term growth You are willing to accept market swings You have an intermediate- to long-term investment time horizon

  42. Asset Allocation You may be an aggressive investor if: You are trying to achieve maximum capital appreciation You are comfortable with, or perhaps have a past history of, equity investing You desire significantly higher long-term growth You are willing to accept significant market swings You have a long-term investment time horizon

  43. Asset Allocation Tolerance for risk is just one of many factors that will dictate the portfolio that is right for you. Others include: Personal financial profile Financial goals Time horizons Investment objectives

  44. Asset Allocation 100% Stocks 100% Stocks 90% Stocks, 10% Bonds 90% Stocks, 10% Bonds 75% Stocks, 25% Bonds 75% Stocks, 25% Bonds 50% Stocks, 50% Bonds 50% Stocks, 50% Bonds Return Minimum Risk Portfolio: 25% Stocks, 75% Bonds Minimum Risk Portfolio: 25% Stocks, 75% Bonds 10% Stocks, 90 % Bonds 10% Stocks, 90 % Bonds 100% Bonds 100% Bonds Risk(StandardDeviation) Risk is measured by standard deviation. Return is measured by arithmetic mean. Risk and return are based on annual data over the period of 1970-1995. Portfolios presented are based on Modern Portfolio Theory. For illustrated purposes only. Source: Ibbotson, Associates. Past performance is no guarantee of future results

  45. Asset Allocation Asset allocation is not a perfect investment method. However, short of a crystal ball, it is the best way to: • Potentially maximize returns • Spread and minimize risk • Potentially lower volatility • Increase diversification • Potentially deliver consistent returns over time

  46. In Closing Who do you think will be better off in the future? The Jones, who save today’s money for tomorrow, or The Smiths, who spend tomorrow’s money today?

  47. The Next Step Homework • Develop a budget for your house

  48. The Next Step Homework • Develop a budget for your house • Track your expenses

  49. The Next Step Homework • Develop a budget for your house • Track your expenses • Calculate monthly spending percentages

  50. The Next Step Homework • Develop a budget for your house • Track your expenses • Calculate monthly spending percentages • Come up with a financial plan

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