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Ned C. Hill National Advisory Council Professor and

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.

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Ned C. Hill National Advisory Council Professor and

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  1. 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

  2. President Gordon B. Hinckley Priesthood Meeting, October 3rd, 1998 • 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 faminein the future. But I am suggesting that thetime 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.”

  3. President Gordon B. Hinckley (cont.) • “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.”

  4. President Gordon B. HinckleyGeneral Conference, October 7th, 2001 “The economy is particularly vulnerable. We have been counseled again and again concerning self-reliance, concerning debt, concerning thrift. So many of our people are heavily in debt for things that are not entirely necessary.” • “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.”

  5. 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]

  6. New Dollar Bill Released by the Treasury Last Week

  7. Elder Joseph B. WirthlinApril Conference, 2004 • “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.”

  8. Net Worth—Helps You Think About Debt • Net worth = Assets - Liabilities • Assets • Market value (not purchase price) • Real and financial • Liabilities • Credit card and other consumer debt • Mortgages • Why do this? • Net worth helps you do stuff in the future • Track over time--should be growing • Identifies assets that could be used to reduce debt

  9. Net Worth—A Picture Assets Liabilities Net Worth

  10. Impact of Credit Card Purchase Flat Screen TV Credit Card Debt Assets Liabilities Net Worth

  11. Impact of Credit Card Purchase Credit Card Debt Flat Screen TV Assets Liabilities Net Worth How do you balance this?

  12. What Adds to Net Worth? Flat Screen TV Credit Card Debt Assets Liabilities Net Worth Net Worth Must Shrink!

  13. Productive debt Unproductive debt Avoid Unproductive DebtIt Makes Net Worth Shrink Suggestion 1 Consumer goods Vacations Car Most credit card debt Home Education Minimum transportation Business Be careful—any debt here can become unproductive

  14. Some Facts about Debt & Credit Cards • 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)

  15. Origin of Most Debt Problems? Spending Problems Debt Expenditures Income

  16. Control Your Spending Suggestion 2 • Step 1: Write down your cash flows • 2-3 months back • Find all expenditures—including cash purchases • Determine total assets and liabilities • Step 2: Agree on goals • What do we want to accomplish? • Agree on a budget for future cash flows • Step 3: Track cash flows--compare budget to actual • Use computer or any other method (envelopes) • Step 4: Review monthly—talk it over! • Step 5: Make adjustments

  17. B U D G E T for _____________, 2 0 0 9 INCOME PLANNED ACTUAL Wages/Salaries (after taxes) Other income Educational Loans Total income EXPENDITURES PLANNED ACTUAL Church donations Savings Food Tuition, books, etc. Mortgage or rent Utilities Transportation Debt payments Insurance Medical Clothing Other Total expenditures

  18. Why You Should Have a Spending Plan • Communicate with spouse and family • Find out what you are spending • Extract more money for saving and investing • Get out of debt • Prepare for the future • Keep money from slipping through your fingers

  19. 500+% If You Must Borrow, Be Careful Where! Suggestion 3 • Finance companies • Credit cards • Banks • Credit unions • “Pay Day Lenders” PD

  20. Reduce Unproductive Debt Suggestion 4 • Plastic surgery • Reduce spending • Use assets to pay off debt • Make a plan -- stick to it • Talk to a credit counselor if needed

  21. Protect Your Family Suggestion 5 • Insurance • Life • Health • Car • Disability • Home owners/renters • Emergency cash • Food storage

  22. Term Life -- Pure Death Benefit • No savings component • About 1/10th to 1/5th the cost of permanent • Expires at age 65 (usually) • Many employers offer term insurance as part of its benefits package • Base amount • Can purchase additional if desired • Two types • Decreasing Term (premiums stay same) • Constant Term (premiums increase over time)

  23. Permanent Life -- Death Benefit Plus Savings Component • Part of premiums go to building “cash value” • 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

  24. Insurance--Makes Up for Low Net Worth Problems • If you have low or negative net worth? • Heirs may have difficulties • Severe cash flow problems • Insurance creates an instant estate--it becomes an asset if you die Liabilities Assets Net Worth Added Net Worth Cash from Insurance

  25. What Kind and How Much? • Start with term insurance (6-10 times annual income) • Group is least costly but what if you leave? • Have some for non-employed spouse

  26. Corollary • Your net worth should build up over time • As it does, you may need less and less life insurance • 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).

  27. Prepare for RetirementYes, Even When You Are Young! Suggestion 6 Some Retirement Myths • “I’ll live on Social Security benefits” • SS will replace only 24% of your income • “Someone else will take care of me” • “Better be safe and invest conservatively” Biggest regrets for retirees • Didn’t take full advantage of tax deferred investments • Didn’t start earlier to save for retirement

  28. Why Start Saving Early? • Remember: Social Security provides only about 24% of a typical family’s pre-retirement income. • Can you live on just 24%? • You’ll need other sources of income • Retirement plan from employer • Personal retirement savings • Equity in a home

  29. ExampleBill starts saving for retirement at age 20Joe 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!

  30. How Does This Work? • Compound interest • Bill started earlier--compound interest has more time to work its miracle • If someone had put $1 in an account back in 1776 at 8% interest how much would the account have in it today? $61,339,000 !!

  31. Save Wisely Suggestion 7 • Every time you get paid: • Pay the Lord first (10%) • Then pay your future self (10%) • Live on the rest (80%)

  32. Saving Builds Net Worth Over Your Lifetime Life Cycle Savings (000’s) Retirement Suggestion 7A Save 20% Save 10% Borrowing To Heirs Age

  33. What Should I Invest In? • Principle: risk-return trade-off • High risk--high return • Low risk--low return • What? • Stocks -- ownership in a company (risky) • Bonds -- loan to a company/government (less risky) • Deposit accounts -- (insured, no risk) • How? • Mutual funds • Tax-deferred investing

  34. Best and Worst Total Returns(since 1926) 54% Stocks: S&P 500 U.S. T-bills 20% 17% 15% 9% 8% 0% 0% 0.4% 3% -1% One year holding period 10-year holding period 20-year holding period -43%

  35. Chances of Beating Inflation % HoldingPeriod

  36. Chances of Loss

  37. Invest to Match Your Time Horizon Suggestion 8 • Short period (5 years or less)—put your money in less risky investments like savings accounts and secure bonds • Longer period (10-20 or more years)—put your money in stocks

  38. Two Forms of Retirement Plans 1. DEFINED BENEFIT PLAN • Employer defines how retirement benefit is computed • Example: Years worked x 1.5% x Last 5 years ave. salary • Example: 20 yrs x .015 x $70,000 = $21,000/yr • Must qualify (minimum number of years worked) • Employer responsible for funding the plan, investing the money and making sure the funds are there for retiring employees • Many employers are dropping these plans

  39. Two Forms of Retirement Plans 2. DEFINED CONTRIBUTION PLAN (401k) • Employee puts X% of monthly salary into the plan • Employer may match some portion of the contribution (THIS IS FREE MONEY!) • Example: You put in 8%, employer adds 4% • What do you actually invest in? Examples: • Short-term government securities (MMMF) • Relatively safe bonds • Index fund • Growth fund • International fund

  40. Use Tax-Advantaged Investing Wherever Possible 401(k)--retirement plans Employer may participate Loan provisions 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.) Virtually same as 401(k) Suggestion 9

  41. Mutual Fund, or other investment Value Fund Growth Fund 10% Money Market Fund Corp. Bond Fund 10% Govt. Bond Fund 20% Internl. Equity Fund 60% Real Estate Fund S&P Index Fund May be 1000’s of possibilities How It Works Employer Match $ (if 401k) You decide this mix Tax-adv. “Vehicle” Your $ Plan Set up through 401(k) Employer SEP Broker Roth IRA Broker IRA Broker Etc.

  42. The Taxes in Tax-advantaged Investing Say your income is $50,000 one year. You put $5,000 that year into your firm’s 401(k). 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!

  43. Diversify! Suggestion 10 Never put all or even most of your eggs in one basket! Don’t Be a Bernie Madoff Investor!

  44. Diversifying • Mutual funds help you do this • Index funds do this at lowest cost • 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)

  45. Do Your Legal Planning Suggestion 11 As a start: provide for guardianship of minor children Some states (UT) allow holographic wills • All in your own handwriting • Date at top, signature at bottom • Name a guardian, alternates, disposition of assets • No notary or witnesses • Caution: Consult attorney about language • Caution: Use only if you don’t have significant assets or a complicated family situation

  46. Avoid “Get Rich Quick” Schemes Suggestion 12

  47. 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!

  48. What is the Annual Return? (1 + .44)365/12 – 1 = 6,600,000%!

  49. Ponzi Scheme—How it Works Etc., etc. KEY: Return comes from new investors and not from any real economic activity.

  50. Impact on Investors • At least 300,000 investors • At least $500M invested • Personal tragedies for many families • Mission savings • Some mortgaged homes • In a typical Ponzi scheme—80-90% of investors lose everything! • Criminal processes underway

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