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Personal Finance

Personal Finance. Major Justin Knutzen. Personal History. 2007: I was leading a “Successful” life…. Personal History. 2008: I started thinking about getting married We openly discussed our finances and found Student Loans still unpaid 8 years after college Three vehicle payments

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Personal Finance

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  1. Personal Finance Major Justin Knutzen

  2. Personal History • 2007: I was leading a “Successful” life…

  3. Personal History • 2008: I started thinking about getting married • We openly discussed our finances and found • Student Loans still unpaid 8 years after college • Three vehicle payments • Line of Credit on the house • Major credit card debt • A Signature loan with a high interest rate Over $100,000 in Non-Mortgage Debt!

  4. Personal History • We had no liquid savings • We had very little retirement savings • Our debt would not permit us to have the wedding that we wanted

  5. Time for a Change • I started to research personal finance • I read books by the following authors: • Dave Ramsey • Suze Orman • Robert Kiyosaki • James Cramer • Thomas Stanley • We started a budget with a plan to pay off our debts • Changed our lifestyle

  6. Key Lessons Learned • Learned difference between “Need” and “Want” • Learned an important word… NO! • A Budget is critical • Plan for where your money will go Before you get paid • A debt reduction plan is important • “Emergencies” happen, a credit card is not a plan • Open communication about our finances is critical

  7. Developing a Budget

  8. Budget • Income Total Pay (Gross Income) Minus Gov’t Deductions (Taxes, Soc Sec, Medicare) Minus Other Deductions (uncontrolled, ex: Alimony) Equals your Personal Disposable Income Added to spouses income = Total Disposable Income (TDI) • Charity (10% of TDI) Place of Worship AFAF Combined Federal Campaign Other

  9. Budget • Housing (30% of TDI) Rent/Mortgage Utilities (gas, electric, water, trash, phone, cable, internet) Insurance (homeowner/renter) Maintenance (for homeowners) • Transportation (17.5% of TDI) Car Payment / Replacement savings Gas Maintenance (oil, tires, repairs, etc) Taxes and Licensing Insurance

  10. Budget • Food (10% of TDI) Groceries Dining Out • Savings (10% of TDI) Emergency Fund Retirement College Fund

  11. Budget • Personal (10% of TDI) Clothing Personal Care Entertainment Vacation Pocket Money • Debt (7.5% of TDI) Credit Cards Student Loans Line of Credit

  12. Budget • Insurance (5% of TDI) Medical Dental Disability ID Theft Term Life Insurance Long-Term Care (Over the age of 60)

  13. Debt Elimination Methods • High Interest • Organize debts by interest rate • Pay off highest interest first • Roll payments into next highest, etc, until debt free • Debt Snowball • Organize debts by amount owed • Pay off smallest debt first • Roll payments into next largest debt, etc, until debt free Northwestern University, Kellogg School of Management Study: Closing debt accounts led to higher success rate of paying off debt than paying high interest first

  14. Retirement Savings • Traditional Thrift Savings Plan (TSP) • Every $100 contributed reduces take home pay by $75 • Money withdrawn in retirement is taxable • Better option for those planning to be in a lower income tax bracket in retirement • Roth TSP • Every $100 contributed reduces take home pay by $100 • Money withdrawn in retirement is tax free • Better option for those expecting to be in a higher tax bracket in retirement Calculations assume 25% tax bracket

  15. TSP Funds • Varying range of risks • Follow measureable index (Except G and L funds) • Low administrative expenses (0.027% in 2012)

  16. TSP Funds • Common Stock Index Fund “C Fund” • Follows Standard and Poor’s 500 Index (S&P 500) • 500 large to medium-sized companies • Price affected by gains/losses in the prices of the stocks and dividend income • Fixed Income Index Fund “F Fund” • Follows Barclays Capital U.S. Aggregate Bond Index • Broad index representing the U.S. bond market • Price affected by interest income on securities and gains/losses in the value of securities

  17. TSP Funds • Government Securities Fund “G Fund” • Special U.S. Treasury securities specifically issued to TSP • Interest rate based on weighted average yield of all outstanding Treasury notes and bonds with 4 or more years to maturity • Earnings are based entirely on interest from the securities and affected by increases/decreases in U.S. Treasury security rates • International Stock Index Fund “I Fund” • Follows Morgan Stanley Capital International EAFE (Europe, Australia, Far East) Index • Stocks of companies in developing countries • Price affected by stock gains/losses, dividend income, and foreign currency changes in relation to the U.S. dollar

  18. TSP Funds • Small Capitalization Stock Index Fund “S Fund” • Follows Dow Jones U.S. Completion Total Stock Market Index • Small and medium size companies not in the S&P 500 • Price affected by gains/losses in the prices of the stocks and dividend income • Lifecycle Funds “L Funds” • Diversify investments into G, F, C, S, and I Funds • Automatically modify investment mixes according to targeted retirement dates

  19. Conclusion • Today, my wife and I are debt free • We will have a full six month emergency fund when we PCS in July • My wife has asked to stay home with our children after we PCS… • With no debt and a full emergency fund, she can

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