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Mastering Personal Money Management for Financial Freedom

Learn how to become debt-free, build wealth, and secure a prosperous retirement. Discover strategies to cut expenses, pay off debts, and invest wisely for a brighter financial future.

jenniferwilliams
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Mastering Personal Money Management for Financial Freedom

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  1. Materials for Lecture 21 • Lecture 21 Annual Payment.XLS • Lecture 21 Monthly Payment.XLS • Lecture 21 Equity Growth.XLS • Lecture 21 Retirement Calculator.XLS • Sources of information • Dave Ramsey -- The Total Money Makeover: A Proven Plan for Financial Fitness. It is available at most book stores and on line • Personal experience and observing successful people

  2. Do You Want to Manage Debt or Wealth? • This lecture is not about business management • It is about personal money management • I ask again: “Do you want to spend your life managing debt or wealth?” • People work for 2 reasons: • Cover costs for necessities • Increase net worth (so we can retire) • To achieve this goal we must manage wealth

  3. To Manage Wealth • First Step is to become debt free • Second step is to build wealth • Reasons to build wealth • Retirement • Security • Have Fun • Money is Not the root of all evil • Desire of money is the root of all evil

  4. Steps to Becoming Debt Free • Cut Expenses so you live within your means and SAVE • Stop using credit cards – pay cash or postpone purchases • Buy used cars 1-2 years old, keep them a few years and trade again • After you have built wealth then you can afford to buy new cars • NEVER lease a vehicle • Think about it, with a lease you are paying for the car plus interest PLUS someone else’s profits

  5. Build a Cash Reserve • Yes, before you start paying off debt build a cash reserve – your personal VAR fund • Why a cash reserve? How much? Where do I invest it? • Cash reserve pay for an emergency: as job loss Not to go on a vacation, go to a wedding, or … • Cash reserve should be equal to 3 times your after-tax Monthly salary • Invest it in a Money Market account, interest is low but MMs usually require a min check size of $250 so it discourages using it on little items

  6. How to Build a Cash Reserve • How do you build a cash reserve? • Sell something • Garage sale • Extra vehicle • Move to cheaper house, etc. • Get a part time job • Deliver papers before work • Deliver pizza after work • Start a business doing something other people do not want to do for themselves • This is not permanent just to get a reserve

  7. Develop a Plan to Pay Off Debts • Sort debts from low to high: D1, D2, .., Dn • Pay the maximum extra you can on the smallest debt (D1) until it is paid off • Use money you had been paying on D1 and add it to the payment on D2 until it is paid • Continue this until all debts are paid off • Euphoria from paying off a debt is great so get the feeling early by attacking the lowest debt (D1) first, then move to D2 ….. • Make double and triple payments

  8. Do Not Get Back Into Debt • Do Not Get into Trouble with Credit Card Debt! • Look how long it takes to pay off a credit card debt: here I tested 2 different interest rates

  9. Do Not Get Back Into Debt • Use Cash or Debit Cards • Can I ever use a Credit Card again? • Yes if your job reimburses your travel expenses • Have one separate card for ONLY travel that will be reimbursed • Avoid all kinds of debt • Save money to buy a car • Do not take vacations until can pay cash • Stay off of cruise ships • Save money for a house

  10. Years and Cost to Finance a Car • The total cost of a $40,000 car • Financed 72 months =$46,382 to $49,101 • Shorter the loan, the lower total cost

  11. Housing: Buy or Rent • Renting • Provides no income tax deductions • But do you have sufficient income to itemize deductions? Probably not when starting out • Does not build equity • Ownership • Builds equity (very slowly) • Often get over extended with large payments • Small income tax deductions on the whole • Do not acquire debt to reduce income taxes! • Save for a house; make a large down payment

  12. Years and Cost to Finance a Home • Examine total cost of a $100,000 home • Financing for 15 vs. 30 years is $77,076

  13. Stochastic Equity Growth for a Home Loan • After 5 Years, how much equity do you have? • Depends on how long you financed • Will your job let you stay in one palce for 30 years?

  14. Once You Are Debt Free, What’s Next? • Do not change standard of living -- SAVE • Save for what? • Retirement • Children’s educ – #529 College Savings Plan • Where do you invest your savings? • Low load mutual funds – lots to choose from • American Funds, ING, etc. • Make sure you can move money among the Funds in the Family without a cost • Get a broker, but do not let them make trades for you – can lead to account churning

  15. Example of Mutual Funds

  16. Retirement Savings • When do I start? How much should I save? Is it to late? What about Social Security for your retirement? • In the future, businesses will not provide retirement accounts • You will be on your own to save through an IRA • Some businesses will provide matching funds • Some will offer managed IRAs with limited options

  17. Retirement Savings • Start saving the day you graduate • Save as much as you can but at least save 15% of your gross salary annually • Save 50% of each raise • Keep working and paying into Social Security so I can collect it after I retire • Do not depend on Social Security to cover your retirement needs • Today estimate SS will pay me 19% of my current take home pay; after paying for 49 years

  18. Social Security and Medicare/Medicaid • Social Security has no store of money • Congress will be forced to act on these entitlements • Debt ceiling, sequestration, budget reductions • All these add up to changes • Probable changes • Extending retirement age • Means testing based on wealth or income • Reduced payment rates

  19. IRS and Retirement Savings • Tax DEFERRED savings • Traditional IRA - $5,000/year per person unless over 60 then save $6,000/year • If you are in a company retirement plan can still use the maximum Traditional IRA • If you are self employed you can have a • SEP IRA – 25% of business income up to $50,000 tax deferred • KEOGH plan – 25% of self-employed income up to $49,000 tax deferred • Not tax deferred savings • You can save as MUCH as you want

  20. Retirement Savings is a Risky Investment • Variables to consider • Current age and amount you have saved • Current salary and expected raises • Age you want to retire • Consumption expenditures after you retire • Annual rate of inflation pre & post retirement • Returns you expect on savings until retirement • Returns on savings after you retire • How long do you & spouse expect to live • Which of these variables are stochastic?

  21. Retirement Calculator • I made a Monte Carlo simulation model to calculate retirement savings • With lots of stochastic & input variables

  22. Output: Annual Value of Cash Reserves

  23. Output: Probability of Positive Cash

  24. Open the Retirement Calculator • Enter your own values • Simulate using the KOV table starting in row 177 • What age do you have a zero wealth? • How much do you have to save to give yourself a 95% chance of having wealth when you are 90 or 95 or even 100? • Did you marry the right person ($’s)? • Remember divorce cuts your wealth in half so it takes longer to save for retirement

  25. Summary of AGEC 622 • Linear programming – what ought to be • Probabilistic forecasting – capabilities of forecasting with multiple regression, exponential smoothing, seasonal analysis, and time series analysis • Monte Carlo simulation – what could be …. • Frame your problem in a systems framework • Model design and development • Parameter estimation for stochastic variables and deterministic component of a forecast • Validate simulated variables • Univariate and MV distributions • Apply these tools for business and personal decision making using stochastic efficiency

  26. What can you take to the job? • Improved Excel skills • Applied econometrics • Ability to organize & build a business model • Make any business model a risk analysis tool • Rank risky alternatives • Deterministic and probabilistic forecasting • Simetar • Available as long as you are a fulltime student • After you graduate, buy it at www.simetar.com • If you do not have Simetar, you can use @Risk =NORM() same as =RISKNORMAL() =UNIFORM() same as =RISKUNIFORM()

  27. What to Expect on Lab Exam • May 1 in this room • Open book, notes and computer programs • Please bring your own computers if you want • Two parts to the exam – Part A is short, do it first • Print each part as you finish it. • DO NOT wait until the end to print Part A!!!! • No talking, texting, tweeting, face booking or other social interaction during the exam • Pizza will be provided at noon. Take a short break. • The type of problem for Part B will be familiar to you • Practice advice: Redo all Labs on simulation

  28. What to Expect on Final Exam • Questions on all aspects of the material covered in class since the last exam • Short answer essay questions • You should not need more space than what is provided for a complete answer • DO NOT repeat the question as part of your answer • It wastes time for you and the grader • A few calculator questions • NO Cheat Sheet is permitted

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