Presentation Transcript

1. Personal Finance for Every Veteran

   …the “GMT” you wish you had in bootcamp While we wait for folks to log on, try looking up the “expense ratios” of the funds you are currently invested in.
2. Would you rather…. Start with a penny and have your balance double every day for one month? or Have 3.5 million dollars up front? The value of the doubling penny after 30 days is: $5,368,709!
3. Who I am Where does my approach/advice come from? Although I have a passion for these topics, the views expressed are not intended to serve as a forecast, a guarantee of future results, investment recommendations or an offer to buy or sell securities. This should not be interpreted as tax advice and please consult your personal tax advisors if you have any questions. Housekeeping Who I’m not (Disclaimer)
4. Topics Behavioral Finance Understanding your current situation Credit Scores Retirement, the time value of money, & the TSP Investing 101 Savings accounts & fees Love & Money Home ownership, mortgages, & refinancing Tax strategy Life insurance (SGLI & USAA) / Health Insurance Tactical next steps
5. Why we need an automatic plan… People are not rational with financial decisions (susceptible to framing, prospect theory, anchoring, choice architecture, & the default option) Study: the more often you check your portfolio the worse you do Google’s anchoring experiment (3% increase) “Save More Tomorrow” (12% vs 4%) Allocation decisions & the default option: Scenario 1: Fund A: Stocks Fund B: Bonds 54% allocation to stocks Scenario 2: Fund A: Stocks Fund B: ½ Bonds ½ Stocks 73% allocation to stocks Scenario 3: Fund A: ½ Bonds ½ Stocks Fund B: Bonds 35% allocation to stocks
6. Prior to the talk 20 mins - capture your “Net Worth” (all assets & debts) Use Mint.com; connect banking & investment accounts, student/car loans Include property (homes & cars) Homes: zillow.com Cars: edmunds.com 10 mins - understand your credit score Signup for CreditKarma Pull a free credit report from annualcreditreport.com; Experian in Jan, TransUnion in Apr, Equifax in Aug 15 mins – analyze your current investments and get free advice: www.FutureAdvisor.com (optional) 30 mins - create a spending plan (aka budget) Can be in Mintor even Excel Savings must be a part of your plan
7. Understanding your current situation Check Mint often Spend < make Save xx% of your income “Pay yourself first” – schedule savings Debts Credit Cards & SSCRA BT offers By 22, have a ROTH IRA & contribute annually
8. Credit Scores Credit Scores have 5 components: (300 850 scale, >720 is good) On Time Payments: 35%(Use Auto-Pay) Credit Utilization: 30%(use < 10%) Length of history: 15% (keep old cards!) Types of credit used: 10% Recent inquiries: 10%(hard vs soft pulls) Credit Scores affect mortgage rates, auto insurance, credit card rates, student loans, apartment rentals
9. “I’ll worry about retirement later…” Time Value of Money is HUGE! Frick & Frack brothers The “Rule of 72” $$ saved from 25-35 > $$ saved 35 on Everyone should have a (ROTH) IRA & TSP! Are you on-track? ~75% of ending salary per year See handout 
10. Retirement Accounts IRA 2014 Limit: $5,500 No matching Hold at any institution Thousands of investment options Only contribute cash Income limits Different for Roth vsTrad Jan 1 – Apr 15 (of following year) open period TSP 2014 Limit: $17,500 No matching Limited choices (5+1 funds) Only contribute from payroll No income limits We have a Roth option Jan 1 – Dec 31 open period
11. Uncle Sam will always* get paid Roth After-tax contributions (pay tax now) Earnings grow tax-free Roth IRA’s have no RMD’s Roth IRA income limit: < $114k “Backdoor Roth” option Traditional Pre-tax contributions (get a tax break now) $120k salary, contribute max amount of $17,500 Taxable income now $102,500 28% x $17,500 = $4,900 Taxed on the way out Traditional IRA’s have RMD’s Really depends on tax bracket now vs. retirement Beliefs on long-term tax brackets / code / law Solution: have some in each *combat-zone special circumstances
12. Investing 101 & active vs. passive Stocks, Mutual Funds, ETF’s, Bonds Write down your financial principles / guidelines 20-25% for “fun” if you must Active vs. Passive Investing: research shows ~80-90% of active funds underperform their benchmark 8,000  2,000  500  125 20% most actively traded accounts performed much worse -men worse than women Past fund performance has very little predictive power to future performance! In fact, expense ratios are the best predictor
13. Expense Ratios (the enemy) Industry average (0.80%  2.50%) Low cost options (0.06%  0.50%) Get angry…it’s your money! Use the calculator TSP – 0.027%! “It is difficult to get a man to understand something, when his salary depends on his not understanding it.” – Upton Sinclair
14. Asset allocation & rebalancing With proper allocation, you should reduce risk (volatility) and outperform the S&P 500 Rebalancing: meeting long-term policy target weights Use it as a disciplined way of buying low and selling high “..shunning the loved & embracing the unloved. Most people do the opposite.” (Swensen) Example: 1990-2012 portfolio: +0.5% difference in return, -2% difference in volatility My target allocation:
15. Precedence of Saving Matching 401(k) or TSP – Max it! Emergency fund (~6-9 months) Pay down debt(s) Roth IRA / Roth 401(k) or TSP Taxable account Invest in yourself too!
16. Savings accounts & fees USAA: reimbursement of ATM fees Never pay monthly service fees for savings/checking CapitalOne 360: doubled-ended bonus emergency fund “Direct deposit” & USAA ACH push Wells Fargo, Chase, & BofA offer military accounts
17. Home ownership & mortgages Up to a $300/month because of credit score Real estate is a key component Consider NOT holding your mortgage with the same bank as your investments Typically 20% down, qualify for a home 3x your annual gross income Closing costs, points Refinancing Being a landlord can be tough!
18. Rent Rent : Income < 30% (rule of 36) Impact in high-rent markets (SF / NYC) Have rental package ready Credit pull Ask for a copy of credit report Security deposit & interest Zillow’s “zestimate” Remember SSCRA forbreaking a lease
19. Tax strategy Look for ways to reduce your taxes Traditional TSP/ 401k / IRA Mortgage interest (& property management fees) Education expenses Consider capital gains (realize gains if you ever find yourself in the 10 or 15% tax bracket. 0% long term gains) Donate to charity with appreciated stock Hire a professional – taxes are “grey” (VITA tax help) Active Duty are tax-lucky!
20. Life insurance Active Duty get SGLI by default ($400k for $27/month. Includes 4 months insurance after separation.) Typically don’t need it until you have a family, but some people “lock” it in while they are healthy Term vs. Whole Nice way to leave a gift $500k for $42/month
21. Other random advice… Never go without health insurance! Careful with your contracts Always look for military discounts Cell phone bills (15%-20%) Movies, restaurants, museums, parks Natl Parks Pass Clubs Space A travel Remember: smart investingis not very exciting, but it isvery rewarding!
22. Tactical next steps Automate your savings (pay yourself first) Enroll in the TSP via HR / YN Open a ROTH IRA Stick to low-cost index funds
23. My favorite personal finance resources Fatwallet Finance Forums Bogleheads Blogs: Mr. Money Mustache, Oblivious Investor Networth IQ | Investopedia The Military Wallet *Bonus Material* Tax Loss Harvesting the Credit Card game Combat zone perks
24. Questions?