Presentation Transcript

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