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Personal Money Management: Building Wealth and Managing Debt

Learn how to become debt-free, build wealth, and secure your retirement through effective personal money management strategies. Explore topics such as cutting expenses, saving for emergencies, paying off debts, and planning for retirement.

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Personal Money Management: Building Wealth and Managing Debt

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  1. Materials for Lecture 20 • Lecture 20 Annual Payment.XLS • Lecture 20 Monthly Payment.XLS • Lecture 20 Equity Growth.XLS • Lecture 20 Retirement Calculator.XLS • Dave Ramsey -- The Total Money Makeover: A Proven Plan for Financial Fitness available at most book stores and on line

  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?” • Recall I told you 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 • The 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 – If you think about it, 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 • 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 Net 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 I build a cash reserve, I am in debt • Sell something • Garage sale • Extra vehicle • 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. Need A Plan to Pay Off Debts • Sort debts from low to high: D1, D2, .., Dn • Pay as much more than the minimum as you can on the lowest debt D1 until paid off • Use the money 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 • The euphoria from paying off a debt is great so get the feeling early by attacking the lowest debt you have • Making 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: 2 interest rates

  9. Do Not Get Back Into Debt • Can I ever use a Credit Card? • Yes if your job reimburses your travel • Have 1 separate card for ONLY travel that will be reimbursed • Avoid all kinds of debt • Save money for a car or a house • Do not take vacations until you can pay cash • Save for a house

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

  11. Housing to Buy or Rent • Renting • Provides no income tax deductions • But do you have sufficient income to itemize deductions? • Do not build equity • Ownership • Builds equity (very slowly) • Often 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/Cost to Finance a Home • Notice the 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 • Critical decision if your job may get you transferred

  14. Now You are Debt Free, What’s Next? • SAVE – do not change standard of living • Save for what? • Retirement • Children’s education – Use 512 tax free accts. • 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 Family without a cost • Get a broker, but do not let them make trades for you – account churning

  15. Retirement Savings • When do I start? How much should I save? Is it to late? What about Social Security for my retirement? • Today and in the future business 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

  16. Retirement Savings • Start saving the day you graduate • Save as much as you can but at least save 15% of your gross salary annually • 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

  17. 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 $46,000 • KEOGH plan – 25% of self-employed income up to $49,000 • Not tax deferred savings • You can save as MUCH as you want

  18. Retirement Savings is an Risky Investment • Variables to consider • Current age and amount you have saved • Current salary and expected raises • Age you want to retire • Consumption pattern after you retire • What is the annual rate of inflation • Returns you expect on savings between now and retirement • Returns on savings after you retire • How long do you expect to live • Which of these variables are stochastic?

  19. Retirement Calculator • Guess What? I made a Monte Carlo simulation model to calculate retirement savings • With lots of stochastic variables

  20. S

  21. Output: Annual value of Cash Reserves

  22. Output: Probability of Positive Cash

  23. Open the Retirement Calculator • Enter your own values • Simulate using the KOV table starting in row 172 • 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 guys, divorce cuts your wealth in half so it takes longer to retire

  24. 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

  25. 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()

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