Savings Fitness

1. Savings Fitness A Guide to Your Money and Your Financial Future PPT Developed by Karissa Berndt USU Family Finance Student Financial Planning for Women March 2007

2. Today’s Program • Provides a general overview of saving & investing • Focus on retirement but principles apply to all goals • Details are in the Savings Fitness booklet • PPT & links available at www.usu.edu/fpw

3. Program Objectives • Identify your goals • Distinguish between savings and investing • Develop net worth statement & savings plan • Learn to manage debt • Understand risk-return relationship • Begin or increase saving/investing

4. How to manage financial challenges and afford a secure retirement? • Write your goals on a 3”x5” card • Sort the cards into two stacks: • Goals in the next 5 years or less • Goals in 5 years or more • Sort the cards in order of priority • Make retirement a priority! • Write on each card what you need to do to accomplish that goal

5. Beginning Your Savings Fitness Plan • Current financial resources: • Net worth: the total value of what you own (assets) minus what you owe (liabilities) • Assets • Possessions, vehicles, home, bank accounts, investments, etc. • Liabilities • Remaining mortgage on your home, any loans/debts, etc. • Subtract your liabilities from your assets. • Goal: a positive net worth, which grows each year • Review your net worth annually (at tax time)

6. Short term goals < 5 years No risk of loss of principal No or low real return after taxes & inflation Steady but slow growth Long term goals 5 years or more Trade potential short term loss for long term gains Positive real return after subtracting taxes & inflation Volatility Saving vs. Investing

7. Estimate How Much You Need to Invest for Retirement • Worksheets & software programs can help you estimate how much you need to invest. • kiplinger.com (click on “Retirement”) • moneymag.com (click on “Retirement”) • usnews.com (click on “Retirement Calculator”) • asec.org (click on “Ballpark Estimate Worksheet”) • See FPW website for PPT on Ballpark Estimate • nasd.com (click on “Investor Services,” then “Financial Calculators”) • Planning for a Secure Retirement • http://www.ces.purdue.edu/retirement/

8. How Much Retirement Income Will I Need? • Need to replace 70 to 90 percent of pre-retirement income • Lower the income, the higher the % that needs to be replaced • It depends on the kind of retirement you want to enjoy

9. How Long Will I Live In Retirement? • Average male life expectancy: age 78 • Average female life expectancy: age 82 • Consider your health and family history • Expect to live longer than previous generations! • Planning for a Secure Retirement • http://www.ces.purdue.edu/retirement/ • Module 1b Life Expectancy Calculators

10. What Savings Do I Already Have? • Social Security retirement benefits • A pension that provides a fixed amount of retirement income each month • Nest egg  the desired total income/year  (Social Security  any pension income) • Nest egg examples- Retirement plan accounts at work, IRAs, annuities, and personal savings

11. What Adjustments Must Be Made For Inflation? • The cost of retirement will go up every year due to inflation • The average annual inflation rate is 3.1% • In 1980 the inflation rate was 13.5% • In 1998 it reached a low of 1.6% • Assume a higher, rather than a lower, rate of inflation • It’s safer to plan on 4% than 3.1%

12. One Simple Trick…Spend Less Money Than You Earn! • Start with a “spending plan” or budget • Income • Add up monthly income: wages, average tips or bonuses, alimony payments, etc. • Expenses • Add up monthly expenses: mortgage or rent, car payments, food bills, entertainment, etc. • Include savings as an expense! • Subtract income from expenses • Consult USU Family Life Center, 797-7224

13. Spending Plans Cont. • What if expenses exceed income? • Cut Expenses (nickel & dime vs. BIG expenses) • clipping grocery coupons • bargain hunting (thrift stores, etc.) • changing phone or cable to a cheaper plan • Real savings: housing & transportation! • Increase Income • work a part-time second job • turn a hobby into income • jointly decide that another family member will work

14. Adopt Savings “Rules” • Americans who follow “rules” save more* • Pay yourself first • Put savings/investing on auto pilot • Save your tax refund • Save unexpected money (i.e., windfall, gifts) • Save all change • Save $ you ‘saved’ on grocery & gas (receipts) • Other ideas? *Rha, Montalto,& Hanna (2007). The Effect of Self-Control Mechanisms on Household Saving Behavior. Financial Counseling and Planning, 17(2), 3-16.

15. Avoid Debt & Credit Problems • How much debt is too much debt? • [monthly debts (credit card payments, car loan payments, student loan payments, etc.) mortgage]  by the money you bring home each month. • The result is your “debt ratio.” • Keep this ratio at 10% or less • Total mortgage and non-mortgage debt should be no more than 36% of your take-home pay.

16. What’s the Difference Between “Good Debt” and “Bad Debt”? • Good debt - provides a financial pay off • buying or remodeling a home (within reason!) • investing in education • advancing your own career skills • Bad debt - borrowing for things that do not provide financial benefits, or that don’t last as long as the loan • Depreciating assets: vehicles • vacations, clothing, furniture, dining out

17. Handle Credit Cards Wisely • Use only 1 or 2 cards, not the usual eight or nine • Don’t charge big-ticket items. • Save or find less expensive loan alternatives • Shop for the best interest rates, annual fees, service fees, and grace periods • Pay off the card each month, • If you cannot pay in full, pay more than minimum • Still have problems? Leave the cards at home • USU FLC 797-7224

18. How to Climb Out of Debt • Work with your creditors directly to try and work out payment arrangements • Request lower APR on credit card • USU Family Life Center Housing & Financial Counseling • can help you set up a plan to work with your creditors and reduce your debts • PowerPay Debt Analysis: https://powerpay.org/

19. Investing for Retirement • Once you’ve reduced unnecessary debt and created a spending plan, you’re ready to begin investing for retirement. • Participate in your employer’s retirement plan • Invest in an Individual Retirement Account

20. Where to Save/Invest? • Cash Equivalents - very little risk; very low return • Savings accounts • Money market mutual funds • Certificates of deposit • U.S. Treasury bills • Suitable for short term goals only • Your money won’t grow • Taxes & inflation negate any growth!

21. Bonds • Corporate or Government Bonds • You loan money to a U.S. company or a government body in return for its promise to pay back what you loaned with interest • Small % of your long term investments • Conservative • Low growth potential

22. Stocks • You own a part of a U.S. or international company • High potential for growth in the long run • Short term volatility • Must be willing to accept the ups & downs along the road to inflation-beating growth

23. Mutual Funds • Pools your money with money of other investors and invests it. • A stock mutual fund, for example, invests in stocks on behalf of fund’s shareholders. • Easier to invest and to diversify. • Ideal for your Individual Retirement Account (IRA) • See FPW PowerPoints on website

24. Where to Put Your Money • For goals that are at least 5 years in the future: • stocks • bonds • real estate • foreign investments • mutual funds • Not insured by the federal government - there is the risk that you could lose some of your money • The longer you have until retirement, the more risk you can afford.

25. Why Take Risk At All? • The greater the risk, the greater the potential return • a diversified portfolio of stocks & bonds will earn significantly more than a savings account. • No/low risk = no growth • Historic Average Annual Returns • U.S. Treasury Bills: 3.8% • Government Bonds: 5.3% • Large-Company Stocks: 11.2% • Inflation averages 3.1% • Taxes reduce investment returns

26. Reducing Investment Risk • Diversification • Distributing your money among several investments, rather than investing in individual companies. • You can do this by investing in: • mutual funds • index mutual funds • Diversification will greatly decrease your risk of losing money.

27. Why Diversify? • At any given time one investment might do better than another. • The factors that can cause one investment to do poorly may actually cause another to do well. • By diversifying into different types of assets, you are more likely to reduce risk, and actually improve return, than by putting all of your money into one investment. • “Don’t put all your eggs in one basket!”

28. Reducing Investment Risk Cont. • Asset Allocation - investing among different categories of investments (FPW PPT) • Put some money in cash, some in bonds, some in stocks, and some in other investments • The choices you make about what % to have in these major categories defines your investment strategy.

29. Employer-Based Retirement Plans • Does your employer provide a retirement plan? • If so…grab it! Employer-based plans are the most effective way to invest for your future. • You’ll enjoy tax benefits. • Two types of employer-based plans : • defined benefit • defined contribution

30. Defined Benefit Plans • Pay a lump sum upon retirement or a guaranteed monthly benefit. • The payout is typically based on a set formula • such as: (# of years you have worked for the employer)  (a percentage of your highest earnings) • Usually the employer funds the plan--commonly called a pension plan. • Most are insured by the federal government.

31. Defined Contribution Plans • 401(k) plans are the most common type • Does not guarantee a specified amount for retirement • The money you have available to help fund your retirement depends on: • how long you participate in the plan • how much you invest • how well the investments perform • More common than traditional pension plans.

32. Vesting Rules • Money that you put in a retirement plan and earnings on those contributions, always belongs to you. • Employees don’t always have immediate access to the money their employer invests in their fund. • Once you are “vested” you own all of your employer’s contribution. • Some plans vest in stages, others after fixed period of employment. • Know your employer’s vesting rules. • Don’t leave before you are vested!

33. What If You Can’t Join An Employer-Based Plan? • If possible, take a job with a plan • Encourage your employer to offer a plan • Invest in an IRA (see FPW PPTs) • Build your personal savings • Consider an annuity (April 11 FPW)

34. What If You Are Self-Employed? • SEP (Simplified employee pension plan) • SIMPLE IRA • IRA • Annuities

35. Coping With Financial Crisis • Establish an Emergency Fund • This can lessen the need to dip into retirement savings for a financial emergency • Insure Yourself • Having adequate insurance will protect your financial assets • Insurance coverage: • Health • Disability • Homeowners or Renters (PPT on FPW website) • Automobile • Umbrella liability • Life (if someone else depends on your income)

36. Monitor Your Progress • Financial planning is not a one-time process, so make sure to do the following: • Periodically review your spending plan • Monitor the performance of your investments • make adjustments as necessary • Contribute more toward retirement as you earn more • Update your insurance to reflect changes in income or personal circumstances • Keep your finances in order

37. April 11 FPW • Making Your Money Last for a Lifetime: Why You Need to Know About Annuities • Check FPW web http://www.usu.edu/fpw/ for related PowerPoint presentations • Asset allocation • IRA picks 2005; Mutual Funds 2006 • What is an IRA? • Ballpark E$timate • Taking the mystery out of retirement planning

38. Questions?