Debt: one piece of the financial puzzle

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Linda Robinson
5 years ago
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1 Debt: one piece of the financial puzzle

2 Financial security SAVINGS

3 Debt: The single largest expense you ll pay in life is interest. You ll spend more money on interest than food, vacations, cars, school, clothes, dinners out, and all forms of entertainment. You do this because you don t save enough and demand a lifestyle you can t actually afford. The future owns your income. Morgan Housel

4 Debt How much will your debt cost you over a lifetime? A typical person will likely pay???? in interest on credit purchases over the course of his or her life.

5 Increase in Household Debt

6 Plus student loan debt Average student loan debt for Class of 2016: Average debt for graduate students: Average monthly student loan payment (for borrowers years old): Student loan delinquency rate of

7 Increase in Student Loan Debt

8 Student Loan Hero s 2015 Student Loan Burden Report 47% have postponed purchasing a car 44% have postponed traveling the world 41% have postponed buying a house 25% have postponed moving out of their parents home 46% would go on fewer dates 33% would give up gym memberships 32% would have only 1 haircut a year 31% would eat ramen for weeks Only 5% say paying off student loan debt is their #1 financial goal Instead, 54% prioritize rent, 44% their credit card bill, 34% saving money and 29% their retirement

9 In hindsight Would research more grants/scholarships (52%) Would start saving earlier (48%) Would find more ways to save and control costs while in school (42%) Would better research and understand financial aid and the implication of taking on student debt (23%) Would open a dedicated college savings account (24%) Would compare future earnings to cost of education

10 Ways to reduce debt?

11 Pay off strategies Federal loans Standard Graduated - Income based Income Contingent Public Service Forgiveness Programs gov t, non-profit, 10 yrs Refinancing with a private lender Need 700+ credit score or prove $2k/mo in disposable income You give up advantages of Federal loans Signing bonus with employer? Inheritance? Pay extra to principle Use debt payoff snowball strategy

Repayment choices www.gradsense.org ttps://studentloans.

12 Repayment choices ttps://studentloans.gov/mydirectloan/mobile/repayment/repaymentestimator.action#view-repayment-plans

14 Exit Counseling

15 Debt to Income Ratios MORTGAGE PAYMENT RATIO <28% PITI: 1000 Gross Monthly Income: 4000 Ratio (<28%) 25% ALL DEBT RATIO <36% PITI: 1000 Car payments: 250 Minimum credit card payments: Student loan payments: 351 Child support: Other monthly debt obligations: Total monthly expenses: 1601 Gross Monthly Income: 4000 Ratio <36% 40%

Relationship between credit and debt http://www.

16 Relationship between credit and debt

18 Opportunity Cost $184/month at 8% over 30 years $25/month at 8% over 30 years

Three Major Credit Bureaus Equifax: www.equifax.

19 Three Major Credit Bureaus Equifax: Experian: TransUnion:

20 Scoring your credit 10% 15% 10% 30% 35% Payment history Utilization Length of credit history New credit Mix of credit Student loan credit is included

21 DAMAGE POINTS Super Prime Prime Maxed out card minus pts minus pts 30-day late payment minus pts minus pts Source:

22 How do you know if a credit card offer is a good idea?

23 SAVINGS BUDGET

24 The budget 50% goes to fixed costs Rent/mortgage, utilities, car payment, debt obligations, contractual obligations, groceries, gas 20% goes to financial goals Building an emergency fund, paying off debt, saving and investing 30% goes to flexible spending Eating out, cable, clothing, gifts, entertainment, pets, vacation Source:

25 How to allocate disposable income between debt, savings and investing?

26 Savings Short term money Money you ll need in the next 5-10 yrs Emergency account how much? Use a bank or credit union Ally.com = 1.0% CapitalOne360.com =.75%

27 Is it worth putting extra money into a saving account?

28 Investing Long term money Mutual funds over stocks Low cost Diversified (lower risk) Auto-pilot (target date) Roth IRA

29 Is it worth opening an IRA vs just stashing the money in a savings account?

30 Short term = high risk 1 Year Returns % 40.00% 20.00% 0.00% % % %

31 Time = reduced risk 20.00% 18.00% 16.00% 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% year returns for the S&P 500

32 Challenge of Picking Stocks OR

33 The challenge of picking stocks

In his popular personal finance book arguing that investors can t consistently beat the market (A Random Walk Down Wall Street), economist Burton Malkiel says

34 In his popular personal finance book arguing that investors can t consistently beat the market (A Random Walk Down Wall Street), economist Burton Malkiel says that a blindfolded monkey throwing darts at a newspaper s financial pages could select a portfolio that would do just as well as one carefully selected by experts.

35 What is a mutual fund?? A type of investment that allows you and me to buy a basket of stocks and/or bonds. (diversification) A mutual fund reduces the risks and costs of investing in individual stocks and bonds.

Auto pilot Vanguard Target Retirement 2055 53.90% U.S.

37 Auto pilot Vanguard Target Retirement % U.S. stocks 36.00% Non-U.S. stocks 10.10% Bonds Cost?.16% $1000 minimum

38 What s the best way to invest in the stock market?

39 Why start sooner rather than later Investor A: Early Funding Investor B: Late Funding Age Saved Balance Saved Balance 20 $2,000 $2,200 $0 $0 Save $2000 every year? 21 $2,000 $4,620 $0 $0 22 $2,000 $7,282 $0 $0 23 $2,000 $10,210 $0 $0 24 $2,000 $13,431 $0 $0 25 $2,000 $16,974 $0 $0 $2000 per year is $X per month? 26 $2,000 $20,871 $0 $0 27 $2,000 $25,158 $0 $0 28 $0 $27,674 $2,000 $2, $0 $30,441 $2,000 $4,620 Age 60 $0????? $2,000????? Total Saved $16,000 $64,000

40 Return Rule of 72 Time Until Investment Doubles 2% 36 years 3% 24 years 4% 18 years 6% 12 years 8% 9 years 9% 8 years 10% 7.2 years Compound interest is the eighth wonder of the world. He who understands it, earns it... he who doesn t pays it. Albert Einstein

41 David Swensen has made an average return of 13.9 percent a year over the last 20 years for Yale, adding $20.6 billion to the university's endowment. That gives him the best track record of any institutional investor around. Low costs and diversification serve investors well." Gretchen Tai runs Hewlett-Packard's pension and 401(k) plans. She's got a great track record, too. Be disciplined and stick to your savings plan, and keep an eye on the total fees you pay for managing your portfolio. Jack Bogle created the world's first index fund for ordinary people. He founded Vanguard Group, which now manages $3 trillion. Buy a stock index fund and add bonds as you age. Warren Buffet s will for the benefit of his wife: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. I suggest Vanguard s.

42 What s an investment strategy for $25k that balances risk and return?

43 Resources U.S. Department of Education: Student Loan Hero: Doctors without Quarters (payoff strategies) (check your credit reports) (how your credit score is calculated) Chris Arnold, NPR, Your Money and Your Life

Financial Literacy Financial Literacy Part I - Agenda

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