April 21, 2017 Presented by Dr. Rebecca Neumann for Academic Staff University of Wisconsin Milwaukee
Mind your Money, Mind your Future Goals for today: Basic money management skills Tracking expenses Budgeting Saving Credit Credit report and credit scores Establishing good credit Protecting your wealth (insurance) How do you make your money grow? Retirement Investing for growth 2
Mind your Money, Mind your Future What is financial freedom? Being rich? Not worrying about money? Being able to buy anything you want? 3
Mind your Money, Mind your Future Financial freedom Ensuring that your net inflows are greater than your net outflows This allows you to save and buy what you want. Requires making choices! 4
The Role of Budgeting in Your Financial Plan What is a budget? Plan for income and expenditures! The key budgeting decisions for building your financial plan are related to cash flow planning. How can I improve my net cash flows in the near future? How can I improve my net cash flows in the distant future?
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Creating a Budget Cash Inflows Earned income Savings Gifts or other Cash Outflows Rent/Mortgage Debt (school, car) Fixed Expenses Variable Expenses Note: Gross versus Net income Note: fixed versus variable expenses 7
Creating a Budget Forecast net cash flows over several months Start with a typical month Adjust it for unusual expenses seasonal shopping, holidays Allow for unexpected expenses medical care, car repairs, home maintenance Create an annual budget by extending your budget out for longer periods Revise and update as needed! Include saving as part of your budget Pay yourself first!
Budget worksheet Cash Inflows Income 1 wages Income 2 wages/tips Gifts Interest, dividends Alimony, child support Government payments Financial Aid Other May planned May actual June planned June actual July planned July actual Total Inflows 0 0 0 0 0 0 Cash Outflows SAVINGS pay yourself first! Emergency funds Retirement Mutual funds College savings Stocks and bonds Fixed Debt payments Flexible rent or mortgage electricity cell phone internet cable water/sewer other utilities insurance premiums tuition, child care, etc credit card 1 credit card 2 Auto loan installment loan Groceries, food food away from home entertainment travel gifts books clothes medical/dental Total Outflows 0 0 0 0 0 0 Net Cash Flows 0 0 0 0 0 0 9
Saving Tips for saving Set up a budget Pay yourself first Direct deposit Avoid check cashing stores and payday loans Save early power of compounding 10
The Benefits of Saving Early Kelly Starts at age 22 Saves $100 per month for10 years ($12,000) John Starts at age 35 Saves $100 per month for30 years ($36,000) The interest rate is 8% compounded annually. Who will have more money at age 65? 11
The Benefits of Saving Early 300000 250000 $253,199 200000 150000 100000 50000 $148,015 Money Saved Total Savings at age 65 0 John Kelly 12
The Benefits of Saving Early What if Kelly had continued to save $100 per month until retirement? 450,000.00 400,000.00 350,000.00 300,000.00 250,000.00 200,000.00 150,000.00 100,000.00 50,000.00 0.00 $148,015 John (started at age 35) $427,140 Kelly (started at age 22) Money Saved Total Savings at age 65 13
How much do you need to save? 50 20-30 budget 50% of income for essentials (needs) Living expenses housing, food, utilities, transportation 20% of income for financial goals Savings, investment, debt reduction 30% of income for personal spending Flexible spending Lifestyle choices Vacations, eating out, cell phone, cable, charitable giving Wants versus needs 14
Credit What is it? Credit is money that is lent to you. You pay it back over time, with interest. Credit allows you to buy now and pay later. Your ability to get credit is based on your borrowing history. 15
Credit Cards How they work When you use a credit card it is like taking out a LOAN from the issuer of the card.
Credit Cards What they cost If only the minimum payment is made: This is how some people end up Item Price APR Min. Monthly Payment (3% of Balance) Interest Paid How Much You End Up Paying Total Years to Pay Off TV $500 18% Start at $15 $198 $698? Computer $1,000 18% Start at $30 $698 $1,698? Furniture $2,500 18% Start at $75 $2,198 $4,698 13? 4 8 17
Credit Cards What they cost The benefit to paying more than the minimum: Original Balance APR Monthly Payment Total Years to Pay Off Total of Payments $2,500 18% 3% of bal. (start at $75) 13 $4,698 $2,500 18% $100 2.5 $3,098 $2,500 18% $2,500 0 $2,500 18
Credit Card Tips Avoid carrying a balance. Don t use your card for cash advances. Think before you buy.
Debt Analysis Not all debt is viewed the same Student loans Credit card debt Mortgages Car loans Ratios can help you calculate positions for different types of debt and/or different types of cash flow.
How much can I borrow? Debt payments to income ratio = monthly debt payments / take-home pay Divide monthly debt payments (not including a house payment) by net (after-tax) monthly income Debt payments to income ratio <20% Financial advisors typically suggest a debt payment to income ratio below 20%. Some say 15% is a better guide May be called Debt payments ratio Indicates how much of a person s earnings go toward debt payments (excluding a home mortgage).
How much can I borrow? Debt to equity ratio = liabilities / net worth Divide total liabilities by your net worth Net worth = total value of assets minus liabilities leave out home value and mortgage Lower is more desirable and above 0.5 is less desirable. May look more reasonable at about 0.33. May also be called Debt ratio Can be calculated as Total Debt/Net Worth or Long-term debt/net Worth
How much home can I afford? Front End Ratio = 28% (Principle + Interest + Taxes+ Insurance) Gross Monthly Income PITI to income or housing expenses to income or annual income percentage or front end ratio Basically the total monthly cost of the house (PITI = principal, interest, taxes, and insurance) relative to gross monthly income (before deductions), Back End Ratio = 36% (Principle + Interest+ Taxes+ Insurance + Other Debt Payments) Gross Monthly Income debt to income or debt ratio or total annual income debt percentage or back end ratio Basically all monthly debt payments relative to gross monthly income.
Credit Report and Credit Score A credit report is a record of how you have paid your debt. Your credit score is a number based on the information in your credit file that shows how likely you are to pay a loan back on time.
Free Credit Report www.annualcreditreport.com You will need some sort of history to verify. Credit card or banking info. Previous addresses. 3 Credit Agencies Experian, Transunion, Equifax Credit report is free! (Credit score may not be).
What s In Your Credit Report? Payment History 35% 15% 10% Length of Credit History New Credit Amounts Owed 30% 10% Types of Credit Used 26
Credit score: FICO Score Payment History 35% MOST IMPORTANT!!!!!! On time payments, Late payments, bankruptcy Amounts Owed 30% Proportion of credit line used (suggestions to use <30% of available) Number of accounts with balances, total amount owing on accounts Length of Credit History 15% How long you have been established with credit New Credit 10% How many applications/requests for credit have you submitted? Okay to shop around, but if you seem desperate,that is bad Types of Credit Used 10% It s good to have more than one type of credit successfullyused
What s not in your credit score? Your race, color, religion, national origin, sex and marital status Your age Your salary, occupation, title, employer, date employed or employment history Where you live Any interest rate being charged on a particular credit card or other account Any items reported as child/family support obligations or rental agreements 28
Does Good Credit Matter? Actual rates on 7/13/15 for a 60 month new auto loan for $20,000 FICO score APR Monthly payment Total Interest 720-850 3.19% $361 $1,662 690-719 4.61% $374 $2,433 660-689 6.57% $392 $3,516 620-659 9.69% $422 $5,311 590-619 14.61% $472 $8,300 500-589 14.77% $473 $8,404 400-499 DENIED 29
Does Good Credit Matter? Actual rates on 7/13/15 for a 30-year fixed rate mortgage for $150,000 FICO score APR Monthly payment Total Interest 760-850 3.77% $697 $100,757 700-759 3.99% $716 $107,618 680-699 4.17% $713 $113,125 660-679 4.38% $750 $119,901 640-659 4.81% $788 $133,744 620-639 5.35% $838 $151,779 600-620 Denied 30
What will Improve your Credit Report or Score? No quick fixes Most measures are longitudinal Consider components of the credit score for possible actions Consider their weightings Consider how these are actually measured
What will Improve your Credit Report or Score? Payment History Tips Pay your bills on time every month! Get help with a debt repayment plan if you need it. Amounts Owed Keep balances low on credit cards and other revolving credit. Pay off debt; do not move it around. Moving it around will not help your score, and if you are taking out new cards, it may actually hurt. Length of Credit History Opening new accounts will hurt your length of credit history. Closing unused accounts may impact your credit history if you ve had an account open for a while, then that establishes a longer credit history. New Credit Shop around Types of Credit Apply for and open new credit accounts only as needed. Having credit cards and installment loans (and making timely payments) will raise your score. Someone with no credit cards tends to be higher risk than someone who has managed credit cards responsibly.
How do you Build Credit? Pay your bills on time. Apply for a small loan at the bank or credit union where you have checking and savings accounts. Apply for credit with a local store. Make a large down payment on a purchase and negotiate credit payments for the balance. Get a co-signer?!?! Worried about temptation? Request a low limit Get a card with usage restrictions, such as a gas card Consider sticking with a secured card Do not apply for many cards at once!!!
Important Things to Remember No quick fixes People who promise a quick fix Usually some form of debt consolidation Does this help? Consider the FICO score It is important to request and check your own credit report at least once per year. If you are denied credit, you may request a free report within 60 days.
Protecting your wealth Insurance Health Life Disability Renters or homeowners Automobile insurance Check university benefits website. Remember to enroll spouse/domestic partner and/or kids if there is a life change. Check options when this first occurs! 35
How do you make your money grow? Savings Emergency funds For specific uses travel, home loan deposit, car Savings, checking, money market, CDs Saving for the future (investing) Retirement funds Education Edvest Investment vehicles Stocks, bonds, mutual funds 36
What about retirement? WRS (Wisconsin Retirement System) Supplemental 403b or TSA (Tax-sheltered annuity) Wisconsin deferred compensation plan IRA, Roth IRA
What about retirement? Wisconsin Retirement System (WRS): Automatically enrolled once eligible Work at least 2/3 of full time for one year. Employee contribution is 6.8% Employer contribution is 6.8% Vested after 5 years. Also provides disability, separation, and survivor benefits. Payout options formula benefit or money purchase. https://www.wisconsin.edu/ohrwd/benefits/ret/
What about retirement? 403(b) or TSA tax sheltered annuity University s version of a 401(k) The funds can be invested in a variety of stocks, bonds, mutual funds. You then get the earnings in retirement. If there is a match, contribute at least up to the maximum amount that your employer will match! No match at the university. https://www.wisconsin.edu/ohrwd/benefits/ret/tsa/ Wisconsin deferred compensation plan (WDC) IRA (pre-tax $) Roth IRA (taxed now but not at withdrawal) https://www.wisconsin.edu/ohrwd/benefits/ret/wdc/
Investment Vehicles Once you ve got emergency funds set up. And you ve started contributing to retirement funds. What else do you use? Money Market CDs Stocks Bonds Mutual Funds Consider risk, return, duration, tax implications
Types of Saving/Investment Products What is it? Savings Bank Account Certificate of Deposit Bank Account Stocks Shares in a company Interest Variable and Low Fixed, a bit higher Pays dividends Term No term Fixed Term No term Conditions + Can open with small amount Low monthly fee, no risk Need larger amount to open Higher interest, Compounds daily Can be bought and sold in the market at any time Produces highest return on average _ Low interest Penalty if withdrawn early Risk (short-term market fluctuation) 41
Types of Saving/Investment Products Savings accounts Allow you to withdraw as needed; also called share accounts at a credit union. CDs certificate of deposit pays you interest over a specified period of time; penalties for early withdrawal; usually pays higher interest than a savings account since you lock your funds away for a specific time period. Money market funds a savings account with a minimum balance; usually tied to changing market interest rates. The fund itself buys shortterm money-market assets and then pays out interest on the shares you hold.
Types of Saving/Investment Products Stocks You buy a share of a company; you gain ownership in that company; you then share in the profit of that company via dividends; and you can also gain based on a capital gain (i.e., you can sell your share for a higher price than you paid). Corporations issue stock in order to raise funds to invest in physical capital (e.g., new machinery, production processes, new technology, etc ) Corporate Bonds You lend to a company by buying a bond; you earn interest on that bond as a payment for loaning the funds to the company. Corporations issue bonds in order to raise funds to invest in physical capital (as above with stocks). The bond is the corporation s written pledge to repay a specified amount of money with interest. Government Bonds You lend to the government by buying a government bond. The bond is the written pledge of a government or municipality to repay a specified sum of money along with interest. These are often very liquid (trade a lot) and usually have low risk of default.
Financial Assets: Types of Saving/Investment Products Mutual Funds A mutual fund pools money together from a bunch of small investors to buy stocks, bonds, other financial securities. You can buy small shares of lots of different stocks and bonds by purchasing a share in a mutual fund. Funds can be weighted toward particular types of assets: Bonds, Municipal bonds, Balanced funds, Stocks, and Growth funds. Funds may focus on a specific investment strategy Income, growth, income and growth. Or have a specific investment objective Green funds - made up of shares of companies that are green or environmentally friendly. Social justice funds - made up of shares of companies that someone has deemed as socially beneficial.
Financial Assets: Types of Saving/Investment Products Diversification Spread the risk of loss in a variety of savings and investment options. don t put all your eggs in one basket. Mutual funds offer automatic diversification Buying one share of the mutual fund gets you a percentage of all the various companies in which that fund invests. Compare this to buying one share of one company, which doesn t offer you any diversification (if that stock falls, you lose money). You can buy shares in a mutual fund via a bank or other financial institution or directly online. Look for no-load funds or check to see that you re getting something in return for any fees charged.
Setting financial goals SMART goals Specific, significant, stretching Measurable, meaningful, motivational Attainable, agreed-upon, action-oriented Realistic, rewarding Time-based, timely Talking about finances Emotions matter 46
Setting financial goals Setting financial goals for multiple timeframes (and following through on them) is an important step on your path to financial freedom. Timeframe Short-Term (0-2 years) Time Horizon Dollar Amount Description Action to be taken Intermediate Term (2-5 years) Longer Term (5+ years) Example 4 months $200 Save for an upcoming vacation Put away $50 from the next 4 paychecks
Go do it now! Start tracking expenses. Set up a budget. Check your credit report. Set a financial goal and take a specific step toward that goal. Start saving!
Some Online Resources Financial planning https://www.ubs.com/microsites/ubs-financial-wellnesscenter/en/home.html https://www.mint.com/ https://www.wisconsin.edu/ohrwd/americasaves/ https://www.wisconsin.edu/ohrwd/benefits/download/ret/financialwellness-plan.pdf Life insurance calculator: https://web1.lifebenefits.com/sites/lbwem/home/insurancebasics/insurance-needs-calculator# UW System benefits https://www.wisconsin.edu/ohrwd/benefits/ https://www.wisconsin.edu/ohrwd/benefits/download/summaries/fasl.pdf UWM benefits links: http://uwm.edu/hr/home/benefits/current-employee-benefits/ https://uwservice.wisconsin.edu/help/wrs-benefits-statement.php
Some Online Resources My page Excel versions of the expense tracking worksheet, budget worksheet, balance sheet worksheet. Word version of the financial goals worksheet. http://people.uwm.edu/rneumann/
Passing on financial skills to the next generation Talk about finances! Make a Difference Wisconsin http://makeadifferencewisconsin.org/ Empowersteenagers with financial literacy educational resources and real-world lessons. Engaging volunteers, dynamic schools, and generous supportersshare a visionof stronger communities built by an investment in money smart teens.