Money Talks. Life After College. Personal Finance for Life in the Real World January 30, The 3 Rules of Business

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1 Money Talks Personal Finance for Life in the Real World January 30, 2009 Life After College NOW LATER The 3 Rules of Business 1. As long as people remain evil and uneducated, you will always be in demand in the workforce. 2. Once you put initials in front of or behind your name, people will always think you re rich and ask you for investment advice. 3. Most of you will never be poor, but you probably won t be Donald Trump...or will you? 1

2 Some stats to help prove my point According to the WSJ, more than half of all consumers live paycheck to paycheck. The Dept of Commerce published that in 2007, the personal savings rate fell to -1.3%! American Bankruptcy Institute published that the most common age group for Chapter 7 Bankruptcies is ages citing credit cards and medical emergencies as the primary reasons. US consumers received 5.2 billion direct mail credit card solicitations in As of November 2008, consumer credit card debt totaled $973 billion. Including cars and school loans, the total jumps to $2.6 trillion. Including mortgages, the total comes to $13.8 trillion. The poorest 54 countries have $452 billion in foreign debt combined! The Land of Opportunity? 27% 11% 14% 3% 5% -1.3% Japan Canada Germany France China USA How did we get here? 12.0% 10.0% 11.0% 12.0% 12.0% 10.8% 8.0% 8.0% 6.0% 6.7% 4.0% 4.8% 2.0% 0.0% -2.0% -1.4% 1.8% 1.4% -0.5% -1.3%

3 Bad Idea.com Some more stats to help prove my point The average 2008 graduate student had nearly $42,000 in school loans ($430 monthly obligation for the next 10 years). The average 2008 graduate student owes $5,800 in credit card debt at graduation ($100 monthly obligation for the next 10 years). Nearly half of all Americans have less than $10,000 saved for retirement. Without Social Security benefits, almost 50% of senior citizens would be living at the poverty level. 1 in 3 has no retirement savings at all. Capital One found that 65.1% of Americans consider themselves highly knowledgeable when it comes to personal finance. How not to be in my statistics 1.Stop borrowing! 2.Get out of debt! 3.Perform Money Magic 4.Get rich! 3

4 Use Cash! 1. Stop Borrowing! Dunn & Bradstreet found that people spend 15-25% more using credit or debit cards than with cash. 78% of people don t pay it off each month. The average credit card balance grows 3.3% each year even more for recent college grads. Get on a Budget! 4 out of 5 millionaires still use a budget Treat every dollar as an investment 2. Get Out of Debt! Forbes400richest 300saidthatthe #1 key is becoming and staying debt free. The average APR for credit cards is 14.9%. Many credit card companies are now raising interest rates to curb expected Senate bans on lending and late fee practices. With no car payment, no student loans and no credit card payments, imagine what the extra cash could do for you 2. Get Out of Debt! What if you were below average? $100 Average credit card payment $430 Average student loan payment $300 Average car payment $830 TOTAL If you had $830 to invest each month at 10%, you could have Wait a second! 10%? 4

5 10%? Don t you know the sky is falling? Over the past year, the market is down over 30%. The housing sector is in shambles. Consumer confidence continues to fall. Thousands of people have lost their jobs. So, is investing in the market a good idea right now? Sample Portfolio of a Market Timer Missing the Best Month Each Year from S&P 500 Index Actual Adjusted Difference Growth of $1 $3, $4.10 ($3,246.49) Annualized Return 10.36% 1.74% -8.63% Domestic Small Cap Funds Actual Adjusted Difference Growth of $1 $15, $0.17 ($15,533.85) Annualized Return 12.49% -2.11% % Sources: S&P index services group and the CRSP at the University of Chicago. 2. Get Out of Debt! What if you were below average? $100 Average credit card payment $430 Average student loan payment $300 Average car payment $830 TOTAL If you had $830 to invest each month at 8%, you could have $155,829 in 10 years $492,252 in 20 years $1,218,565 in 30 years 5

6 2. Get Out of Debt! What if you were below average? $100 Average credit card payment $430 Average student loan payment $300 Average car payment $830 TOTAL If you had $830 to invest each month at 10%, you could have $174,610 in 10 years $627,505 in 20 years $1,802,197 in 30 years Debt Reduction Strategies Debt Snowball Order debts by amount (smallest to largest) Pay extra on 1 st debt until paid Once paid, apply payment to next debt Psychologically rewarding For the emotional Debt Avalanche Order debts by interest rate (largest to smallest) Pay extra on 1 st debt until paid Once paid, apply payment to next debt Minimizes interest payments For the disciplined Which one is better? Maybe an example will help You have $51,000 in total consumer debt and $850/month to put toward paying them off. Minimum payments = $650) $42,000 in student loans at 4.5% (minimum payment - $350) $5,000 on a credit card at 9.9% (minimum payment - $100) $4,000 car loan at 7.5% (minimum payment - $200) Debt Snowball $400 Car Loan (10 mos.) $100 Credit Card $350 Student Loans $850 TOTAL Debt Avalanche $300 Credit Card (18 mos.) $200 Car Loan $350 Student Loans $850 TOTAL 6

7 Maybe an example will help You have $51,000 in total consumer debt and $850/month to put toward paying them off. Minimum payments = $650) $42,000 in student loans at 4.5% (minimum payment - $350) $5,000 on a credit card at 9.9% (minimum payment - $100) $4,000 car loan at 7.5% (minimum payment - $200) Debt Snowball $0 Car Loan $500 Credit Card (10 mos.) $350 Student Loans $850 TOTAL Debt Avalanche $0 Credit Card $500 Car Loan (1 mos.) $350 Student Loans $850 TOTAL Maybe an example will help You have $51,000 in total consumer debt and $850/month to put toward paying them off. Minimum payments = $650) $42,000 in student loans at 4.5% (minimum payment - $350) $5,000 on a credit card at 9.9% (minimum payment - $100) $4,000 car loan at 7.5% (minimum payment - $200) Debt Snowball $0 Car Loan $0 Credit Card $850 Student Loans (48 mos.) $850 TOTAL (68 months) Debt Avalanche $0 Credit Card $0 Car Loan $850 Student Loans (47 mos.) $850 TOTAL (66 months) 3. Perform Money Magic In Case of Emergency Not On Your Life Free Ain t Cheap Sorry, No Refunds Not Your Traditional Retirement 7

8 In Case of Emergency Pay yourself first! Set aside 10-15% of your paycheck as an emergency fund. A true emergency fund consists of 3-6 months expenses (about $10-15k) Emergencies will find you when you least expect it! This can replace your credit card AND maybe even your budget! Not On Your Life Life insurance protects those that depend on your paycheck. It s not an investment! Most need little, if any, life insurance unless you have kids. How much do I need? Rule of Thumb - 10x s your salary Should I get Term or Whole Life? Term or Whole Life? Whole Life (aka Cash Value) Only expires when you die Includes savings/investment vehicle in premiums Can borrow against policy in times of need Very expensive $1,200/yr for $100k policy Term Life Expires after specified term (10, 20 or 30 years) No savings/investment vehicle included in premiums Cannot borrow against Very inexpensive $100/yr for $100k policy 8

9 In 2005, federal law allows everyone to receive their credit report once each year from each of the 3 credit bureaus. Beware of misleading free credit report websites Free Ain t Cheap These sites will charge $9.99-$29.99 per month after a 30-day trial period. The ONLY official free site is: You don t have to check all 3 bureaus at the same time Use this site once every four months to check your credit Sorry, No Refunds 75% of all tax filers receive a refund Average 2007 refund = $2,771 Is it any coincidence that retail sales jump 12% every March and 20% every April? Don t wait on a bailout! Give yourself an $225/month raise. Sorry, No Refunds What can proper tax planning prevent? The Urge to Purge Negative Rate of Return Higher Debt Interest Inaccurate budgeting What can I do to eliminate my refund? Get your withholdings right (or wrong)! Aim for +/- $

10 Not Your Traditional Retirement Traditional contributions are tax deductible; distributions are taxable Roth contributions are not tax deductible; distributions are not taxable Traditional IRA Roth IRA $5,000 Contribution $5,000 Contribution $33,638 After 20 10% $33,638 After 20 10% $8,410 25% $0 0% $25,229 TOTAL $33,638 TOTAL $1,250 Tax 25% So, it s a wash, right? $8,410 After 20 10% Wrong. Assumes you will actually invest the tax deduction. The invested tax deduction will be taxable. 4. Get Rich! The End When do you want to retire? This depends on a few factors: Get a large inheritance Hope it will just happen Get rich slowly Retirement Meter 4. Get Rich! Age You Invest Jonathan Invests 30 $3,000 $3,300 $0 $0 31 $3,000 $6,930 $0 $0 32 $3,000 $10,923 $0 $0 33 $3,000 $15,315 $0 $0 34 $3,000 $20,147 $0 $0 35 $3,000 $25,462 $0 $292,041 $0 36 $3,000 $31,308 I NEVER $0 catch $0 37 $0 $34,438 up $3,000 with a $3,300 $72, $308,372 $0 $37,882 $3,000 $6,930 investment! 39 With only $0 a $41,671 $3,000 $10,923 $21, investment! $0 $45,838 $3,000 $15, $0 $50,421 $3,000 $20, $0 $55,463 $3,000 $25, $0 $280,338 $3,000 $262, $0 $308,372 $3,000 $292,041 10

11 4. Get Rich! But what if A 30 year old, who makes $50,000 per year, invests $400 per month in a Roth IRA and invests $250 per month in her company s Roth 401(k) with a 50% match. How much willshehaveatage59½? At 8% - $1,137,817 TAX FREE!!!* At 10% - $1,682,774 TAX FREE!!!* At 12% - $2,513,721 TAX FREE!!!* *In the interest of full disclosure, the 401(k) match is taxable. Some Good Reading The Richest Man in Babylon by George Clason The Total Money Makeover by Dave Ramsey The Wealthy Barber by David Chilton A Random Walk Down Wall Street by Burton Malkiel Some Good Reading

12 Jonathan Kraftchick, CPA