Financial Tools You Need to Know to Survive Money Management

Financial Tools

You Need to Know

to Survive

Money Management

What We Will Cover Today

Where does your money go?

Your cash reserves.

What are your goals?

How money works.

Asset allocation.

Keys to Success

Develop a budget Define specific goals Know how money works Establish cash reserves Develop a financial plan Pay yourself regularly Take immediate action

You must know the seven keys to success:

Where Does Your Money Go?

Develop a spending plan

Track your monthly expenses

Note the little expenses

Stick to your budget

It is important to:


Latte: $3 Cookie: $1

Lunch: $6

Soda: $1

Magazine: $2

Total: $13

The latte effect:

Week:$78 Month:

$339

Year: $4,060


The latte effect:

Week:$78 Month:

$339

Year: $4,060

Invest: $2,500


Your Monthly Spending

Cost of Living/Debt Repayment . . . . . . . . . . %

Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . %

Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . %

Savings/Investments . . . . . . . . . . . . . . . . . . %

TAXES 25%

INSURANCE 8%

SAVINGS/INVESTMENTS 2%

COST OF LIVING/DEBT REPAYMENT 65%

A TYPICAL FAMILY

Your Cash Reserves

Emergencies

Planned expenses

Investment opportunities

Minimize the need to use credit

The need:

Your Cash Reserves

Interest paying

Liquidity/check writing

Low risk

No withdrawal penalties

What to look for:

Your Goals

Think about your short term goals

Think about your intermediate term goals

Think of your long term goals

Put them to paper

Develop a plan

Work with a motivator

To better attain your goals:

How Money Works

The Rule of 72

72 =Interest Rate

6 % doubles in years

8 % doubles in years

÷Number of Years to Double

How Money Works

The Magic of Compound Interest

$150,000

$100,000

$50,000

$0

Years 5 10 15 20 25

Investing $100/month8% compounded monthly

How Money Works

Tax-Deferred Compounding

$350,000

$300,000

$250,000

$200,000

$150,000

$100,000

$50,000

$0

Years 10 25 30

$361,887

$209,960$216,364

$139,563

$35,062

$29,904

Taxed Every YearTax-Deferred

Based on a 10%annual rate of return

How Money Works

A Tale of Two Investors

* Return figures are for illustrative purposes only and do not represent the past or future performance of any actual investment.

Years

$1,019,169

$16,000

$805,185

$78,000

$1,019,169*

$805,185*

Prudent PollyProcrastinating Pete

Assumes 10% annual rate of return

Guaranteed Rates of Return

How Money Works

Also known as… Going broke safely

$1000

Interest: 3% +30

1030

Tax: 30% -9

1021

Inflation: 3% -30

$991

Dollar Cost Averaging - When is the Best Time to Invest?

How Money Works

0

200

400

600

800

1000

1200

1400

1600

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

Dollar Cost Averaging

How Money Works

$3/doz – 12 eggs

$4/doz – 12 eggs

$2/doz – 12 eggs

$9 – 36 eggs

$3 – 12 eggs

$3 – 9 eggs

$3 – 18 eggs

$9 – 39 eggs

Dollar Cost Averaging - When is the Best Time to Invest

How Money Works

$0

$1

$2

$3

$4

$5

$6

$7

$8

$9

$10

$11

JAN FEB MAR APR MAY JUNE JULY AUG SEP OCT NOV DEC

A

B

Dollar Cost Averaging - When is the Best Time to Invest

How Money Works

$0

$1

$2

$3

$4

$5

$6

$7

$8

$9

$10

$11


Investing $100/month

2017

14

20

B

A


How Money Works

$0

$1

$2

$3

$4

$5

$6

$7

$8

$9

$10

$11


$0

$1

$2

$3

$4

$5

$6

$7

$8

$9

$10

$11



2017

14

20

17

14 14 13 13

11

11

10

Total Shares: 174 x $10 = $1,740A

B


How Money Works

$0

$1

$2

$3

$4

$5

$6

$7

$8

$9

$10

$11


$0

$1

$2

$3

$4

$5

$6

$7

$8

$9

$10

$11



2017

14

20

17

14 14 13 13

11

11

10

40

3340

Total Shares: 174 x $10 = $1,740A

B


How Money Works

$0

$1

$2

$3

$4

$5

$6

$7

$8

$9

$10

$11



20 17

14

20

17

14 14 13 13

11

11

10

40

3340

66

33

25

33

3540

25 20

Total Shares: 174 x $10 = $1,740

Total Shares: 410 x $5 = $2,050

A

B

Debt Inflation Taxes

The Three Worst Enemies To Your Money

How Money Works

Asset Allocation

Process of efficiently developing a diversified portfolio by mixing different classes of financial assets in varying proportions.

Process whereby an investor constructs a portfolio reflective of goals, time frame and level of risk tolerance to meet financial objectives.

The art of balancing risk and reward to meet objectives.

What is Asset Allocation?

Asset Allocation

Increases diversification

Potentially lowers volatility

Potentially lowers risk

Potentially increases return

Potentially delivers consistent returns over time

Why Do We Use Asset Allocation?

Asset Allocation

WWII Normandy invasion

Markowitz and the University of Chicago

Markowitz, Miller and Sharpe win the

Nobel Prize in 1990

A History

Asset Allocation

The Power of Diversification

8% $684,848

$100,000 - 25 years

Asset Allocation


8% $684,848

$20,000

-100%

$0

$100,000 - 25 years

Asset Allocation


8% $684,848

$20,000 $20,000

-100% 0%

$0 $20,000

$100,000 - 25 years

Asset Allocation


8% $684,848

$20,000 $20,000 $20,000

-100% 0% 5%

$0 $20,000 $67,727

$100,000 - 25 years

Asset Allocation


8% $684,848

$20,000 $20,000 $20,000 $20,000

-100% 0% 5% 10%

$0 $20,000 $67,727 $216,697

$100,000 - 25 years

Asset Allocation


8% $684,848

$20,000 $20,000 $20,000 $20,000 $20,000

-100% 0% 5% 10% 15%

$0 $20,000 $67,727 $216,697 $658,379

$100,000 - 25 years

Asset Allocation


8% $684,848

$20,000 $20,000 $20,000 $20,000 $20,000$962,800

-100% 0% 5% 10% 15%

$0 $20,000 $67,727 $216,697 $658,379

$100,000 - 25 years

Asset Allocation

The Costs of Volatility

Year 1 Year 2 Year 3 Year 4 Year 5

-10%

10 % 10% 10% ?

Asset Allocation

If you start with $100,000:

The Costs of Volatility

and gain 10% and lose 10%

and gain 20% and lose 20%

Asset Allocation

Stocks

Bonds

Cash Equivalents

Real Assets

Typical Asset Classes

Asset Allocation

Set your objectives

Set your time horizon

Set your investment parameters

Rebalance

Start By Creating a Portfolio for You

Asset Allocation

You prefer low-volatility investments

You are not comfortable with a large exposure to stocks

You desire an extremely stable income stream or growth pattern

You are concerned about the possible loss of principal

You have a short-term investment time frame

You may be a conservative investor if:

Asset Allocation

You want to preserve the future purchasing power of your capital, but not in a high-risk situation

The amount of risk you are willing to take to outpace inflation is slight

Your objective is more income-oriented than growth-oriented

You want to achieve some growth, but at a minimal risk

You may be moderate conservative if:

Asset Allocation

One of your priorities is preserving the future purchasing power of your capital

You are willing to take a modest amount of risk to outpace inflation

You desire a modest but stable growth pattern

You are comfortable with experiencing possible short-term decreases in your portfolio value in exchange for the potential of long-term gains

You may be a moderate investor if:

Asset Allocation

You are striving for capital appreciation

You are open to the idea of equity investing

You desire above-average long-term growth

You are willing to accept market swings

You have an intermediate- to long-term investment time horizon

You may be moderate aggressive if:

Asset Allocation

You are trying to achieve maximum capital appreciation

You are comfortable with, or perhaps have a past history of, equity investing

You desire significantly higher long-term growth

You are willing to accept significant market swings

You have a long-term investment time horizon

You may be an aggressive investor if:

Tolerance for risk is just one of many factors that will dictate the portfolio that is right for you. Others include:

Asset Allocation

Personal financial profile

Financial goals

Time horizons

Investment objectives

Asset Allocation

100% Bonds

10% Stocks, 90 % Bonds

Minimum Risk Portfolio: 25% Stocks, 75% Bonds

50% Stocks, 50% Bonds



100% Stocks

Risk is measured by standard deviation. Return is measured by arithmetic mean. Risk and return are based on annual data over the period of 1970-1995. Portfolios presented are based on Modern Portfolio Theory. For illustrated purposes only.

Risk (Standard Deviation)

Ret

urn

Source: Ibbotson, Associates.Past performance is no guarantee of future results

100% Bonds

10% Stocks, 90 % Bonds

Minimum Risk Portfolio: 25% Stocks, 75% Bonds




100% Stocks

Asset allocation is not a perfect investment method. However, short ofa crystal ball, it is the best way to:

Asset Allocation

Potentially maximize returns

Spread and minimize risk

Potentially lower volatility

Increase diversification

Potentially deliver consistent returns over time

In Closing

Who do you think will be better off in the future?

The Jones, who save today’s money for tomorrow, or

The Smiths, who spend tomorrow’s money today?

The Next Step

Develop a budget for your house

Homework

The Next Step

Develop a budget for your house Track your expenses

Homework

The Next Step

Develop a budget for your house Track your expenses Calculate monthly spending percentages

Homework

The Next Step

Develop a budget for your house Track your expenses Calculate monthly spending percentages Come up with a financial plan

Homework

The Next Step

Develop a budget for your house Track your expenses Calculate monthly spending percentages Come up with a financial plan Have sufficient reserves

Homework

The Next Step

Develop a budget for your house Track your expenses Calculate monthly spending percentages Come up with a financial plan Have sufficient reserves Diversify your holdings

Homework

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Financial Tools You Need to Know to Survive Money Management