Money Talk for the Broke Grad_________________________Understanding Debt, Basic Budgeting, and Investing

Nicholas Hunt-WalkerAstroLunch – Winter 2014

Objectives• The Most Important Thing – Removing the stigma surrounding

discussing personal finance so that everyone can benefit• Ballin’ On A Budget – Budgeting for a comfortable life• Pay What You Owe! – Budgeting for debt management• Yes, You Can Have More! - Budgeting for your future!

• Note 1: I am by no means a financial expert. These are notes to keep in mind, and are borne out of my own research and opinion(s).

• Note 2: Much seen here can be found at http://f2.washington.edu/fm/sfs/home

The Common Problem

Budgeting• As grad students, we don’t

make a lot of money, but it’s not an unlivable amount.

• You (yes, you!) can budget with the best of them!

• The key: be aware of how much you make, how much you spend, and your realistic spending ability.

• Sounds obvious, but it trips up everyone. Let’s see the numbers…

• We start with post-qual 50% salary, ~$1,681.25 per month after taxes

• Essentials (Basic): Housing, food, WIFI @ home, cell phone

• Rent - $850 (1 BR in seattlerentals.com)• WIFI - $50 + tax (for first 12 mos)• Electricity - $45 (year average)• Cell - $105 + tax (AT&T iPhone)• Food - $720 ($8 x 3 x 30)• Basic expenses: $1,720

• Balance: -$88.75• Just basic expenses!

Budgeting

• Get a roommate! Or several! Compare to $850 + $50 + $45 : $975.00• 2 BR - $1,200+/mo ($600 + $25 WIFI + $25 Electricity for you) : $650.00• 3 BR - $1,800+/mo ($600 + $16.67 + $18.30) : $635.00• 4 BR - $2,200+/mo ($550 + $12.50 + $15 ) : $577.50

• Get a cheaper cellphone plan! Compare to : $105.00• Verizon (w/ smartphone & basic data)

: $90.00• T-Mobile (w/ iPhone) : $65.00• Virgin (unlimited data, messaging, email) : $35.00

• Learn to cook! Compare to $8/meal x 30 days : $720.00• Safeway w/ Club Card ($85 per week x 4.3 weeks) : $365.50

• Monthly savings for the next cheapest options• $325 (housing) + $15 (phone) + $354.50 (food) : $685.50

Budgeting: Simple Reduction

• That’s $1681.25 – $596.75 ≈ $575 for the next cheapest options! That’s…• Money for better food and more coffee

outings• …for dates• …for a car• …for savings and retirement (see Investment)• …for paying down debt• …for pricey fitness• …for vacations

• How do we get there? Create and maintain your budget.

Budgeting: Results of Reduction

• Ditch the spreadsheets. Use an app! I use Mint.com.

• Creates automatic budgets based on your income. Can also alter budgets manually

• Can link up to all your accounts to record, categorize, and track funds

• Ask me to show the full Mint app

Budgeting: Maintaining the Budget

• Most of us have some variation of significant debt.• Understanding is the key, then action. • What types of debt do I have to deal with? • When is it due? • How far am I under?• How does debt affect my life?

Budgeting for Debt

Understanding Debt: Credit• Credit scores tracked by 3 credit bureaus: Trans Union, Experian, and

Equifax. • All three reports of your credit available FOR FREE once per year via

AnnualCreditReport.com. • Any information deemed important (not just financial!):• All financial accounts • Payment history on financial accounts as well as their balances• All requests for your credit history• Any negative financial moves (late payments, defaulted loans, collections)• Oh yeah, and your score

Understanding Debt: Credit

So Nick, I’ve got my report and I’ve seen my score. how do I know if my score is good or not?

Well, I’m glad you asked…

• Two strategies that I’ve seen:• a) Highest interest rates first• b) Lowest balances first

• The benefit of a): reduce total amount of money spent over time• The benefit of b): reduce number of bills over time

Managing your Debt

• Consider: Three acc’ts and $300 budgeted per month to pay them• Acc’t 1: $3,000; Interest Rate – 18%• Acc’t 2: $2,000; Rate – 14%• Acc’t 3: $1,000; Rate – 10%• Min payments of $75, $43.33, and $18.33, respectively; minimums must

be met to avoid credit trouble• Pay $238.34 per month on acc’t 1 until paid off

• t = 15 months; $349.78 interest paid

• Pay $281.67 per month on acc’t 2• t = 7 months; $324.21 + $71.25 interest paid

• Pay $300 per month on acc’t 3 • t = 3 months; $162.99 + $11.63 interest paid

• Total: 25 months and $919.86 in interest paid

Ex: Case A Recomb….Strategy

• Same three accounts and $300 budgeted• Pay $181.67 per month on #3

• t = 6 mos; $28.09 in interest paid

• Pay $225 per month on #2 • t = 9 mos; $136.44 + $109.36 interest paid

• Pay $300 per month on #1• t = 9 mos; $624.53 + 190.61 interest paid

• Total: 24 months and $1,089.03 in interest paid

• Similar timescales, $170 difference in interest. Different payment schedules. Do what works best for you!

• Credit for numbers: http://www.bankrate.com/calculators/managing-debt/minimum-payment-calculator.aspx

Ex: Case B Strategy

Managing your DebtLast Notes on Debt…• Be careful who you marry!• Be careful who you cosign with!• Having credit card debt is OK. Most people

have it. The key is making it manageable.• Bad credit is not good, but can be

managed! Make a plan!• If necessary, consult Student Legal Services

(http://depts.washington.edu/slsuw) about declaring bankruptcy. IT IS NOT A DEATH SENTENCE!!! (Extra slides on bankruptcy per request)

Budgeting for Growth• BOTTOM LINE: Saving money should ALWAYS be a part

of your budgeting plan, with or without debt.

• Standard – 10% of net income ($168/mo here)

• Forget the standard! Put whatever you can in, from $1-500

• What for?• Emergencies!• Short term desires• Short term investments• Long term investments• Big, planned purchases• Whatever!

• Savings Account• Money Market Account• Certificates of Deposit• Roth IRA• Traditional IRA• 401(k)• 403(b) [but not at UW!]

Wide World of Investments• Mutual Funds• Stocks• Annuities• Municipal Bonds• Government Bonds• Corporate Bonds• Property Investment

• No (or low) min balance requirement; banks and credit unions.

• Low rates for return on investments; one of most secure investments.

• Access almost whenever you want, with limits.• Examples:• Typical Bank (Chase, B of A, Wells Fargo):

0.01%; compounded monthly; $300 daily min or $5 monthly fee

• Washington Fed Credit Union: 0.15%; $100 min• BECU: 4.07% on first $500, 0.1% after• WSECU: 0.11%

Basic Savings

• There is life after work, you need to prepare for it• Social Security may be available, but if it is, it won’t be as helpful as it

is now• Even if SS holds up to the present, SS alone will not provide a good

life.• What you invest now will fund your twilight years

The Need for Long Term Savings

Source: http://www.socialsecurity.gov/OACT/quickcalc/

• Traditional IRA: money invested pre-tax; taxed upon withdrawal• Roth IRA: money invested after tax; principal withdrawn untaxed• Max annual limit for contributions to all IRAs is $5.5K (as of 2014)• Money in an IRA invested in a combination of stocks and bonds,

usually handled by a third party• Money to be withdrawn after age 59.5. For Roth IRA, principal is

always penalty free; only interest is taxed• No official minimum limit (though the third party might have one)• $10K in earnings usable to buy, build, or rebuild first home tax free• I use http://www.betterment.com to manage my IRA• Just how much money can you expect from an IRA?

IRAs - Overview

• Over time, interest accrued overwhelms the amount contributed, even for the lower rates. (Equilibrium point varies per rate; 18 years at 7%)

• I made an iPython notebook out of this figure, so ask me to see other combos of principal and contributions

• Risky, but an understanding lessens the risk. Slightly.• Shares - pieces of company ownership entitling you to a piece of the

assets and earnings of that company.• Stock prices can fluctuate for a number of reasons. Not really

influenced by individuals.• Shareholders receive a cut of the profits via dividends.• Short-term strategies need a close eye on the market, and some luck.• Long-term strategies need an eye for sustained growth.• Trading requires a brokerage account. Common, brokerages: Fidelity,

TD Ameritrade, E*Trade, Scottrade.• If wary about trading, try a trading game. Example:

http://www.marketwatch.com/game/

Stocks - Overview

• Allows a group of investors to pool their funds

• Diverse investments minimize volatility of stock market

• Benefit from expertise of dedicated fund managers

Index/Mutual Funds - Overview• Set it and forget it! No need to

follow the ups and downs of individual companies

• Avoid racking up expenses from buying and selling individual stocks (often $5-10 per trade)

• Few fees in general; mainly the expense ratio (operating costs per share)

• Main barrier: initial input• Ex: Target Retirement 2050 Index• $1,000 minimum• 20.22% growth over past 5 yr• 0.18% Expense Ratio

Let’s Recap(itulate)• Debt sucks, but debt ≠ death. Maintain awareness via your credit

report.• Living within your means ≠ living debt free. Just pay your bills.• A sensible budget keeps money in your pocket, even on the most

meager of salaries. You don’t have to do it yourself. Use an app!• Keep an eye out for ways to reduce your expenses. Be realistic about

your daily, weekly, monthly, and annual needs.• ALWAYS INCLUDE SAVINGS! Even if it’s only a dollar a day, little

savings translate into big returns over time• You NEED to invest for your retirement• Enough investment options to make your head spin. Consider

investing with a group• No matter what you choose, make friends with your money. It can

work for you if you let it.

Useful Links• http://f2.washington.edu/fm/sfs/home

- Student Fiscal Services• http://depts.washington.edu/slsuw

- Student Legal Services• http://www.mint.com

- Mint Budgeting• http://www.betterment.com

- Betterment Investing Services• http://www.annualcreditreport.com

- Annual Credit Report• http://www.bankrate.com/calculators/managing-debt/minimum-payment-

calculator.aspx - Minimum Payment Calculator

• https://github.com/nhuntwalker/mystuff/blob/master/blog/interestPost/interestCalc.ipynb - My iPython Notebook on Interest from Investment

• http://www.marketwatch.com/game/ - Marketwatch Stock Market Game

• http://en.wikipedia.org/wiki/Mutual_fund#Leading_complexes- Top 10 Mutual Fund Complexes

• http://www.socialsecurity.gov/OACT/quickcalc/- Social Security payment calculator

EXTRAAAAAA SLIIIIIIDES!

• Same three accounts and $300 budgeted• Pay $100 per month on all; Step up when accounts are paid• Acc’t 3 paid in 11 months

• $48.58 interest accrued

• Acc’t 2 paid 8 months later• $205.71 + $57.36 interest accrued

• Acc’t 1 paid 5 months later• $447.53 + $232.01 + $60.94 interest accrued

• Total: 24 months and $1,052.13 in interest

• Similar timescales, right in the middle of the two!!

Ex: Case C Strategy –Even Steven

Understanding Debt: Bankruptcy• First and foremost: It is NOT a

death sentence! However…• Has the greatest single impact

on credit scores. Can affect your ability to obtain credit for its duration.

• Definition: Legal status of a person (or entity) that cannot repay debts owed; declared in court, not by yelling “I declare BANKRUPTCY!”

• Typical result: discharge much debt, but not all!

• Ch. 7 – basic; non-exempt assets sold; alimony, child support, student loans, income taxes (< 3 yrs), property taxes, fines, and restitution remain. Lasts 10 years.

• Ch. 13 – debt consolidation; proposes a plan to pay creditors over 3-to-5 year period. Individual gets to keep property. Can stall foreclosure. Lasts 7 years

Understanding Debt: Bankruptcy

• Consult Student Legal Services (http://depts.washington.edu/slsuw) and find out what’s right for you

• Showing over time that you’re more reliable than before improves your score. It requires consistency and diligence.

• Don’t open or close cards. Closing cards erases history. Opening cards makes you seem like a leech. Just pay down balances.

Understanding Debt: Repairing Your Credit

• Access and understand your credit report. Make sure there are no fraudulent charges. Call companies you are indebted to, especially accts in collections. Accts in collections stay on your report for seven years. Chances are you can work out payment deals.

• Pay bills on time. Set up reminders ahead of time. Make reliability your highest priority. Payment history is 35% of your score!

• Reduce your debt. Your debt-to-available-credit ratio is 30% of your score. Put more money on your highest-interest bills. Pay the minimum on everything else. And DON’T INCUR MORE DEBT!

• Finally, you are not alone. You are also not the first person to need a hand in getting out of debt. The last thing you want is to be in court. Services exist for this purpose.

• http://www.badcredit.org/reviews/credit-repair/ (not free)• http://www.nfcc.org/ (somewhat free)

Understanding Debt: Repairing Your Credit

• An entity (company, government) borrows at fixed rate and fixed time; Essentially like a CD; interest paid every 6 mos

• Maturity ranges from 90-days to 30-years• Unsecured bond: interest payments and return are guaranteed only

by the credit of issuing company. If company fails, you get little back• Secured bond: specific assets are pledged to bondholders if company

fails to repay• Some government and municipal (state) bonds are exempt from

income and capital gains taxes (awesome!); tax-exempt bonds typically of lower interest

• Some bonds can be paid off by the borrowing entity before maturity. Be aware of bonds with “call provisions”

• The bond holder is the bond owner. Can be bought, sold, & traded• Bonds are rated based on reliability. Check ratings at

http://www.standardandpoors.com/ratings/en/us/

Investing: Bonds - Overview

• US Treasury bonds: http://www.treasurydirect.gov/indiv/products/products.htm

• US Treasury securities come in different types: • bills (< 1 yr, 0.025 – 0.137%)• notes (2-10 yrs, 0.25 – 2.75%)• TIPS (5-30 yrs, 0.125 – 0.75%)• bonds (30 yrs, 2.75 – 3.75%)

• Purchased in multiples of $100• TIPS = Treasury Inflation-Protected Security;

principal tied to consumer price index, and increases with inflation. On maturity, Treasury pays either original or inflated principal, whichever’s greater

Investing: Bonds – Govn’t

Investing – 401(k)/403(b)• Another retirement savings plan typically offered by companies• Money contributed from your income pre-tax, to be taxed upon

withdrawal in retirement• Sponsoring company matches contribution up to a certain percentage

of your salary• Maximum contribution is $17,500 (as of 2013)• Money in an IRA invested in a mutual fund – a diverse collection of

stocks and bonds. Your 401(k) gains value as your portfolio does• 403(b) is essentially a 401(k) for public education orgs and non-profits• **NOTE**: We are ineligible for any UW retirement plan, either as

TAs or RAs

• Like a savings acc’t, but with a higher rate and requiring a higher balance (often $10K or more)

• Interest rate changes as economy changes• Ex:• BECU (member): 0.3% to 0.35%• BECU (regular): 0.15% to 0.2% • WSECU: 0.11% to 0.31%• Wells Fargo: 0.03% to 0.05% w/ checking acc’t• Bank of America: 0.03% to 0.07%• Washington Fed: 0.15% to 0.25%

Investing: Money Market Acct

• Secure; Offers higher interest rate than savings acct, with agreement that money won’t be touched until maturity

• Has a maturity date, a fixed interest rate (at the time of issuance), and lasts from 1 month to 5 years. Can be rolled over to a new CD at maturity

• Money can be withdrawn early, but there are penalties.• As of 12/16/2013:• BECU (12 to 17 mo Member): 0.45% for <$50K; 0.5% for $50K+ • BECU (24 to 35 mo Member): 0.60% for <$50K; 0.65% for $50K+• Chase (15 to 17 mo w/ Checking): 0.15% for <$10K; 0.25% for <$100K• Chase (42 to 47 mo w/ Checking): 0.25% for <$10K; 0.45% for <$100K• B of A (24 to 35 mo): 0.15% for <$100K• B of A (48 to 120 mo): 0.2%• WSECU (12 mo): 0.3% for $1K min• WSECU (48 mo): 0.91%

Investing: Certificate of Deposit

• Can check current bonds at http://washington.municipalbonds.com/bonds/recent/

• Bond issued by the state of WA or its various agencies; used to supplement public projects

• WA state residents are special, since we pay no income tax, and our municipal bonds are also federally exempt

• Two types:• General Obligation: issuers guarantee to pay by any means necessary

with full faith and credit• Revenue: repaid using revenues from projects the bond helped fund;

chance they will default• Typically issued in multiples of $5K• Yield varies, but hovers around 5%. Maturity dates vary as well.

Investing: Bonds – Municipal

Barriers to Sticking to Budgets• Fear of the bank account• Wants vs. needs• Not looking for deals• Expenses out of your control (for

when life happens)