Planning Your Financial Future A. Gene Nelson Senior Professor Department of Agricultural Economics...
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Transcript of Planning Your Financial Future A. Gene Nelson Senior Professor Department of Agricultural Economics...
Planning Your Financial Future
A. Gene NelsonSenior Professor
Department of Agricultural EconomicsNovember 12, 2012
Survey about Topics to Cover
TopicsMean Rating
(1=important, 10=not)
1 How do we use budgeting to meet our goals? 2.67
2 How do we track our financial progress? 3.43
4 How can I get a better return on my savings? 4.14
5 What’s an investment portfolio and why have one? 4.62
6 How can I increase income left after taxes? 4.95
8 When should I begin saving for retirement? 5.81
3 Why is debt both good and bad? 6.05
10 Where should I go for financial advice? 7.00
9 What about Social Security? 8.05
7 Why do I need insurance? 8.29
Other Suggested Topics
• Preparing economic down turns– Liquidity – emergency fund (12 months)
• Making a good budget– We will discuss
Why Do You Need a Financial Plan?• What you have or will have is closely related
to your ability to earn, plan, and manage the use of your money.
• Financial planning is the means we use to get the things we want.
• Through financial planning we attain the goals we have in life.
• But it’s not all about the money . . . or is it?
Example Financial Mission Statement
"To achieve financial independence and to avoid catastrophic financial occurrences
that may result in financial dependence."
How to Get Rich
Hint: You’re Almost There
Roger Pine – CFA, CFP®
What is the present value of all of your future earnings?
• Hint: You likely are already a millionaire…
22 26 30 34 38 42 46 50 54 58 62 66 70 74 $-
$20,000.00
$40,000.00
$60,000.00
$80,000.00
$100,000.00
$120,000.00
Salary by Year
=
22$0.00
$200,000.00
$400,000.00
$600,000.00
$800,000.00
$1,000,000.00
$1,200,000.00
Present Value
$43,000 starting salary2% raises annually5% discount rateSemi-retirement at 66Full retirement at 71
$1,043,000!
For most college graduates just starting out, human capital is the most valuable asset.
Human Capital
Financial Assets
Asset Mix:Typical Graduating Senior
At this stage in life, it pays to focus on earning power.
Human Capital
Financial Assets
Asset Mix:Typical Graduating Senior
Which bar would you prefer to increase by 5%?
If you save wisely, your financial capital will eventually catch up with your human capital
Human Capital
Financial Assets
Asset Mix:Approaching Comfortable Retirement
There is more to the story. Expenditures also have a present value.
Human Capital
Financial Assets
Lifetime Expenses
This is how you get rich.
Human Capital
Financial Assets
Lifetime Expenses
This is not how you get rich.
Human Capital
Financial Assets
Lifetime Expenses
USING BUDGETING TO MEET GOALS
Budgeting
• The process of projecting, monitoring, adjusting, and controlling future income and expenditures– Savings and consumption habits
• We establish a budget to keep track of how we spend our money
• Compare your total income to your total expenses. To get ahead, you should be spending less than you earn.
How Budgeting Works
• Track income and spending and saving, and see how actual differs from the plan.
• Comparing what was planned and what actually happens is valuable part of budgeting.
• First step to gaining control.
• Controlling one’s financial affairs begins with a plan of where money should go.
Budgeting – How to get started . . .
• Here are some examples:
• Use Quicken – http://quicken.intuit.com/
• Use Mint – http://www.mint.com/
mint.com
Positive cash flow => set a goal
Emergency Funds and Reserves• A standard emergency fund among financial
planning professionals is 3 to 6 months expenses.
• Clients with irregular income need more.
• Cash reserves above and beyond the emergency fund can be invested in short-term CDs, etc., since credit cards can be used to take advantage of a sale on a big-ticket item, or emergency funds can be used and replenished from the short term investment.
Thought for the Day
The biggest barrier to becoming rich is living like you’re rich before you are.
Knight Kiplinger
HOW TO TRACK FINANCIAL PROGRESS
How to Track Financial Progress?• Statement of Financial PositionTotal assets – total liabilities = net worth(what you (what you (what you’re own) owe) worth – equity)• Net worth is what’s left if all assets were sold
and liabilities paid.• Prepared at a specific date in time.• Need to define the owner: individual,
household, business and household.• Assesses solvency.
Sample Statement of Financial Position
Assets LiabilitiesCash/Cash Equivalents Current Liabilities
JT Checking 2,100 JT Credit Cards 10,000 JT Savings 48,000 JT Home Mortgage 4,200
Total Cash/Cash Equiv. 50,100 Total Current Liabilities 14,200
Invested Assets Long-term LiabilitesJT Stock Portfolio 15,000 JT Mortgage on Home 288,000 W 401(k) 9,000 Total Long-term Liabilities 288,000 H IRA 14,500
Total Invested Assets 38,500 Total Liabilities 302,200
Personal-Use Assets Net Worth $213,900
JT Home 420,000 W Jewelry 5,000 JT Automobile 2,500
Total Personal Assets 427,500
Total Assets $516,100 Total Liabilities & Net Worth $516,100
Statement of Financial PositionJanuary 1, 2012
How Net Worth Changes Over Time• https://www.forefieldkt.com/kt_dt/dt_trns.aspx?xd=NetWorth&il=ff
SAVING AND INVESTING
Saving and Investing
•Start early.
•Look for low cost investments.
•Diversify among asset classes.
•Some tax advantaged and some not.
•Keep it simple.
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Required Savings Rates for RetirementBeginning Savings at
AgesSavings as % of Gross
Pay
25-35 10-13%
35-45 15-18%
45-55 20-25%
55-65 30-35%
Assumes appropriate asset allocation for reasonable risk, 80% wage replacement, and Social Security normal retirement age.
Time/Savings Example
Range in compound annual returns for different holding periods.
Saving and Investing
•Start early.
•Look for low cost investments.
•Diversify among asset classes.
•Some tax advantaged and some not.
•Keep it simple.
31
INCREASING INCOME AFTER TAXES
DEBT: GOOD OR BAD?
33
WHERE TO GO FOR FINANCIAL ADVICE
Where to Go For Financial Advice• Seek a Certified Financial Planner™ (CFP®)• Certifying entity is the Certified Financial
Planner Board of Standards, Inc.• Website: http://www.cfp.net/ • The CFP Board has more than 66,802 CFP®
certificants.• Of that total, there are 4,526 certificants
in Texas.
http://www.youtube.com/watch?feature=player_embedded&v=HLIhtnshN6A
The CFP® Board (www.cfp.net)Mission:• The mission of Certified Financial Planner Board
of Standards, Inc. (CFP Board) is to benefit the public by granting the CFP® certification and upholding it as the recognized standard of excellence for personal financial planning.
Public Awareness Campaign:• “Let’s Make a Plan”
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Behavior – Required Reading
• The Millionaire Next Door: The Surprising Secrets of America’s Wealthy – Thomas J. Stanley and William D. Danko
1 – Read it2 – Loan it to a friend and make them read it3 – Discuss it
• FREE money management workshops (presented multiple times each semester on a variety of current and relevant money topics for college students).
• FREE workshops and presentations to classes, community groups, and campus organizations upon request.
• FREE individual appointments with Money Wise Aggie Counselors to seek personalized money management information.
• NEW! Online workshops: – Money Management for College Students (19 minutes)– Eating Smart on a Budget (15 minutes) – I'm Graduating Now What (20 minutes) – Taking Out a Student Loan (12 minutes) – Repaying Your Student Loans (12 minutes)
https://moneywise.tamu.edu
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Spring 2013AGEC 435
Personal Financial Planning for Professionals
Instructor: Dr. A Gene Nelson
TR 11:10 p.m. to 12:25 p.m.AGLS Building 114
40
Spring 2013AGEC 489 Spec Topics
Risk and InsuranceInstructor: Dr. A Gene
NelsonTR 2:20 p.m. to 3:35 p.m.
AGLS Building 110
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Financial Planning
@Texas A&M University
Course Schedule
Fall SemesterSpring
SemesterSummer Session
First Year
Fin Planning Fundamentals
(AGEC 435)
Insurance Planning
Income Taxation
Second Year
Investment Planning
Retirement and Estate Planning
Financial Plan Development
(capstone)
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Factors Favoring the Outlook for Personal Financial Advisors
1. Millions of new retirees expected in next 10 years.
2. Increasing size of personal investments as baby boomers approach retirement.
3. People are living longer.
4. Growing number and assets of the very wealthy.
5. More employers have retirement savings programs, rather than traditional pension plans.
6. The increasing complexity of financial and investment products.
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