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Financial Planning 101

Financial Planning 101. Todd Jorns www.flip4u.org. Facts & Stats. A woman age 65 has a 19% chance of living to age 95. A man age 65 has a 11% chance of living to age 95. Only 60% of workers are currently saving for retirement. Over 50% felt they were behind in saving for retirement.

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Financial Planning 101

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  1. Financial Planning 101 Todd Jorns www.flip4u.org

  2. Facts & Stats • A woman age 65 has a 19% chance of living to age 95. • A man age 65 has a 11% chance of living to age 95. • Only 60% of workers are currently saving for retirement. • Over 50% felt they were behind in saving for retirement. • 32% rated themselves as “a lot behind.” 2005 Retirement Confidence Survey

  3. Facts & Stats • 25% of all workers rely solely on Social Security when they retire. • 66% rely primarily on Social Security. • The average Social Security benefit is $959 a month ($11,508 a year). • 31% of Americans would rather scrub a bathroom than plan for retirement! 2005 Retirement Confidence Survey

  4. Facts & Stats 2007 Retirement Confidence Survey

  5. Objectives • Improve Awareness and Understanding of the term “saving versus investing.” • Familiarize and Educate attendees on the various retirement options available to them. • Inspire and Motivate attendees to be in charge of their retirement. • Challenge attendees to share this knowledge with their children, family and friends.

  6. Do’s & Don’ts • Don’t get mad at me. • Don’t get mad at yourself. • Don’t blame anyone (but yourself). • Do use the information positively. • Do create a plan for yourself. • Do stick to your plan. • Do enjoy retirement.

  7. Waiver • I am not a certified financial planner or accountant. • All information I share with you are things I have read about or seen on TV. • I have a passion to share my financial knowledge with anyone who will listen. • My goal is to help others find the path towards F3 (future financial freedom).

  8. Investing versus Saving • How to Have a Net Worth of $1 Million at Age 55 • Interest Rates and Their Effect on Your Investments • The Magic of Compound Interest • Rule of 72 – Lump Sum Investment

  9. How to Have a Net Worth of $1 Million at Age 55 Bloomberg Personal, September 1994

  10. Interest Rates and Their Effect on Your Investments $10,000 Lump Sum

  11. Interest Rates and Their Effect on Your Investments $100 Per Month

  12. The Magic of Compound Interest • Jimmie • Opens IRA at 12% interest at age 22. • Invests $2,000/year for 6 years = $12,000. • After 43 years IRA is worth $1,348,440. • Joel • Spends $2,000/yr on himself for six years. • Opens IRA at 12% at age 28. • Invests $2,000/yr for 37 years = $74,000. • After 43 years, IRA is worth $1,363,780. • Difference of $15,340 (start early!).

  13. How to Have a Net Worth of $1 Million at Age 55 Bloomberg Personal, September 1994

  14. Interest Rates and Their Effect on Your Investments $10,000 Lump Sum

  15. Interest Rates and Their Effect on Your Investments $100 Per Month

  16. The Magic of Compound Interest • Jimmie • Opens IRA at 12% interest at age 22. • Invests $2,000/year for 6 years = $12,000. • After 43 years IRA is worth $1,348,440. • Joel • Spends $2,000/yr on himself for six years. • Opens IRA at 12% at age 28. • Invests $2,000/yr for 37 years = $74,000. • After 43 years, IRA is worth $1,363,780. • Difference of $15,340 (start early!).

  17. The Magic of Compound Interest

  18. The Magic of Compound Interest

  19. Rule of 72 • The rule of 72 says if you take the interest rate you are receiving and divide it into 72, it will give you the number of years it will take for your investment to double. • Example, 72 divided by 4 (interest rate at a bank) = 18 years for your money to double. • Another example, 72 ÷ 2 = 36 years.

  20. Rule of 72

  21. Guidelines & Resources • Retirement Options/Contributions • Net Worth Projection – Calculator • 12 Financial Principles • Debt: the Good, Bad & Ugly • Financial Web Resources • Financial Priorities

  22. Retirement Options/Vehicles • 401(k) (corporations) • 403(b) (not-for-profits-education/hospitals) • 457(b) (government) • Roth IRA • IRA • Annuities • U.S. Savings Bonds • CDs • Savings Accounts • Others

  23. Retirement Contributions *Catch-up contributions: Workers age 50 and above are permitted to contribute an additional $1,000 to their IRAs and $5,500 to their 403b and 457b plans in 2009.

  24. Net Worth Projection – Calculator • Will help you plan for retirement. • Allows you to make projections into the future. • Adjustments made to the Interest Rate shows the impact on investments. • You can download this calculator at www.flip4u.org.

  25. 12 Financial Principles • Map your financial futureTake time to list your financial goals, along with a realistic plan for achieving them. You can go places you want to go without a roadmap - but seldom on the first try. • Pay yourself firstBefore paying bills and other financial obligations, set aside an affordable amount each month in accounts designated for long-range goals and unexpected emergencies.  • Start saving youngRecognize that your total savings are determined both by the interest you earn on those savings and the time period over which you save. The sooner you start saving, the more funds you'll be able to amass over time.  www.aba.com/Consumer+Connection/12Principles.htm

  26. 12 Financial Principles 4. High returns equal high risksRecognize that no one will pay you high interest rates on a sure thing. In most cases, the higher the interest rate offered to you, the investor, the higher the risk of losing some, or all, of the money you invest. Diversification of assets is the best protection against risk.  5. Money doubles by the "Rule of 72"To determine how long it will take your money to double, divide the interest rate into 72. For example, an account earning 6% interest will double in twelve years (72 divided by 6 equals 12). 6. Budget your moneyCreate an annual budget to identify expected income and expenses, including savings. This will serve as a guide to help you live within your income. www.aba.com/Consumer+Connection/12Principles.htm

  27. 12 Financial Principles 7. Know your take-home payBefore committing to significant expenditures, estimate how much income is likely to be available for you. Net income, after all mandatory deductions, is more important to estimate than gross income before deductions.  8. Don't expect something for nothingBe leery of advertisements, sales people or other sources of financial offers promising anything free. Like non-financial opportunities, if it sounds too good to be true, it probably is. 9. Your credit past is your credit futureBe aware that credit bureaus maintain credit reports, which record borrowers' histories of repaying loans. Negative information in credit reports can affect your ability to borrow at a later point.  www.aba.com/Consumer+Connection/12Principles.htm

  28. 12 Financial Principles 10. Compare interest ratesObtain rate information from multiple financial services firms to get the best value for your money.  11. Don't borrow what you can't repayBe a responsible borrower who repays as promised, showing you are worthy of getting credit in the future. Before you borrow, compare your total payment obligations with income that you will have available to make these payments.  12. Stay insuredPurchase insurance to avoid being wiped out by a financial loss, such as an illness or accident. An insurance plan should be part of every personal financial plan. www.aba.com/Consumer+Connection/12Principles.htm

  29. Debt: the Good, Bad & Ugly • House Loan (Mortgage) • Auto Loan (Car or Truck) • Personal Loan • Credit Card

  30. House Loan (Mortgage) • Mortgages are usually good debt because equity in the house is built up over time. • Only borrow what you can reasonably afford to pay back each month. • The shorter the term (15yr vs. 30yr) the less interest you pay over time. • Shop around for lowest interest rate.

  31. Auto Loan • Auto loans are considered not so good debt because the value of the car goes down over time. • The shorter the term (36 mo vs. 60 mo) the less interest you pay over time. • Shop around for lowest interest rate. • Better to buy a used car or save up and pay cash for your vehicles.

  32. Personal Loan • Personal loans are considered bad debt because you pay interest with no return. • Only borrow if it is a true emergency. • Shop around for lowest interest rate. • Pay back the loan ASAP. • Better to create your own “emergency” fund and borrow from and repay yourself.

  33. Credit Card Debt • Credit Card debt is ugly debt because you pay enormously high interest rates. • Interest rates can range from 0% - 30% • Credit card debt is one of the leading causes of personal bankruptcy. • Don’t carry balance over each month. • Better to only charge what you can easily pay back each month.

  34. Credit Card Debt • How long to pay off credit card? • $5,000 balance • 10% interest rate • $100 monthly payment • Almost 5.5 years to pay off the debt. • $1,495 of interest • $5,000 principle • $6,495 total money paid – Ugly!

  35. Credit Card Debt • How long to pay off credit card? • $5,000 balance • 20% interest rate • $100 monthly payment • Over 9 years to pay off the debt. • $5,840 of interest • $5,000 principle • $ 10,840 total money paid – Ugly!

  36. Financial Web Resources • www.tiaa-cref.com/ • www.kiplinger.com/planning/ • www.fool.com/ • www.smartmoney.com/ • www.morningstar.com/ • www.yourmoneypage.com/index.shtml • www.bankrate.com/brm/popcalc2.asp • www.savingforcollege.com/ • www.collegesavings.org/ • www.flip4u.org

  37. Financial Priorities • Pay down (eliminate) credit card debt ASAP • Create an emergency fund - enough to cover 3 – 6 months of monthly expenses • Make sure you have adequate life insurance (term is the cheapest) • Maximize all your tax-deferred opportunities first (401k, 403b, 457b) • Open Roth IRAs • Save for children’s college education

  38. Words to “Live” By • Start saving/investing now! • Pay yourself first! • Rule of 72 • Compounding interest ($ work hard for you) • Stick with your financial plan • Invest 50% of your annual raise in you! • Work smart, invest hard, retire peacefully

  39. Questions Todd.Jorns@illinois.gov www.flip4u.org

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