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Materials for Lecture 17. Lecture 17 Annual Payment.XLS Lecture 17 Monthly Payment.XLS Lecture 17 Equity Growth.XLS Lecture 17 Retirement Calculator.XLS Sources of information

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materials for lecture 17
Materials for Lecture 17
  • Lecture 17 Annual Payment.XLS
  • Lecture 17 Monthly Payment.XLS
  • Lecture 17 Equity Growth.XLS
  • Lecture 17 Retirement Calculator.XLS
  • Sources of information
    • Dave Ramsey -- The Total Money Makeover: A Proven Plan for Financial Fitness. It is available at most book stores and on line
    • Personal experience and observing successful people
do you want to manage debt or wealth
Do You Want to Manage Debt or Wealth?
  • This lecture is not about business management
  • It is about personal money management
  • I ask again: “Do you want to spend your life managing debt or wealth?”
  • People work for 2 reasons:
    • Cover costs for necessities
    • Increase net worth (so we can retire)
      • To achieve this goal we must manage wealth
to manage wealth
To Manage Wealth
  • First Step is to become debt free
  • Second step is to build wealth
  • Reasons to build wealth
    • Retirement
    • Security
    • Have Fun
  • Money is Not the root of all evil
  • Desire of money is the root of all evil
steps to becoming debt free
Steps to Becoming Debt Free
  • Cut Expenses so you live within your means and SAVE
  • Stop using credit cards – pay cash or postpone purchases
  • Buy used cars 1-2 years old, keep them a few years and trade again
    • After you have built wealth then you can afford to buy new cars
    • NEVER lease a vehicle
      • Think about it, you are paying for the car plus interest PLUS someone else’s profits
build a cash reserve
Build a Cash Reserve
  • Yes, before you start paying off debt build a cash reserve – your personal VAR fund
  • Why a cash reserve? How much? Where do I invest it?
    • Cash reserve pay for an emergency: as job loss Not to go on a vacation, go to a wedding, or …
    • Cash reserve should be equal to 3 times your after-tax Monthly salary
    • Invest it in a Money Market account, interest is low but MMs usually require a min check size of $250 so it discourages using it on little items
how to build a cash reserve
How to Build a Cash Reserve
  • How do you build a cash reserve?
  • Sell something
    • Garage sale
    • Extra vehicle
    • Move to cheaper house, etc.
  • Get a part time job
    • Deliver papers before work
    • Deliver pizza after work
    • Start a business doing something other people do not want to do for themselves
  • This is not permanent just to get a reserve
develop a plan to pay off debts
Developa Plan to Pay Off Debts
  • Sort debts from low to high: D1, D2, .., Dn
  • Pay the maximum extra you can on the smallest debt (D1) until it is paid off
  • Use money you had been paying on D1 and add it to the payment on D2 until it is paid
  • Continue this until all debts are paid off
  • Euphoria from paying off a debt is great so get the feeling early by attacking the lowest debt (D1) first, then move to D2 …..
  • Making double and triple payments
do not get back into debt
Do Not Get Back Into Debt
  • Do Not Get into Trouble with Credit Card Debt!
  • Look how long it takes to pay off a credit card debt: here I tested 2 different interest rates
do not get back into debt1
Do Not Get Back Into Debt
  • Use Cash or Debit Cards
  • Can I ever use a Credit Card again?
    • Yes if your job reimburses your travel expenses
    • Have one separate card for ONLY travel that will be reimbursed
  • Avoid all kinds of debt
    • Save money to buy a car
    • Do not take vacations until can pay cash
    • Stay off of cruise ships
    • Save money for a house
years and cost to finance a car
Years and Cost to Finance a Car
  • The total cost of a $40,000 car
  • Financed 72 months =$46,382 to $49,101
  • Shorter the loan, the lower total cost
housing buy or rent
Housing: Buy or Rent
  • Renting
    • Provides no income tax deductions
      • But do you have sufficient income to itemize deductions? Probably not when starting out
    • Does not build equity
  • Ownership
    • Builds equity (very slowly)
    • Often get over extended with large payments
    • Small income tax deductions on the whole
    • Do not acquire debt to reduce income taxes!
    • Save for a house; make a large down payment
years and cost to finance a home
Years and Cost to Finance a Home
  • Examine total cost of a $100,000 home
  • Financing for 15 vs. 30 years is $77,076
stochastic equity growth for a home loan
Stochastic Equity Growth for a Home Loan
  • After 5 Years, how much equity do you have?
  • Depends on how long you financed
  • Will your job let you stay for 30 years?
once you are debt free what s next
Once You Are Debt Free, What’s Next?
  • Do not change standard of living -- SAVE
  • Save for what?
    • Retirement
    • Children’s educ – #529 College Savings Plan
  • Where do you invest your savings?
    • Low load mutual funds – lots to choose from
      • American Funds, ING, etc.
    • Make sure you can move money among the Funds Family without a cost
    • Get a broker, but do not let them make trades for you – can lead to account churning
retirement savings
Retirement Savings
  • When do I start? How much should I save? Is it to late? What about Social Security for yourretirement?
  • In the future, businesses will not provide retirement accounts
  • You will beon your own to save through an IRA
    • Some businesses will provide matching funds
    • Some will offer managed IRAs with limited options
retirement savings1
Retirement Savings
  • Start saving the day you graduate
  • Save as much as you can but at least save 15% of your gross salary annually
  • Keep working and paying into Social Security so I can collect it after I retire
    • Do not depend on Social Security to cover your retirement needs
    • Today estimate SS will pay me 19% of my current take home pay; after paying for 48 years
social security and medicare medicaid
Social Security and Medicare/Medicaid
  • Social Security has no store of money
  • Congress will be forced to act on these entitlements
    • Debt ceiling, sequestration, budget reductions from Super Committee
    • All these add up to changes
  • Probable changes
    • Extending retirement age
    • Means testing based on wealth or income
    • Reduced payment rates
irs and retirement savings
IRS and Retirement Savings
  • Tax DEFERRED savings
    • Traditional IRA - $5,000/year per person unless over 60 then save $6,000/year
    • If you are in a company retirement plan can still use the maximum Traditional IRA
    • If you are self employed you can have a
      • SEP IRA – 25% of business income up to $50,000 tax deferred
      • KEOGH plan – 25% of self-employed income up to $49,000 tax deferred
  • Not tax deferred savings
    • You can save as MUCH as you want
retirement savings is a risky investment
Retirement Savings is a Risky Investment
  • Variables to consider
    • Current age and amount you have saved
    • Current salary and expected raises
    • Age you want to retire
    • Consumption expenditures after you retire
    • Annual rate of inflation pre & post retirement
    • Returns you expect on savings until retirement
    • Returns on savings after you retire
    • How long do you & spouse expect to live
  • Which of these variables are stochastic?
retirement calculator
Retirement Calculator
  • I made a Monte Carlo simulation model to calculate retirement savings
  • With lots of stochastic & input variables
open the retirement calculator
Open the Retirement Calculator
  • Enter your own values
  • Simulate using the KOV table starting in row 177
  • What age do you have a zero wealth?
  • How much do you have to save to give yourself a 95% chance of having wealth when you are 90 or 95 or even 100?
  • Did you marry the right person ($’s)?
  • Remember divorce cuts your wealth in half so it takes longer to save for retirement
summary of agec 622
Summary of AGEC 622
  • Linear programming – what ought to be
  • Probabilistic forecasting – capabilities of forecasting with multiple regression, exponential smoothing, seasonal analysis, and time series analysis
  • Monte Carlo simulation – what could be ….
    • Frame your problem in a systems framework
    • Model design and development
    • Parameter estimation for stochastic variables and deterministic component of a forecast
    • Validate simulated variables
    • Univariate and MV distributions
  • Apply these tools for business and personal decision making using stochastic efficiency
what can you take to the job
What can you take to the job?
  • Improved Excel skills
  • Applied econometrics
  • Ability to organize & build a business model
  • Make any business model a risk analysis tool
  • Rank risky alternatives
  • Deterministic and probabilistic forecasting
  • Simetar
    • Available as long as you are a fulltime student
    • After you graduate, buy it at www.simetar.com
  • If you do not have Simetar, you can use @Risk

=NORM() same as =RISKNORMAL()

=UNIFORM() same as =RISKUNIFORM()