CHAPTER 13CHAPTER 13

FINANCIALFINANCIAL

DECISIONDECISION

MAKINGMAKING

FINANCIALFINANCIAL PYRAMIDPYRAMIDCREDITCREDIT

SAVINGSSAVINGS

&&

GOAL PLANNINGGOAL PLANNING

FINANCIALFINANCIAL

DECISION MAKINGDECISION MAKING

NEGOTIATINGNEGOTIATING

BUDGETINGBUDGETING

(first seminar)(first seminar)

PRINCIPLES OFPRINCIPLES OFFINANCIAL DECISION MAKINGFINANCIAL DECISION MAKING

Thinking with your head, not your Thinking with your head, not your emotions.emotions.

Determining which decision will provide Determining which decision will provide the greatest amount of benefit.the greatest amount of benefit.

Know the length of benefit you are Know the length of benefit you are interested in maximizing. (short term, interested in maximizing. (short term, intermediate term or long term)intermediate term or long term)

Forgetting about lost cost!Forgetting about lost cost! Calculating opportunity cost.Calculating opportunity cost. Don’t use long term debt to pay off Don’t use long term debt to pay off

short term needs.short term needs.

DECISION MAKINGDECISION MAKING

HOW MANY MAJOR FINANCIAL HOW MANY MAJOR FINANCIAL DECISIONS WILL YOU MAKE IN YOUR DECISIONS WILL YOU MAKE IN YOUR LIFE? (AVG.)LIFE? (AVG.)

2323

MAJOR DECISIONSMAJOR DECISIONS Buying vehicles (8)Buying vehicles (8) Purchasing primary residence (6)Purchasing primary residence (6) When you start saving for retirement (1)When you start saving for retirement (1) When you start saving for college for When you start saving for college for

your children or do you? (1)your children or do you? (1) Should you go back to get additional Should you go back to get additional

education? (3)education? (3) When do you get married or do you? (2)When do you get married or do you? (2) Should you have a child (2)Should you have a child (2)

WHEN TO START SAVING FOR WHEN TO START SAVING FOR RETIREMENTRETIREMENT

AGE 22AGE 22 AGE 45AGE 45

YEARLY DEPOSITYEARLY DEPOSIT $4,000$4,000 $4,000$4,000

YEARS TO SAVEYEARS TO SAVE 43 43 20 20

RATE OF RETURNRATE OF RETURN 8% 8% 8% 8%

RESULTSRESULTS $1,318,332 $1,318,332 $183,047$183,047

WHEN TO START SAVING FOR WHEN TO START SAVING FOR COLLEGE EDUCATIONCOLLEGE EDUCATION

19 YEARS PRIOR19 YEARS PRIOR 3 YEARS PRIOR3 YEARS PRIORMUST SAVE $266/MO MUST SAVE MUST SAVE $266/MO MUST SAVE

$3,300/MO$3,300/MO

FOR MOST PEOPLE $266/MO IS AN OPTION, FOR MOST PEOPLE $266/MO IS AN OPTION, HOWEVER FOR THOSE WHO WAIT, MOST HOWEVER FOR THOSE WHO WAIT, MOST TAKE A SECOND MORTGAGE OUT TO PAY TAKE A SECOND MORTGAGE OUT TO PAY FOR COLLEGE WHICH WILL END UP FOR COLLEGE WHICH WILL END UP COSTING THEM AN ADDITIONAL COSTING THEM AN ADDITIONAL $240,000 OF INTEREST.$240,000 OF INTEREST.

TRADITIONAL IRA TRADITIONAL IRA OR ROTH IRAOR ROTH IRA

RETIREMENT TAX BRACKETRETIREMENT TAX BRACKET 15%15% 38%38%

DED. IRA $2,363DED. IRA $2,363 $1,720 $1,720ROTH IRA $1,838 $1,838ROTH IRA $1,838 $1,838TAX. INV. $ 369 $ 318TAX. INV. $ 369 $ 318

THE DECISION IS BASED ON YOUR THE DECISION IS BASED ON YOUR FUTURE TAX BRACKET AND INCOME.FUTURE TAX BRACKET AND INCOME.

REBATE VS INTEREST RATEREBATE VS INTEREST RATE WHICH ONE IS A BETTER DEAL?WHICH ONE IS A BETTER DEAL?

PERCENTAGE RATEPERCENTAGE RATE 0%0% 4%4%CASH REBATECASH REBATE $1,500 $1,500 $2,500 $2,500SAVINGS RATESAVINGS RATE 2.5% 2.5% 2.5%2.5%

SAVINGSSAVINGS $1,175 $1,175 $1,446 $1,446

WHICH METHODWHICH METHODIS BETTER? IS BETTER? INTEREST CASH INTEREST CASH

REBATEREBATE

CREDIT CARD INTERESTCREDIT CARD INTEREST

HOW IMPORTANT IS THE INTEREST RATE?HOW IMPORTANT IS THE INTEREST RATE? 12%12% 22%22%

AMOUNT OWEDAMOUNT OWED $8,000 $8,000 $8,000 $8,000FUTURE CHARGES 200/MO. 200/M0.FUTURE CHARGES 200/MO. 200/M0.MONTHLY PAY.MONTHLY PAY. $ 300 $ 300 $ 350 $ 350

INTEREST CHARGES INTEREST CHARGES $9,044$9,044 $55,506$55,506

TOTAL COST DIFF.TOTAL COST DIFF. $46,462 $46,462

NEW OR USEDNEW OR USEDVEHICLE?VEHICLE?

NEWNEW USED USEDAVG. PURCHASE PRICEAVG. PURCHASE PRICE $21,000$21,000 $11,000 $11,000AVG. MAINT. PER YEARAVG. MAINT. PER YEAR 2,000 2,000 3,000 3,000MONTHLY PAYMENTMONTHLY PAYMENT 400 400 200 200TOTAL DEPRECIATIONTOTAL DEPRECIATION 18,316 18,316 8,886 8,886TOTAL INTEREST PAID (5%) TOTAL INTEREST PAID (5%) 2,777 2,777 1,455 1,455

TOTAL COST (5 YEARS) $52,093TOTAL COST (5 YEARS) $52,093$36,341$36,341(The used car will save you about $15,000 plus (The used car will save you about $15,000 plus

investment return over a 5 year period.) investment return over a 5 year period.)

REFINANCE OR NOT?REFINANCE OR NOT?

CURRENT LOANCURRENT LOAN $140,000$140,000

CURRENT INTEREST RATECURRENT INTEREST RATE 7.50% 7.50%

NEW INTEREST RATENEW INTEREST RATE 4.50% 4.50%

TOTAL COST TO REFINANCETOTAL COST TO REFINANCE $ 2,100$ 2,100

STAY IN HOUSE STAY IN HOUSE 7 YEARS 7 YEARS

REFINANCING WILL SAVE $21,252 REFINANCING WILL SAVE $21,252 OVER THE SEVEN YEARS. ONE YEAR OVER THE SEVEN YEARS. ONE YEAR PAYBACK PERIOD. GREAT DEAL!PAYBACK PERIOD. GREAT DEAL!

SHOULD SPOUSE WORK OR SHOULD SPOUSE WORK OR NOT?NOT?

First you must consider why you need the extra money. First you must consider why you need the extra money. Is it to increase your status or is it to save for Is it to increase your status or is it to save for emergencies? Know why so you don’t just work emergencies? Know why so you don’t just work harder and buy more things. harder and buy more things. (Nice emergency fund (Nice emergency fund below!)below!)

Scenario:Scenario:Extra Income Extra Income $2,000$2,000Less: TaxesLess: Taxes 410 410Less: Extra Exp.Less: Extra Exp. 946 946

Monthly BenefitMonthly Benefit $ 644$ 644 or or $7,728/yr.$7,728/yr.____________

CONSOLIDATE DEBTCONSOLIDATE DEBTOR NOT?OR NOT?

If you have two different loans and three credit If you have two different loans and three credit cards, would it be wise to consolidate using a cards, would it be wise to consolidate using a home equity line of credit:home equity line of credit:Current LoansCurrent Loans Consolidation LoanConsolidation Loan

Total PrincipleTotal Principle $ 9,800 $ 9,800 $ 9,800 $ 9,800Total interestTotal interest 4,717 4,717 2,424 2,424Other costOther cost -0- -0- 375 375Investment Savings -0-Investment Savings -0- (634)(634)Tax savingsTax savings -0- -0- (819) (819) Total CostTotal Cost $14,817$14,817 $ 11,146 $ 11,146 ------------------------ ------------- -------------TOTAL SAVINGS OF $ 3,671$ 3,671

FIXED OR ADJUSTABLEFIXED OR ADJUSTABLERATE?RATE?

TYPE OF LOANTYPE OF LOAN VARIABLEVARIABLE FIXEDFIXED FIXEDFIXEDLOAN AMT.LOAN AMT. $140K $140K $140K $140K $140K $140KTERMTERM 5/30 YR. 15 YR. 30 YR. 5/30 YR. 15 YR. 30 YR.5 YR. RATE5 YR. RATE 2.5% 2.5% AVG. 30 YEAR RATEAVG. 30 YEAR RATE 7.0% 7.0% 3.5% 3.5% 4.5% 4.5%

30 YR. COSTS 30 YR. COSTS $330,037$330,037 $180,000$180,000 $255,240$255,240

SAVINGS $ -0- $150,037 $ SAVINGS $ -0- $150,037 $ 74,797 74,797

WHAT IS IT WORTH TO REDUCE WHAT IS IT WORTH TO REDUCE MY SPENDING?MY SPENDING?

1 yr. 1 yr. 10 yrs. 10 yrs. 30 yrs. 30 yrs.Waiting to buy a new carWaiting to buy a new car $2,640 $32,454 $152,434 $2,640 $32,454 $152,434

Eating out lessEating out less 600 7,376 34,644 600 7,376 34,644

Buying fewer clothesBuying fewer clothes 1,200 14,752 69,288 1,200 14,752 69,288

Taking fewer tripsTaking fewer trips 600 600 7,376 34,644 7,376 34,644

Going to fewer moviesGoing to fewer movies 360 4,426 20,786 360 4,426 20,786

Paying off credit cards/mo.Paying off credit cards/mo. 1,800 22,128 1,800 22,128 103,932103,932

Carpooling to work Carpooling to work 300 300 3,688 3,688 17,322 17,322

Total Savings $ 7,500 $92,200 $433,051Total Savings $ 7,500 $92,200 $433,051

ROI 5% 30 yr. ROI 5% 30 yr. $998,896$998,896

WHAT IS THE VALUE OF WHAT IS THE VALUE OF HIGHER EDUCATION?HIGHER EDUCATION?

Should you strive for a graduate degree? At what Should you strive for a graduate degree? At what age is this useful? (Break even point is about age age is this useful? (Break even point is about age 45)45)

Income with Bachelors Income with Bachelors $2,125,433$2,125,433

Income with Masters Income with Masters 3,004,4333,004,433(Subtotal)(Subtotal) $ 879,000$ 879,000

Less: Educational Cost Less: Educational Cost 150,000 150,000 Lost wages Lost wages 100,000 100,000

Increased Taxes Increased Taxes 290,000 290,000

Total Financial BenefitTotal Financial Benefit $ 339,000$ 339,000 __________________

SHOULD I PAY POINTS TO SHOULD I PAY POINTS TO LOWER MY INTEREST?LOWER MY INTEREST?

The average family stays in their home for an The average family stays in their home for an average of seven years prior to moving!average of seven years prior to moving!

LESSLESS MOREMOREPOINTSPOINTS POINTSPOINTS

LOAN AMOUNTLOAN AMOUNT $140,000$140,000 $140,000$140,000INTEREST RATEINTEREST RATE 6.5% 6.0% 6.5% 6.0%DISCOUNT POINTS 1.0%DISCOUNT POINTS 1.0% 2.0% 2.0%

FINANCIAL BENEFITFINANCIAL BENEFIT(SAVINGS):(SAVINGS): $1,956$1,956

TERM OR UNIVERSAL LIFE?TERM OR UNIVERSAL LIFE?

INVESTING IN LIFE INSURANCE IS A PERSONAL CHOICE INVESTING IN LIFE INSURANCE IS A PERSONAL CHOICE AND A FINANCIAL CHOICE. BOTH CHOICES DON’T AND A FINANCIAL CHOICE. BOTH CHOICES DON’T ALWAYS COINCIDE WITH EACH OTHER.ALWAYS COINCIDE WITH EACH OTHER.

UNIVERSALUNIVERSAL TERMTERMPOLICY AMOUNTPOLICY AMOUNT $350,000$350,000 $350,000$350,000PREMIUMSPREMIUMS $150/MO.$150/MO. $50 $50 CASH VALUECASH VALUE(AFTER 50 YRS)(AFTER 50 YRS) 5.21%5.21% 7.95%7.95%ROR ON INV.ROR ON INV.

BEST FIN. DEC. (BEST FIN. DEC. (May or may not be wisest choice)May or may not be wisest choice) xx(Assuming the insured invests the difference in (Assuming the insured invests the difference in

premiums at 4% return.)premiums at 4% return.)

SHOULD I MAKE EXTRA SHOULD I MAKE EXTRA PAYMENTS ON MY HOUSE?PAYMENTS ON MY HOUSE?

NoNo WithWithExtraExtra ExtraExtraPmtsPmts PmtsPmts

Principal & Int.Principal & Int. $885/mo.$885/mo. $985/mo.$985/mo.Taxes Taxes 179 179 179 179Mortg. Ins.Mortg. Ins. 37 37 37 37

Total Interest PaidTotal Interest Paid $178,562$178,562 $128,255$128,255

TOTAL SAVINGSTOTAL SAVINGS N/A N/A $50,307$50,307