financial tools you need to know to survive money management
TRANSCRIPT
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Financial Tools
You Need to Know
to Survive
Money Management
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What We Will Cover Today
Where does your money go?
Your cash reserves.
What are your goals?
How money works.
Asset allocation.
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Keys to Success
Develop a budget Define specific goals Know how money works Establish cash reserves Develop a financial plan Pay yourself regularly Take immediate action
You must know the seven keys to success:
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Where Does Your Money Go?
Develop a spending plan
Track your monthly expenses
Note the little expenses
Stick to your budget
It is important to:
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Where Does Your Money Go?
Latte: $3 Cookie: $1
Lunch: $6
Soda: $1
Magazine: $2
Total: $13
The latte effect:
Week:$78 Month:
$339
Year: $4,060
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Where Does Your Money Go?
The latte effect:
Week:$78 Month:
$339
Year: $4,060
Invest: $2,500
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Where Does Your Money Go?
Your Monthly Spending
Cost of Living/Debt Repayment . . . . . . . . . . %
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . %
Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . %
Savings/Investments . . . . . . . . . . . . . . . . . . %
TAXES 25%
INSURANCE 8%
SAVINGS/INVESTMENTS 2%
COST OF LIVING/DEBT REPAYMENT 65%
A TYPICAL FAMILY
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Your Cash Reserves
Emergencies
Planned expenses
Investment opportunities
Minimize the need to use credit
The need:
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Your Cash Reserves
Interest paying
Liquidity/check writing
Low risk
No withdrawal penalties
What to look for:
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Your Goals
Think about your short term goals
Think about your intermediate term goals
Think of your long term goals
Put them to paper
Develop a plan
Work with a motivator
To better attain your goals:
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How Money Works
The Rule of 72
72 =Interest Rate
6 % doubles in years
8 % doubles in years
÷Number of Years to Double
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How Money Works
The Magic of Compound Interest
$150,000
$100,000
$50,000
$0
Years 5 10 15 20 25
Investing $100/month8% compounded monthly
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How Money Works
Tax-Deferred Compounding
$350,000
$300,000
$250,000
$200,000
$150,000
$100,000
$50,000
$0
Years 10 25 30
$361,887
$209,960$216,364
$139,563
$35,062
$29,904
Taxed Every YearTax-Deferred
Based on a 10%annual rate of return
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How Money Works
A Tale of Two Investors
* Return figures are for illustrative purposes only and do not represent the past or future performance of any actual investment.
Years
$1,019,169
$16,000
$805,185
$78,000
$1,019,169*
$805,185*
Prudent PollyProcrastinating Pete
Assumes 10% annual rate of return
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Guaranteed Rates of Return
How Money Works
Also known as… Going broke safely
$1000
Interest: 3% +30
1030
Tax: 30% -9
1021
Inflation: 3% -30
$991
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Dollar Cost Averaging - When is the Best Time to Invest?
How Money Works
0
200
400
600
800
1000
1200
1400
1600
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
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Dollar Cost Averaging
How Money Works
$3/doz – 12 eggs
$4/doz – 12 eggs
$2/doz – 12 eggs
$9 – 36 eggs
$3 – 12 eggs
$3 – 9 eggs
$3 – 18 eggs
$9 – 39 eggs
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Dollar Cost Averaging - When is the Best Time to Invest
How Money Works
$0
$1
$2
$3
$4
$5
$6
$7
$8
$9
$10
$11
JAN FEB MAR APR MAY JUNE JULY AUG SEP OCT NOV DEC
A
B
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Dollar Cost Averaging - When is the Best Time to Invest
How Money Works
$0
$1
$2
$3
$4
$5
$6
$7
$8
$9
$10
$11
JAN FEB MAR APR MAY JUNE JULY AUG SEP OCT NOV DEC
Investing $100/month
2017
14
20
B
A
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Dollar Cost Averaging
How Money Works
$0
$1
$2
$3
$4
$5
$6
$7
$8
$9
$10
$11
JAN FEB MAR APR MAY JUNE JULY AUG SEP OCT NOV DEC
$0
$1
$2
$3
$4
$5
$6
$7
$8
$9
$10
$11
JAN FEB MAR APR MAY JUNE JULY AUG SEP OCT NOV DEC
Investing $100/month
2017
14
20
17
14 14 13 13
11
11
10
Total Shares: 174 x $10 = $1,740A
B
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Dollar Cost Averaging
How Money Works
$0
$1
$2
$3
$4
$5
$6
$7
$8
$9
$10
$11
JAN FEB MAR APR MAY JUNE JULY AUG SEP OCT NOV DEC
$0
$1
$2
$3
$4
$5
$6
$7
$8
$9
$10
$11
JAN FEB MAR APR MAY JUNE JULY AUG SEP OCT NOV DEC
Investing $100/month
2017
14
20
17
14 14 13 13
11
11
10
40
3340
Total Shares: 174 x $10 = $1,740A
B
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Dollar Cost Averaging
How Money Works
$0
$1
$2
$3
$4
$5
$6
$7
$8
$9
$10
$11
JAN FEB MAR APR MAY JUNE JULY AUG SEP OCT NOV DEC
Investing $100/month
20 17
14
20
17
14 14 13 13
11
11
10
40
3340
66
33
25
33
3540
25 20
Total Shares: 174 x $10 = $1,740
Total Shares: 410 x $5 = $2,050
A
B
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Debt Inflation Taxes
The Three Worst Enemies To Your Money
How Money Works
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Asset Allocation
Process of efficiently developing a diversified portfolio by mixing different classes of financial assets in varying proportions.
Process whereby an investor constructs a portfolio reflective of goals, time frame and level of risk tolerance to meet financial objectives.
The art of balancing risk and reward to meet objectives.
What is Asset Allocation?
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Asset Allocation
Increases diversification
Potentially lowers volatility
Potentially lowers risk
Potentially increases return
Potentially delivers consistent returns over time
Why Do We Use Asset Allocation?
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Asset Allocation
WWII Normandy invasion
Markowitz and the University of Chicago
Markowitz, Miller and Sharpe win the
Nobel Prize in 1990
A History
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Asset Allocation
The Power of Diversification
8% $684,848
$100,000 - 25 years
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Asset Allocation
The Power of Diversification
8% $684,848
$20,000
-100%
$0
$100,000 - 25 years
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Asset Allocation
The Power of Diversification
8% $684,848
$20,000 $20,000
-100% 0%
$0 $20,000
$100,000 - 25 years
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Asset Allocation
The Power of Diversification
8% $684,848
$20,000 $20,000 $20,000
-100% 0% 5%
$0 $20,000 $67,727
$100,000 - 25 years
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Asset Allocation
The Power of Diversification
8% $684,848
$20,000 $20,000 $20,000 $20,000
-100% 0% 5% 10%
$0 $20,000 $67,727 $216,697
$100,000 - 25 years
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Asset Allocation
The Power of Diversification
8% $684,848
$20,000 $20,000 $20,000 $20,000 $20,000
-100% 0% 5% 10% 15%
$0 $20,000 $67,727 $216,697 $658,379
$100,000 - 25 years
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Asset Allocation
The Power of Diversification
8% $684,848
$20,000 $20,000 $20,000 $20,000 $20,000$962,800
-100% 0% 5% 10% 15%
$0 $20,000 $67,727 $216,697 $658,379
$100,000 - 25 years
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Asset Allocation
The Costs of Volatility
Year 1 Year 2 Year 3 Year 4 Year 5
-10%
10 % 10% 10% ?
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Asset Allocation
If you start with $100,000:
The Costs of Volatility
and gain 10% and lose 10%
and gain 20% and lose 20%
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Asset Allocation
Stocks
Bonds
Cash Equivalents
Real Assets
Typical Asset Classes
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Asset Allocation
Set your objectives
Set your time horizon
Set your investment parameters
Rebalance
Start By Creating a Portfolio for You
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Asset Allocation
You prefer low-volatility investments
You are not comfortable with a large exposure to stocks
You desire an extremely stable income stream or growth pattern
You are concerned about the possible loss of principal
You have a short-term investment time frame
You may be a conservative investor if:
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Asset Allocation
You want to preserve the future purchasing power of your capital, but not in a high-risk situation
The amount of risk you are willing to take to outpace inflation is slight
Your objective is more income-oriented than growth-oriented
You want to achieve some growth, but at a minimal risk
You may be moderate conservative if:
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Asset Allocation
One of your priorities is preserving the future purchasing power of your capital
You are willing to take a modest amount of risk to outpace inflation
You desire a modest but stable growth pattern
You are comfortable with experiencing possible short-term decreases in your portfolio value in exchange for the potential of long-term gains
You may be a moderate investor if:
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Asset Allocation
You are striving for capital appreciation
You are open to the idea of equity investing
You desire above-average long-term growth
You are willing to accept market swings
You have an intermediate- to long-term investment time horizon
You may be moderate aggressive if:
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Asset Allocation
You are trying to achieve maximum capital appreciation
You are comfortable with, or perhaps have a past history of, equity investing
You desire significantly higher long-term growth
You are willing to accept significant market swings
You have a long-term investment time horizon
You may be an aggressive investor if:
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Tolerance for risk is just one of many factors that will dictate the portfolio that is right for you. Others include:
Asset Allocation
Personal financial profile
Financial goals
Time horizons
Investment objectives
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Asset Allocation
100% Bonds
10% Stocks, 90 % Bonds
Minimum Risk Portfolio: 25% Stocks, 75% Bonds
50% Stocks, 50% Bonds
75% Stocks, 25% Bonds
90% Stocks, 10% Bonds
100% Stocks
Risk is measured by standard deviation. Return is measured by arithmetic mean. Risk and return are based on annual data over the period of 1970-1995. Portfolios presented are based on Modern Portfolio Theory. For illustrated purposes only.
Risk (Standard Deviation)
Ret
urn
Source: Ibbotson, Associates.Past performance is no guarantee of future results
100% Bonds
10% Stocks, 90 % Bonds
Minimum Risk Portfolio: 25% Stocks, 75% Bonds
50% Stocks, 50% Bonds
75% Stocks, 25% Bonds
90% Stocks, 10% Bonds
100% Stocks
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Asset allocation is not a perfect investment method. However, short ofa crystal ball, it is the best way to:
Asset Allocation
Potentially maximize returns
Spread and minimize risk
Potentially lower volatility
Increase diversification
Potentially deliver consistent returns over time
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In Closing
Who do you think will be better off in the future?
The Jones, who save today’s money for tomorrow, or
The Smiths, who spend tomorrow’s money today?
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The Next Step
Develop a budget for your house
Homework
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The Next Step
Develop a budget for your house Track your expenses
Homework
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The Next Step
Develop a budget for your house Track your expenses Calculate monthly spending percentages
Homework
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The Next Step
Develop a budget for your house Track your expenses Calculate monthly spending percentages Come up with a financial plan
Homework
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The Next Step
Develop a budget for your house Track your expenses Calculate monthly spending percentages Come up with a financial plan Have sufficient reserves
Homework
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The Next Step
Develop a budget for your house Track your expenses Calculate monthly spending percentages Come up with a financial plan Have sufficient reserves Diversify your holdings
Homework