Ned C. HillNed C. HillNational Advisory Council Professor and National Advisory Council Professor and

Academic Director, H. Taylor Peery Institute of Financial ServicesAcademic Director, H. Taylor Peery Institute of Financial Services

Marriott School of ManagementMarriott School of ManagementBrigham Young University

Personal and Family Financial Management

15 Suggestions

OPAC ConferenceNovember 2009

President Gordon B. Hinckley Priesthood Meeting, October 3rd, 1998

Story of Pharaoh’s dream of the seven fat cattle and the Story of Pharaoh’s dream of the seven fat cattle and the seven lean cattleseven lean cattle

“…“…I want to make it very clear I want to make it very clear that I am not prophesying, that that I am not prophesying, that I am not predicting years of famineI am not predicting years of faminein the future. But I am suggesting in the future. But I am suggesting that that thethe time has come to get our time has come to get our houses in orderhouses in order. . There is a portent There is a portent of of stormy weather aheadstormy weather ahead to which to which we had better give heed.”we had better give heed.”

““So many of our people are living So many of our people are living on the very edge of their incomes. on the very edge of their incomes. In fact, some are living on borrowings.”In fact, some are living on borrowings.”

President Gordon B. Hinckley (cont.)

““I urge you, brethren, to look to the condition of I urge you, brethren, to look to the condition of your finances.”your finances.”

““I urge you to be modest in your expenditures; I urge you to be modest in your expenditures; discipline yourselves in your purchases to avoid discipline yourselves in your purchases to avoid debt to the extent possible.”debt to the extent possible.”

““Pay off debt as quickly as you can, and free Pay off debt as quickly as you can, and free yourselves from bondage.”yourselves from bondage.”

““That’s all I have to say about it, but I wish to say That’s all I have to say about it, but I wish to say it with all the emphasis of which I am capable.”it with all the emphasis of which I am capable.”

President Gordon B. Hinckley General Conference, October 7th, 2001

““The economy is particularly vulnerable. We have The economy is particularly vulnerable. We have been counseled again and again concerning self-been counseled again and again concerning self-reliance, concerning debt, concerning thrift. So reliance, concerning debt, concerning thrift. So many of our people are heavily in debt for things many of our people are heavily in debt for things that are not entirely necessary.”that are not entirely necessary.”

““I urge you as members of this Church to get free I urge you as members of this Church to get free of debt where possible and to have a little laid of debt where possible and to have a little laid aside against a rainy day.”aside against a rainy day.”

President Gordon B. President Gordon B. HinckleyHinckley

““I am satisfied that money I am satisfied that money is the root of more trouble is the root of more trouble in marriage than all other in marriage than all other causes combined.”causes combined.”

““There would be fewer rash There would be fewer rash decisions, fewer unwise decisions, fewer unwise investments, fewer investments, fewer consequent losses, fewer consequent losses, fewer bankruptcies if husbands bankruptcies if husbands and wives would counsel and wives would counsel together on such matters together on such matters and unitedly seek counsel and unitedly seek counsel from each other.”from each other.”

Cornerstones of a Happy HomeCornerstones of a Happy Home [pamphlet, 1984] [pamphlet, 1984]

New Dollar Bill Released by the Treasury Last

Week

                                                            

Elder Joseph B. WirthlinApril Conference, 2004

““Remember this: debt is a form of bondage. It is a Remember this: debt is a form of bondage. It is a financial termite. When we make purchases on financial termite. When we make purchases on credit, they give us only an illusion of prosperity. credit, they give us only an illusion of prosperity. We think we own things, but the reality is, our We think we own things, but the reality is, our things own us.”things own us.”

““Some debt—such as for a modest home, Some debt—such as for a modest home, expenses for education, perhaps for a needed first expenses for education, perhaps for a needed first car—may be necessary. But never should we enter car—may be necessary. But never should we enter into financial bondage through consumer debt into financial bondage through consumer debt without carefully weighing the costs.”without carefully weighing the costs.”

Net Worth—Helps You Think About Debt Net worth = Assets - LiabilitiesNet worth = Assets - Liabilities AssetsAssets

Market value (not purchase price)Market value (not purchase price) Real and financialReal and financial

LiabilitiesLiabilities Credit card and other consumer debtCredit card and other consumer debt MortgagesMortgages

Why do this?Why do this? Net worth helps you do stuff in the futureNet worth helps you do stuff in the future Track over time--should be growingTrack over time--should be growing Identifies assets that could be used to reduce debtIdentifies assets that could be used to reduce debt

Net Worth

Net Worth—A Picture

Assets

Liabilities

Net Worth

Impact of Credit Card Purchase

Assets

Liabilities

Credit Card DebtFlat Screen TV

Net Worth

Impact of Credit Card Purchase

Assets

Liabilities

Credit Card DebtFlat Screen TV

How do you balance this?

Net Worth

What Adds to Net Worth?

Assets Liabilities

Credit Card DebtFlat Screen TV

Net Worth Must Shrink!

Avoid Unproductive DebtIt Makes Net Worth Shrink

Productive debtProductive debt Unproductive debtUnproductive debt

Home

Education

Minimumtransportation

Business

Consumer goods

Vacations

Car

Most credit card debt

Suggestion 1

Be careful—any debt here can become unproductive

Some Facts about Debt & Credit Cards Average household has 13 credit cardsAverage household has 13 credit cards 65% of card holders do not pay off total balance each month65% of card holders do not pay off total balance each month People tend to spend 12% more when they use their credit cards People tend to spend 12% more when they use their credit cards

(compared to cash).(compared to cash). Over 40% of US families spend more than they earn (Federal Over 40% of US families spend more than they earn (Federal

Reserve)Reserve)

Origin of Most Debt Problems?Spending Problems

Income Expenditures

Debt

Control Your Spending

Step 1: Write down your cash flowsStep 1: Write down your cash flows 2-3 months back2-3 months back Find Find all all expenditures—including cash purchasesexpenditures—including cash purchases Determine total assets and liabilitiesDetermine total assets and liabilities

Step 2: Agree on goalsStep 2: Agree on goals What do we want to accomplish?What do we want to accomplish? Agree on a budget for future cash flowsAgree on a budget for future cash flows

Step 3: Track cash flows--compare budget to actualStep 3: Track cash flows--compare budget to actual Use computer or any other method (envelopes)Use computer or any other method (envelopes)

Step 4: Review monthly—talk it over!Step 4: Review monthly—talk it over! Step 5: Make adjustmentsStep 5: Make adjustments

Suggestion 2

B U D G E T for _____________, 2 0 0 9

INCOME PLANNED ACTUALWages/Salaries (after taxes)Other incomeEducational LoansTotal incomeEXPENDITURES PLANNED ACTUALChurch donationsSavingsFoodTuition, books, etc.Mortgage or rentUtilitiesTransportationDebt paymentsInsuranceMedicalClothingOtherTotal expenditures

Why You Should Have a Spending Plan

Communicate with spouse and family Communicate with spouse and family Find out what you are spendingFind out what you are spending Extract more money for saving and Extract more money for saving and

investinginvesting Get out of debtGet out of debt Prepare for the futurePrepare for the future Keep money from slipping through your Keep money from slipping through your

fingersfingers

If You Must Borrow, Be Careful Where!

Finance companiesFinance companies Credit cardsCredit cards BanksBanks Credit unionsCredit unions ““Pay Day Lenders”Pay Day Lenders”

0

5

10

15

20

25

30

FC CC B CU SPD

500+%

Suggestion 3

Reduce Unproductive Debt

Plastic surgery Plastic surgery Reduce spendingReduce spending Use assets to pay off Use assets to pay off

debtdebt Make a plan -- stick Make a plan -- stick

to itto it Talk to a credit Talk to a credit

counselor if neededcounselor if needed

Suggestion 4

Protect Your Family

Insurance Life Health Car Disability Home owners/renters

Emergency cash Food storage

Suggestion 5

Term Life -- Pure Death Benefit No savings componentNo savings component About 1/10About 1/10thth to 1/5 to 1/5thth the cost of permanent the cost of permanent Expires at age 65 (usually)Expires at age 65 (usually) Many employers offer term insurance as part Many employers offer term insurance as part

of its benefits packageof its benefits package Base amountBase amount Can purchase additional if desiredCan purchase additional if desired

Two typesTwo types Decreasing Term (premiums stay same)Decreasing Term (premiums stay same) Constant Term (premiums increase over time)Constant Term (premiums increase over time)

Permanent Life -- Death Benefit Plus Savings Component Part of premiums go to building “cash value”Part of premiums go to building “cash value”

Can borrow against itCan borrow against it

The other part goes to death benefitThe other part goes to death benefit Premiums stay constant over timePremiums stay constant over time Does not expireDoes not expire Most policies give fixed rate of return on the cash valueMost policies give fixed rate of return on the cash value More expensive per $ of insurance coverageMore expensive per $ of insurance coverage Often used for estate tax purposesOften used for estate tax purposes Variants: universal life, variable lifeVariants: universal life, variable life

Cash fromInsurance

Added Net Worth

Net Worth

Insurance--Makes Up for Low Net Worth Problems If you have low or negative net worth?If you have low or negative net worth?

Heirs may have difficultiesHeirs may have difficulties Severe cash flow problemsSevere cash flow problems

Insurance creates an Insurance creates an instant estate--instant estate--it becomes an it becomes an asset if you dieasset if you die

AssetsLiabilities

What Kind and How Much?

Start with Start with term insurance term insurance (6-10 times (6-10 times annual income)annual income)

Group is least costly but what if you leave?Group is least costly but what if you leave? Have some for non-employed spouseHave some for non-employed spouse

Corollary

Your net worth should build up over time As it does, you may need less and less life

insurance However, life insurance can be used as a

tool to pass part of the estate on to heirs (this is where permanent insurance comes in).

Prepare for RetirementYes, Even When You Are Young!

Some Retirement MythsSome Retirement Myths ““I’ll live on Social Security benefits”I’ll live on Social Security benefits”

SS will replace only 24% of your incomeSS will replace only 24% of your income ““Someone else will take care of me”Someone else will take care of me” ““Better be safe and invest conservatively”Better be safe and invest conservatively”

Biggest regrets for retireesBiggest regrets for retirees Didn’t take full advantage of tax deferred Didn’t take full advantage of tax deferred

investmentsinvestments Didn’t start earlier to save for retirementDidn’t start earlier to save for retirement

Suggestion 6

Why Start Saving Early?

Remember: Social Security provides only Remember: Social Security provides only about about 24% of a typical family’s pre- of a typical family’s pre-retirement income.retirement income.

Can you live on just 24%?Can you live on just 24%? You’ll need other sources of incomeYou’ll need other sources of income

Retirement plan from employerRetirement plan from employer Personal retirement savingsPersonal retirement savings Equity in a homeEquity in a home

ExampleBill starts saving for retirement at age 20Joe starts saving for retirement at age 40

0100000200000

300000400000

500000600000

700000800000

9000001000000

20 25 30 35 40 45 50 55 60 65

20 Start40 Start

Bill has accumulated over 5 times what Joe did by 65!

($2,000 per year at 8%)

$903,800

$172,702

How Does This Work?

Compound interestCompound interest Bill started earlier--compound interest has Bill started earlier--compound interest has

more time to work its miraclemore time to work its miracle If someone had put $1 in an account back in If someone had put $1 in an account back in

1776 at 8% interest how much would the 1776 at 8% interest how much would the account have in it today?account have in it today?

$61,339,000 !!$61,339,000 !!

Suggestion 7

Every time you get paid:• Pay the Lord first (10%)• Then pay your future self (10%)• Live on the rest (80%)

Save Wisely

Saving Builds Net Worth Over Your Lifetime

-100

0

100

200

300

400

500

600

700

20 25 30 40 50 60 65 70 80 Age

(000’s)

Borrowing

Save 10%

Save 20%

Retirement

To Heirs

Life Cycle Savings

Suggestion 7A

What Should I Invest In? Principle: risk-return trade-offPrinciple: risk-return trade-off

High risk--high returnHigh risk--high return Low risk--low returnLow risk--low return

What?What? Stocks -- ownership in a company (risky)Stocks -- ownership in a company (risky) Bonds -- loan to a company/government (less risky)Bonds -- loan to a company/government (less risky) Deposit accounts -- (insured, no risk)Deposit accounts -- (insured, no risk)

How?How? Mutual fundsMutual funds Tax-deferred investingTax-deferred investing

Best and Worst Total Returns(since 1926)54%

-43%

15%

0%

20%

-1%

9%

0%

17%

3%

8%

0.4%

One yearholdingperiod

10-yearholdingperiod

20-yearholdingperiod

Stocks: S&P 500

U.S. T-bills

Chances of Beating Inflation

0102030405060708090

100

One-year 5 Years 10 Years 20 Years

S&P500

Bonds

T-bills

Holding Period

%

Chances of Loss

Oneyear

5years

10years

20years

0

5

10

15

20

25

30

Oneyear

5years

10years

20years

S&P 500

Bonds

T-bills

Invest to Match Your Time Horizon

Short period (5 years or less)—put your Short period (5 years or less)—put your money in less risky investments like money in less risky investments like savings accounts and secure bondssavings accounts and secure bonds

Longer period (10-20 or more years)—put Longer period (10-20 or more years)—put your money in stocksyour money in stocks

Suggestion 8

Two Forms of Retirement Plans1. DEFINED BENEFIT PLAN

Employer defines how retirement benefit is computed

Example: Years worked x 1.5% x Last 5 years ave. salary

Example: 20 yrs x .015 x $70,000 = $21,000/yr

Must qualify (minimum number of years worked) Employer responsible for funding the plan,

investing the money and making sure the funds are there for retiring employees

Many employers are dropping these plans

Two Forms of Retirement Plans2. DEFINED CONTRIBUTION PLAN (401k)

Employee puts X% of monthly salary into the plan Employer may match some portion of the

contribution (THIS IS FREE MONEY!) Example: You put in 8%, employer adds 4% What do you actually invest in? Examples:

Short-term government securities (MMMF) Relatively safe bonds Index fund Growth fund International fund

Use Tax-Advantaged Investing Wherever Possible

401(k)--retirement plans401(k)--retirement plans Employer may participateEmployer may participate Loan provisionsLoan provisions Various investment optionsVarious investment options

IRAsIRAs Roth IRAs (not tax-deductible—but no taxes Roth IRAs (not tax-deductible—but no taxes

when you take money out in retirement) when you take money out in retirement) Keogh Plan (various types, up to 30% of self-emp Keogh Plan (various types, up to 30% of self-emp

inc)inc) SEP Plan (up to 25% of self-empl income)SEP Plan (up to 25% of self-empl income) 403(b)--retirement (employees of govts, ed, relig.)403(b)--retirement (employees of govts, ed, relig.)

Virtually same as 401(k)Virtually same as 401(k)

Suggestion 9

How It Works

Tax-adv. “Vehicle”Your

$

401(k) Employer

SEP Broker

Roth IRA Broker

IRA Broker

Etc.

Mutual Fund, or other investment

Value Fund

Growth Fund

Money Market Fund

Corp. Bond Fund

Govt. Bond Fund

Internl. Equity Fund

Real Estate Fund

S&P Index Fund

May be 1000’s of possibilities

10%

10%

20%

60%

You decide this mix

Employer Match $ (if 401k)

Plan Set up through

The Taxes in Tax-advantaged Investing

Say your income is $50,000 one year.Say your income is $50,000 one year. You put $5,000 that year into your firm’s 401(k).You put $5,000 that year into your firm’s 401(k).

Your $5,000 automatically comes out of your salary each month and goes—at Your $5,000 automatically comes out of your salary each month and goes—at your direction—into whatever mutual funds are available through the plan.your direction—into whatever mutual funds are available through the plan.

You leave it there until you retire.You leave it there until you retire.

Your taxable income that year is $45,000—not $50,000.Your taxable income that year is $45,000—not $50,000. The $5,000 grows for many years.The $5,000 grows for many years. You will pay ordinary income taxes when you take out the ($5,000 + You will pay ordinary income taxes when you take out the ($5,000 +

the increase).the increase). If your employer matches 1:1, you’d be putting your $5,000 + If your employer matches 1:1, you’d be putting your $5,000 +

employer’s $5,000 into the fund!employer’s $5,000 into the fund!

Diversify!

Never put all or even most of your Never put all or even most of your eggs in one basket!eggs in one basket!

Suggestion 10

Don’t Be a Bernie

Madoff Investor!

Diversifying Mutual funds help you do this Index funds do this at lowest cost Be cautious about employer stock or

partnership plans where you are locked into the fortunes of your company for the bulk of your retirement (e.g., Arthur Andersen, Enron)

Suggestion 11 Do Your Legal Planning

As a start: provide for guardianship of minor As a start: provide for guardianship of minor childrenchildren

Some states (UT) allow holographic willsSome states (UT) allow holographic wills All in your own handwritingAll in your own handwriting Date at top, signature at bottomDate at top, signature at bottom Name a guardian, alternates, disposition of assetsName a guardian, alternates, disposition of assets No notary or witnessesNo notary or witnesses Caution: Consult attorney about languageCaution: Consult attorney about language Caution: Use only if you don’t have significant assets or Caution: Use only if you don’t have significant assets or

a complicated family situationa complicated family situation

Avoid “Get Rich Quick” Schemes

Suggestion 12

Case Study: the Ponzi Scheme

End of January, 2006

Student reports finding this card in the Tanner Building

Reverse side claims:

Invest $6 to $6,000

Earn 44% over 12 days

New economic paradigm!

What is the Annual Return?

(1 + .44)365/12 – 1 =

6,600,000%!

Ponzi Scheme—How it Works

Etc., etc.

KEY: Return comes from new investors and not from any real

economic activity.

Impact on Investors

At least 300,000 investorsAt least 300,000 investors At least $500M investedAt least $500M invested Personal tragedies for many familiesPersonal tragedies for many families

Mission savingsMission savings Some mortgaged homesSome mortgaged homes

In a typical Ponzi scheme—80-90% of In a typical Ponzi scheme—80-90% of investors lose everything!investors lose everything!

Criminal processes underwayCriminal processes underway

How to Recognize a Scam Is promised return unusually high?Is promised return unusually high?

Remember the risk-return trade-off:Remember the risk-return trade-off: High return = high riskHigh return = high risk No one can No one can promisepromise more than an FDIC insured rate! more than an FDIC insured rate!

Do the Do the factsfacts check out? check out? Does the investment make sense to you?Does the investment make sense to you? Is the person registered, are references OK?Is the person registered, are references OK?

Is product significantly Is product significantly above (or below!) above (or below!) reasonable reasonable market price?market price?

Does sale require Does sale require pressurepressure tactics? tactics? Does seller emphasize Does seller emphasize “affinity”, “affinity”, e.g., BYU or Church e.g., BYU or Church

connections?connections? Is most of the product purchased by end users or by Is most of the product purchased by end users or by other other

distributorsdistributors? ?

Top 10 Scams to Avoid

1.1. Easy business opportunitiesEasy business opportunities2.2. Ponzi schemesPonzi schemes3.3. Many work-at-home plansMany work-at-home plans4.4. Health, diet and gasoline saving productsHealth, diet and gasoline saving products5.5. Corrupt sales schemesCorrupt sales schemes6.6. Many investment seminarsMany investment seminars7.7. Phishing/pharmingPhishing/pharming8.8. Windfall scamsWindfall scams9.9. Commodity and foreign currency scamsCommodity and foreign currency scams10.10. Some multi-level plansSome multi-level plans

Multi-Level Marketing Tests

Is the product sold primarily to other Is the product sold primarily to other distributors or to actual customers?distributors or to actual customers?

Is the product really of value in the Is the product really of value in the marketplace?marketplace?

Is the price reasonable for the product?Is the price reasonable for the product? Are the real risks fully disclosed?Are the real risks fully disclosed?

Health

Insu

rance Life Insurance W

ills and TrustsOther Insurance

Rainy Day Fund(Safe, liquid)

Tax-advantaged Retirement Fund

Food StorageOther Investments(Index Funds)

Tithes and Offerings

Self-

SufficiencySpiritual Understanding: Stewardship and Faith

Budgeting/Planning

Managing Taxes

Home Buying

Protection

Garbage Consumer debt Gambling Derivatives Start-ups Scams

Steps against Identity Theft

Debt Management

Read a Good Personal Finance Book—or Two

Tyson, Tyson, Personal Finance for DummiesPersonal Finance for Dummies, 4, 4thth Edition Edition Benna, Bucci, Caher, et al, Benna, Bucci, Caher, et al, Managing Your Money Managing Your Money

All-in-one for DummiesAll-in-one for Dummies Engel and Hecht, Engel and Hecht, How to Buy StocksHow to Buy Stocks, 8, 8thth Edition Edition Lynch and Rothchild, Lynch and Rothchild, Learn to EarnLearn to Earn Stanley and Danko, Stanley and Danko, The Millionaire Next DoorThe Millionaire Next Door

Suggestion 13

Check Out These Websites

http://providentliving.org/media/training/peaceheart/main.html (lds.org > Home and Family > Family Finances)

http://personalfinance.byu.edu/ (lds.org > Home and Family > Family Finances > Other resources > Personal Finance

Keep Track of Your Finances Organize and know how to read your financial Organize and know how to read your financial

documents (insurance, retirement, bank and documents (insurance, retirement, bank and investment statements)investment statements)

Create financial reports for your family (assets and Create financial reports for your family (assets and liabilities)liabilities)

Know your monthly cash inflows and outflowsKnow your monthly cash inflows and outflows Learn to use the Web for financial informationLearn to use the Web for financial information Develop a plan to get you to where you’d like to be Develop a plan to get you to where you’d like to be

financially in 5 years, 10 yearsfinancially in 5 years, 10 years

Suggestion 14

Computers and the Internet Can Help

Quicken Money

Manager

Excel

Online BankingTurboTax

Internet

Yahoo!Finance

Protect Your Identity Identity theft is on the rise

Shred financial documents Don’t give out account #’s, CC #’s, PINs, etc. over

phone (unless you originated the call to known party) Be aware of phishing Don’t fall for “awards” or any other gimmick in

which you have to send in a check Protect your computer with anti-virus/anti-

spyware programs Don’t give out SSNs Keep informed—new scams are created every

day!

Suggestion 15

Conclusions Make decisions that build net worth over timeMake decisions that build net worth over time

Avoid unproductive debtAvoid unproductive debt Develop an attitude of saving not spendingDevelop an attitude of saving not spending

Wise financial management empowers you to Wise financial management empowers you to serve more capably: family, community, church serve more capably: family, community, church

Read a good book or two on personal financeRead a good book or two on personal finance Surely we will be held accountable for how we Surely we will be held accountable for how we

manage our resourcesmanage our resources