Financial Planning for Dummies MBAs

SHAWN TYDLASKA, CFPMITCH ROTENBERG, FORMER CFP (SO DON’T SUE ME) April 14, 2015

Ross 100/100 Initiative

Why Are We Here?

Questions You Asked Us:

1. Where do I currently stand financially?2. What are the different types of financial advisers?3. What should I do with my loans?4. I don’t know the first thing about budgeting, what should I do?5. Explain what all those retirement accounts do and how they are different.6. What are the different types of investments and which ones should I

choose?7. How much should I be saving?8. What do I need to know about life insurance?9. What does my credit score mean and how is it used?10.What else should I know that I probably don’t know?

Financial Planning Basics

Key Designations: CFP, CFA, CPA, ChFc, CLU

Ways Advisers are compensated: There’s a lot of different ways advisers are compensated, so ask them “What are the different ways you earn fees from managing my accounts?” and determine if there are conflicts of interest.

-fee-based, flat fee, hourly, commissions

Type of Professional What They DoAre they a Fiduciary?

Estate AttorneyWills, Trusts, inheritance planning

Yes

Accountant Taxes, business structures Yes

Stock Broker Stocks, bonds, credit lines No

Insurance Agent Insurance & annuities No

Financial Planner Financial Quarterback Maybe

What are the types of advisers?

    Balance Sheet    4/1/2015  Assets Liabilities and Net Worth  Cash/Cash Equivalents Current Liabilities (Due < 12 months)  Cash $40.00 Credit Card (Only if you carry a balance) $0 Checking $10,000.00 Credit Card #2 $0 Savings $0 Uncashed Checks $0 Savings Goal/Dream Basket $800.00   $0 Total Cash/Cash Equiv. $10,840.00 Total Current Liabilities $0    Invested Assets Long Term Liabilities (Due in >12 months)  401(k) $20,000.00 Auto Loan (4%, 5 year) $5,000.00 Roth IRA $12,000.00 Student loans $50,000.00 Traditional IRA $0 Mortgage $0  Brokerage Account $0 Total Long Term Liabilities $55,000 Total Invested Assets $32,000.00     Personal-Use Assets  Home $0 Total Liabilities $55,000.00 Cars (Kelly Blue Book Value) $8,000.00  

Collectibles $0 Net Worth $(4,160.00)Total Personal-Use Assets $8,000.00     Total Assets $50,840.00 Total Liabilities & Net Worth $50,840.00          

Where do you currently stand financially?

Where do I currently stand financially?

Additional Resource:

Non-Discretionary Expenses = Rent, loans, groceries, insurance, utilities, etc

The expenses you would still have to pay if you lost your job

Emergency Fund = Current Assets

Non-Discretionary Monthly Expenses

$10,840

$3,500 = 3.1 months

Where do I currently stand financially?

Source: J.P. Morgan - Guide to RetirementEx: $100,000 x 0.9 = $90,000 > $32,000 saved

General Rules of Budgeting1. NEVER EVER EVER HAVE CREDIT CARD DEBT

If you do have it, pay this off first!!!

2. Always have 3-6 months of cash in an emergency fund

3. Invest in your 401(k) at the very least up to company match (it’s free money!)

4. No more than 50% of take home pay to fixed costs If you’re over 50%, don’t worry… we just want to let you know it’s not

sustainable for your whole career.

5. No less than 20% to savings ‘Bucket’ your savings

Retirement, savings towards real estate, dream basket, etc.

6. Get in the habit of saving – set up an automatic deposit to an investment account (you’ll benefit from dollar cost averaging)

How should I tackle my student debt?

Student Loan Calculator: www.Bankrate.com

Make extra principle payments Interest Rate Phase Out at MAGI of $65k-$80k single, $130k-$160k joint*

Look into refinancing the debt into a lower interest rate loan: SoFi

CommonBond

Consider variable rate loans (3.91% variable vs. 6.21% fixed) *Source: IRS Pub. 970

Origination Date: 1/1/15

Loan Amount: $50,000.00

Interest Rate: 6.50%

Term: 10 Year

Monthly Payment: $567.74

Payoff DateTotal

PaymentsInterest

Payments

Original Loan 1/1/25 $68,128.79 $18,128.79

$50 Extra Per Month 12/1/23 $65,983.24 $15,983.24

$100 Extra Per Month 2/1/23 $64,301.32 $14,301.32

$150 Extra Per Month 5/1/22 $62,945.93 $12,945.93

Investment Planning

Why do I need to start saving now? Assumptions 2 MBAs graduate (1 from Ross, 1 from Booth) Age 30 Ross Grad starts immediately and saves $10,000 for 10 years

(Total Savings $100,000) Booth Grad starts in 10 years and saves $10,000 for 25 years

(Total Savings $250,000) Assume an 8% growth rate Where do they end up at age 65?

Why do I need to start saving now?

Ross = $1,071,477 Booth = $799,544

Remember, Ross Grad only saved $100k and Booth Grad saved $250k

Booth Savings Needed to Catch Up = $13,500/year or $251,000 more than Ross Grad30 34 38 42 46 50 54 58 62

$-

$50,000.00

$100,000.00

$150,000.00

$200,000.00

$250,000.00

$300,000.00

401(k) Balance Booth401(k) Balance RossTotal Invested BoothTotal Invested Ross

Age

401(k), Roth, or Traditional IRA?

If available, invest in a 401(k) instead of an IRA because it offers the greatest maximum savings limits ($17,500)

Use a Traditional IRA/401(k) if

You expect to be in a lower tax bracket at retirement

Take the tax break now

Use a Roth IRA/401(k) if

You expect to be in a higher tax bracket at retirement

Offers tax diversification

If most of your retirement income will be taxable… invest in a Roth

How should I invest my 401(k)? Rule of Thumb: Equity allocation

of your portfolio should equal 100 – age

Ex: A 30 year old would have 70% of his/her portfolio in stocks

New Rule of Thumb: 120-Age

KISS Consider Target Date Funds

Consider low-cost ETFs like the S&P 500 (Ticker SPY, 9 basis points) and Total Bond Market (Ticker BND, 8 basis points)

30 57Age: 65

What is the difference between stocks, bonds, ETFs, and mutual funds?

A mutual fund is basically a basket of stocks

ETFs are also a basket of stocks, traded like a stock, but usually passively managed

A bond is a loan where you give a company some money, and they promise to pay you interest over time and return your principal at the end of the term of the contract

Isn’t putting your money in the stock market like gambling? Owner in the company

Can vote on the Board of Directors

Entitled to a share of the company profits

Ideas on where to invest

This is not a comprehensive list nor a recommendation

Historical market returns

1926 1936 1946 1956 1966 1976 1986 1996 2006

Compound annual return

• Small stocks 11.7%• Large stocks• Treasury Bonds• Treasury bills• Inflation

9.65.73.73.0

11.7%

9.6%

5.7%

3.7%3.0%

Insurance Planning

Insurance Needs Over a Lifetime…

Auto Insurance

Medical/Dental Insurance

Renter’s/Homeowner’s Insurance

Medicare/SSI

Long Term Care

Life Insurance

Disability Insurance (State & Private)

Youth Young Adult Newly Married Proud Parent Retirement

Life InsuranceType of Life Insurance Advantages Disadvantages

Permanent • Covers your whole life

• Better for Estate Planning

• Can be used as a savings vehicle

• Very expensive

• High cancellation costs

• Adverse tax consequences if used improperly

Term • Covers a specific period of time

• Much less expensive

• Easy to drop and add coverage

• Is very costly at older ages

• Death Benefit is rarely paid out

Life Insurance Planning Over Time…

$500K

$500K

$500K

15 yr

20 yr

30 yr

Credit Score?24

What about my Credit Score?

Resource:

What is a good Credit Score?

A Score above 700 usually suggests good credit management

Source: MyFICO.com

Additional Resources: Favorite Books:

“The Millionaire Next Door” “Think & Grow Rich” “Richest Man in Babylon” “Wealthy Barber”

Podcasts: “Planet Money”

Informational Websites: Yahoo Finance Investopedia FinViz Get Rich Slowly Bankrate.com

Organizational Websites: Mint.com

Advising Websites: PersonalCapital LearnVest Betterment

Got Questions?28

Appendix

29

How is the stock market currently valued? Consider Mean Reversion and P/E Ratios

Source: J.P. Morgan

Compound annual return

• Small stocks 11.7 %

• Large stocks

• Treasury Bonds

• Treasury bills

• Inflation

9.6

5.7

3.7

3.0

Relationship Between Risk and Return

Risk

Expected Return

Cash

Equivalents

Bonds

Int’l Bonds

Real Estate

Stocks

Int’l Stocks

Building a Diversified Portfolio

Select securities that are not very correlated to decrease the risk that any one asset class experiences a significant downturn. “Money is like manure.  Left in a pile, it stinks.  If you spread it around, it'll grow some stuff.”

Should I use my 401(k) to pay for student loans?

Generally not a good ideaIf you take a loan, you pay yourself back

interest, but lose out on compounding growth of your portfolio

If you take a distribution, you pay a 10% early withdrawal penalty for a distribution before age 59.5 and you will be taxed at your ordinary income rates

Invest extra money or ay down debt? Two things to consider:

Appetite for risk? Do you value ‘Peace of Mind’ from being debt free? Do you feel accomplishment paying off debt?

Opportunity cost analysis Expected return of investments vs. my loan interest rates

Things to consider: Taxes on gains from investments Variable interest rates can change Market does not grow in a straight line…. So paying off is a ‘safer’ bet.