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Personal Finance for Everyone
…90 minutes that will change your future
While we wait for folks to log on, try looking up the “expense ratios” of the funds you are currently invested in.
Would you rather….
Have 3.5 million dollars up front?
Start with a penny and have your balance double every day for one month?
or
Where my approach/advice comes from
Although I have a passion for these topics, the views expressed are not intended to serve as a forecast, a guarantee of future results, investment recommendations or an offer to buy or sell securities. This should not be interpreted as tax advice and please consult your personal tax advisors if you have any questions.
Housekeeping
Who I am
Who I’m not (Disclaimer)
Topics Behavioral Finance
Understanding your current situation
Credit Scores
Retirement, the time value of money, & 401k / 403b
Investing 101
Savings accounts & fees
Love & Money
Home ownership, mortgages, refinancing, & renting
Tax strategy
Life insurance / Health Insurance
Tactical next steps
Happiness & Wealth
Wealth
Happin
ess
Why we need an automatic plan…
People are not rational with financial decisions (susceptible to framing, prospect theory, anchoring, choice architecture, & the default option)
Study: the more often you check your portfolio the worse you do
We don’t like losing! (Prospect Theory) (DMR) Commitment devices!
Google’s anchoring experiment (3% increase)
Why we need an automatic plan (cont.)“Save More Tomorrow” (12% vs 4%)
Allocation decisions & 1/n:
Scenario 1:
Fund A: StocksFund B: Bonds
54% allocation to stocks
Scenario 2:
Fund A: StocksFund B: ½ Bonds ½ Stocks
73% allocation to stocks
Scenario 3:
Fund A: ½ Bonds ½ StocksFund B: Bonds
35% allocation to stocks
Prior to the webinar20 mins - capture your “Net Worth” (all assets & debts)
Use Mint.com; connect banking & investment accounts, student/car loans Include property (homes & cars)
Homes: zillow.comCars: edmunds.com
10 mins - understand your credit score Signup for CreditKarma Pull a free credit report from annualcreditreport.com; Experian
in Jan, TransUnion in Apr, Equifax in Aug
15 mins – analyze your current investments and get free advice: www.FutureAdvisor.com
(optional) 30 mins - create a spending plan (aka budget) Can be in Mint or even Excel Savings must be a part of your plan
Understanding your current situation
Check Mint often
Spend < make
Save xx% of your income
“Pay yourself first” – schedule savings
DebtsCredit Cards & student loansBT offers
Understand your current allocation & fees
Credit ScoresCredit Scores have 5 components:
(300 850 scale, >720 is good)
1. On Time Payments: 35% (Use Auto-Pay)
2. Credit Utilization: 30% (use < 10%)
3. Length of history: 15% (keep old cards!)
4. Types of credit used: 10%
5. Recent inquiries: 10% (hard vs soft pulls)
Credit Scores affect mortgage rates, auto insurance, credit card rates, student loans, apartment rentals
“I’ll worry about retirement later…”
Time Value of Money is HUGE!
Frick & Frack brothers
The “Rule of 72”
$$ saved from 25-35 > $$ saved 35 on
Everyone should have a (ROTH) IRA & 401k!
Are you on-track?~75% of ending salary per year
Share this!See handout
Retirement AccountsIRA
• 2014 Limit: $5,500
• No matching
• Hold at any institution
• Thousands of investment options
• Only contribute cash
• Income limits • Different for Roth vs Trad
• Jan 1 – Apr 15 (of following year) open period
401(k) / 403(b)
• 2014 Limit: $17,500
• May get matching
• Hold at company’s chosen firm
• Limited choices
• Only contribute from payroll
• No income limits
• May get a Roth option
• Jan 1 – Dec 31 open period
Uncle Sam will always get paid
Roth
• After-tax contributions (pay tax now)
• Earnings grow tax-free
• Roth IRA’s have no RMD’s
• Roth IRA income limit: < $114k
• “Backdoor Roth” option
Traditional
• Pre-tax contributions (get a tax break now)• $120k salary, contribute max
amount of $17,500• Taxable income now $102,500• 28% x $17,500 = $4,900
• Taxed on the way out
• Traditional IRA’s have RMD’s
• Really depends on tax bracket now vs. retirement• Beliefs on long-term tax brackets / code / law• Solution: have some in each
Investing 101 & active vs. passive
Stocks, Mutual Funds, ETF’s, Bonds
Write down your financial principles / guidelines
20-25% for “fun” if you must
Active vs. Passive Investing: research shows ~80-90% of active funds underperform their benchmark
8,000 2,000 500 125
20% most actively traded accounts performed much worse -men worse than women
Past fund performance has very little predictive power to future performance!
In fact, expense ratios are the best predictor
Expense Ratios (the enemy)
Industry average (0.80% 2.50%)
Low cost options (0.06% 0.50%)
Get angry…it’s your money!
Use the calculator
Why “Rollover”
“It is difficult to get a man to understand something, when his salary depends on his not understanding it.” – Upton Sinclair
Asset allocation & rebalancingWith proper allocation, you should reduce risk
(volatility) and outperform the S&P 500 Rebalancing: meeting long-term policy target
weights
Use it as a disciplined way of buying low and selling high
“..shunning the loved & embracing the unloved. Most people do the opposite.” (Swensen)
“Contrarian behavior lies at the heart of most successful investing programs.” (Swensen)
Example: 1990-2012 portfolio: +0.5% difference in return, -2% difference in volatility
My target allocation:
Precedence of Saving1. Matching 401(k) or 403(b)– Max it!
2. Emergency fund (~6-9 months)
3. Pay down debt(s)
4. Roth IRA / Roth 401(k) or TSP
5. Taxable account
6. Alternatives (exotics)
Invest in yourself too!
Savings accounts & feesATM reimbursements
Never pay monthly service fees for savings/checking
CapitalOne 360:doubled-ended bonusemergency fund
“Direct deposit” & ACH pushes
Home ownership & mortgagesUp to a $300/month because of credit score
Real estate is a key component
Consider NOT holding your mortgage with the same bank as your investments
Typically 20% down, qualify for a home 3x your annual gross income
Closing costs, points
Refinancing
Being a landlord can be tough!
RentRent : Income < 30% (rule of 36)
Impact in high-rent markets (SF / NYC)
Have rental package ready Credit pullAsk for a copy of credit report
Security deposit & interest
Zillow’s “zestimate”
Tax strategyLook for ways to reduce your taxes
Traditional 401k / IRA Mortgage interest (& property management fees)Education expenses
Consider capital gains (realize gains if you ever find yourself in the 10 or 15% tax bracket. 0% long term gains)
IRA conversions
Donate to charity with appreciated stock
Hire a professional – taxes are “grey” – ask questions!
Life insuranceTypically don’t need it until you have a family,
but some people “lock” it in while they are healthy
Term vs. Whole
$500k for $42/month
Nice way to leave a gift
Auto & Health
Other random advice… Never go without health insurance!
“Exotic” or “alternative” asset classes
Careful with your contracts
Always look for discounts Cell phone bills (15%-20%) AAA, movies, restaurants, museums, parks Driving habits Avoid buying a new car
Remember: smart investingis not very exciting, but it isvery rewarding!
Fatwallet Cash Back
Tactical next stepsAutomate your savings (pay yourself first)
Open a (ROTH) IRA
Enroll in your company’s 401k
Stick to low-cost index funds
Help a friend (ER) or 19 yr old cousin
Company stock plans
Don’t let inaction win!
Student loans vs. savingPaying down student loans vs. saving for
retirementMax matching contributionsConsider interest rates
loan rate: <2% Invest >10% pay down
2%-10% calculate
Both are urgent!Save some to build the habitConsider tax deductionWindows are closed for good!
Grandma’s inheritance
My favorite personal finance resources
Fatwallet Finance Forums
Bogleheads
Blogs: Mr. Money Mustache, Oblivious Investor
Networth IQ | Investopedia
*Bonus Material*Tax Loss Harvestingthe Credit Card game
Questions?
What is FutureAdvisor? Free product – analysis & advice Premium product – does it all for you + Tax-Loss Harvesting –
for 0.5%
How do you differ from the competition? We are holistic – they are not! Where you have to hold your $$
Why would I pay 0.5% for this service? Because it’s 1/2 to 1/3 the price of a traditional advisor Because it will actually get done! (80% fact)
What funds do you use & are there commissions?
Sign up for a FREE account for a diagnosis!www.FutureAdvisor.com