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Personal Investments

Personal Investments. Personal Investments. Unit 1 Introduction – Your financial life. Activity: Financial dreams/Financial nightmares. List all your financial nightmares. List all your financial dreams. Your (financial) Life. People change jobs on average every two years.

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Personal Investments

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  1. Personal Investments Personal Investments 1

  2. Unit 1Introduction – Your financial life 2

  3. Activity: Financial dreams/Financial nightmares List all your financial nightmares • List all your financial dreams 3

  4. Your (financial) Life 4

  5. People change jobs on average every two years. Expect to be self-employed,under-employed or unemployed sometimes. 5

  6. Typical income 6

  7. Your financial life - income 7

  8. Based on gender? 8

  9. Based on education 9

  10. Salaries are leveling off. You can still improve your earnings with education. 10

  11. Income is not rising but debt is 11

  12. People are raiding the piggy bank 12

  13. Spending power? 13

  14. How are we doing at savings? 14

  15. Could we save more? 15

  16. Summary • Consider your entire financial life and be aware of all the twists and turns • Choose a good career and educate yourself • Don’t borrow to spend • Save – even if you think you’ve saved all you can, save more 16

  17. What we will do in this course • Focus on financial goals • Save and let Uncle Sam help • Learn about different investments • Asset allocation NOT investment selection • Evaluate funds • Learn when to buy and sell • Protect your wealth 17

  18. Your financial goals(optional) 18

  19. Setting goals – start small • What do you want to achieve this year? • Over the next year, what ONE occurrence would have to happen for you to feel you’ve made significant financial progress? • Write this occurrence as a goal.   • Describe why it is important to you. • Describe how you will feel when you have accomplished this goal. 19

  20. Cost out your goals • Down payment on house (The more you put down the less risk to default and less monthly payments) • Wedding (yours or your kids) • Car (Budget or goal?) • College tuition (you/your kids/your grandkids) (http://cgi.money.cnn.com/tools/collegecost/collegecost.html) • Starting your own business • Retirement (Rule of thumb – annual income divided by 4%) (http://sites.stockpoint.com/aarp_rc/wm/Retirement/Retirement.asp?act=LOGIN) • Estate (Inheritance or charity) 20

  21. Your net worth What you own (home, car, bank accounts, etc.) Less What you owe (mortgage, car loans, student loans, credit card balance, etc.) Keep track of it and grow it every year. 21

  22. Your financial life – net worth 22

  23. Summary • Set goals – start small and keep at it • Make your goals specific and cost them out • Calculate your net worth • Grow your net worth 23

  24. Unit 2 -Tax-advantaged saving - Saving with help from Uncle Sam. 24

  25. The importance of saving early Which is more? • Saving $4000 a year from 25 to 45 years old and then no more savings but you leave it in your account (at 8% per year) • Saving $8000 (double) a year from 45 to 65 years old 25

  26. Finding money to invest – time value of money (a review) 26

  27. 3. The effect of saving every year • You cut out candy and soda for savings of $25 every week. • What will you have in 40 years? 27

  28. Time value of money – a review 28

  29. The effect of a better return 29

  30. Start early and let your money work for you 30

  31. Case study: Cost of cashing out • About 57% of people who leave companies cash out their retirement benefits of $8445. If you left this money in a retirement plan for 40 years at a return of 8%, calculate what it contributes to your retirement. 31

  32. Cost of cashing out • You lose about $183,500 for your retirement fund. If you cash out, you pay taxes on your withdrawal plus a 10% penalty on top of that. That would leave you with $6000 now versus $183,500 when you retire. 32

  33. Maximizing retirement saving • 54% have access to employer-sponsored plans and 43% participate • 53% of white-collar occupations • 40% of blue-collar occupations • 20% of service occupations • Employees make contributions to retirement savings plan • Employers may match contributions up to a certain amount • When employee leaves company, the money goes with him or her (portable) • Retirement income depends on how much employee contributes and the returns on the money 33

  34. Employer Plans • Most common defined contribution plan is 401K • 43 million participants • 457,830 plans • $2.1 Trillion in assets 34

  35. 401K – How does it work? • Jill is single and makes $30,000 a year gross salary and she wants to put $1800 away for retirement in 30 years. • She is considering three options: • 401K contribution • Traditional IRA contribution • Roth IRA contribution 35

  36. 401K – How it works • Salary is typically contributed pretax – will reduce your salary for tax purposes • Maximum contribution $15,500 (2008) with an additional catch-up of $5000 for those over 50 years old • 82% of employees contribute • On average participants put in 6.8% of salary • 91% of employers match your contributions up to on average 3.3% of your salary • There is a 10% penalty for withdrawing before age 59 ½ and you have to pay taxes on your withdrawal • When you leave your company, you may rollover your 401K to a Individual Retirement Account (IRA) 36

  37. Traditional IRA • Jill’s income level is low enough (see IRA publication 590 for limits) to put money away pretax into a traditional IRA • IRAs like 401Ks may have • Her salary for tax purposes is reduced by $1800 to $28,200 so she pays less taxes now • In 30 years, at 8% return, Jill has $18,113 which will be taxed when she takes a distribution 37

  38. Roth IRA • Jill’s income level is low enough to put money into a Roth IRA (see IRS publication 590 for limits) • Her salary is not reduced so she has no tax savings now • In 30 years, at 8% return, Jill has $18,113 which will be NOT be taxed when she takes a distribution 38

  39. 401K • Jill puts 6% ($1800) in a 401K. Her company matches up to 50 cents for every dollar the employee contributes up to 6%. • Her salary for tax purposes is reduced by $1800 to $28,200 so she pays less taxes now • Her company matches 3% of $900 so the total contribution is $2700 • In 30 years, she will have $27,169 which will be taxed when she takes it out 39

  40. 401K, IRA or Roth IRA for Jill? • If a company matches, 401K is best up to the maximum of the match • If your tax rate is low now and higher when you retire or you want more flexibility on your distribution, the Roth IRA is the next best 40

  41. Risks with 401K • 18% to 25% of employees don’t participate or contribute • About half of those under 25 contribute • Participants don’t know how to allocate assets (100% company stock is a risk) • When people leave company they cash out their 401Ks instead of rolling it over 41

  42. 401K Checklist • Max out employer contribution • Monitor asset allocation • Ask about fees • Always roll over when leaving a company 42

  43. IRA • You can contribute up to what you earn for the year • Roth IRAs are best if your tax rate is low • When you leave a company, make sure that you roll over your savings to a IRA – keep it separate 43

  44. Issues in retirement planning • It’s up to you and not your employer – save in a tax-advantaged way • How much should you save? Lots of opinions but 10% to 15% a year will be a good safety net • Don’t cash out retirement savings – it costs you a lot • Don’t borrow on your 401k—it costs you too 44

  45. http://www.irs.gov/publications/p590/ar01.html#d0e124 for the latest limits. 45

  46. Unit 3: Investments 46

  47. Understanding Returns 47

  48. A real life example • You will get your paycheck next week but you need $100 now. You arrange for a payday loan paying a fee of $15 for the use of $100. The payday loan company will collect the $100 electronically from your bank account when your pay check is deposited next week. What is the rate charged? 48

  49. Income investments • Invest only in instruments you understand • Most investors start off with income investments such as certificates of deposit or bonds 49

  50. Certificate of Deposits • Invest a fixed amount of money (principal) in a CD. Your principal is guaranteed plus a fixed amount of interest: • Receive interest monthly, quarterly or at maturity. • You will incur penalty fees for withdrawing your money early before the term expires (before it reaches the maturity date). • CDs can be purchased through banks, credit unions or brokerages. CD considerations are: • Time period (maturity date) • Interest yield includes the effect of compounding interest rate and is usually higher than the interest rate of statement savings accounts. • Interest payments may be withdrawn as they are paid by the bank • CDs are insured by the FDIC or NCUA up to $100,000 ($250,000 on retirement accounts) 50

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