Financial Tools You Need to Know to Survive Money Management

What We Will Cover Today Where does your money go? Your cash reserves. What are your goals? How money works. Asset allocation.

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:

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:

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

Where Does Your Money Go? The latte effect: Week:$78 Month:$339 Year:$4,060 Invest:$2,500

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

Your Cash Reserves Emergencies Planned expenses Investment opportunities Minimize the need to use credit The need:

Your Cash Reserves Interest paying Liquidity/check writing Low risk No withdrawal penalties What to look for:

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:

How Money Works The Rule of = Interest Rate 6 % doubles in years 8 % doubles inyears ÷ Number of Years to Double

How Money Works The Magic of Compound Interest $150,000 $100,000 $50,000 $0 Years Investing $100/month 8% compounded monthly

How Money Works Tax-Deferred Compounding $350,000 $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 $0 Years $361,887 $209,960 $216,364 $139,563 $35,062 $29,904 Taxed Every Year Tax-Deferred Based on a 10% annual rate of return

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 Polly Procrastinating Pete Assumes 10% annual rate of return

Guaranteed Rates of Return How Money Works Also known as… Going broke safely $1000 Interest: 3% Tax: 30% Inflation: 3% -30 $991

Dollar Cost Averaging - When is the Best Time to Invest? How Money Works

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

Dollar Cost Averaging - When is the Best Time to Invest How Money Works A B

Dollar Cost Averaging - When is the Best Time to Invest How Money Works Investing $100/month B A

Dollar Cost Averaging How Money Works Investing $100/month Total Shares: 174 x $10 = $1,740 A B

Dollar Cost Averaging How Money Works Investing $100/month Total Shares: 174 x $10 = $1,740 A B

Dollar Cost Averaging How Money Works Investing $100/month Total Shares: 174 x $10 = $1,740 Total Shares: 410 x $5 = $2,050 A B

Debt InflationTaxes The Three Worst Enemies To Your Money How Money Works

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?

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?

Asset Allocation WWII Normandy invasion Markowitz and the University of Chicago Markowitz, Miller and Sharpe win the Nobel Prize in 1990 A History

Asset Allocation The Power of Diversification

Asset Allocation The Power of Diversification

Asset Allocation The Power of Diversification

Asset Allocation The Power of Diversification

Asset Allocation The Power of Diversification

Asset Allocation The Power of Diversification

Asset Allocation The Power of Diversification

Asset Allocation The Costs of Volatility Year 1Year 2Year 3Year 4 Year 5 -10% 10 % ?

Asset Allocation If you start with $100,000: The Costs of Volatility and gain 10% and lose 10% and gain 20% and lose 20%

Asset Allocation Stocks Bonds Cash Equivalents Real Assets Typical Asset Classes

Asset Allocation Set your objectives Set your time horizon Set your investment parameters Rebalance Start By Creating a Portfolio for You

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:

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:

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:

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:

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:

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

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 Portfolios presented are based on Modern Portfolio Theory. For illustrated purposes only. Risk (Standard Deviation) Return 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

Asset allocation is not a perfect investment method. However, short of a 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

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?

The Next Step Develop a budget for your house Homework

The Next Step Develop a budget for your house Track your expenses Homework

The Next Step Develop a budget for your house Track your expenses Calculate monthly spending percentages Homework

The Next Step Develop a budget for your house Track your expenses Calculate monthly spending percentages Come up with a financial plan Homework

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

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