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Lecture 17 Annual Payment.XLS Lecture 17 Monthly Payment.XLS Lecture 17 Equity Growth.XLS Lecture 17 Retirement Calculator.XLS Sources of information –Dave.

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Presentation on theme: "Lecture 17 Annual Payment.XLS Lecture 17 Monthly Payment.XLS Lecture 17 Equity Growth.XLS Lecture 17 Retirement Calculator.XLS Sources of information –Dave."— Presentation transcript:

1 Lecture 17 Annual Payment.XLS Lecture 17 Monthly Payment.XLS Lecture 17 Equity Growth.XLS Lecture 17 Retirement Calculator.XLS Sources of information –Dave Ramsey -- The Total Money Makeover: A Proven Plan for Financial Fitness. It is available at most book stores and on line –Personal experience and observing successful people Materials for Lecture 17

2 This lecture is not about business management It is about personal money management I ask again: Do you want to spend your life managing debt or wealth? People work for 2 reasons: –Cover costs for necessities –Increase net worth (so we can retire) To achieve this goal we must manage wealth Do You Want to Manage Debt or Wealth?

3 First Step is to become debt free Second step is to build wealth Reasons to build wealth –Retirement –Security –Have Fun Money is Not the root of all evil Desire of money is the root of all evil To Manage Wealth

4 Cut Expenses so you live within your means and SAVE Stop using credit cards – pay cash or postpone purchases Buy used cars 1-2 years old, keep them a few years and trade again –After you have built wealth then you can afford to buy new cars –NEVER lease a vehicle Think about it, you are paying for the car plus interest PLUS someone elses profits Steps to Becoming Debt Free

5 Yes, before you start paying off debt build a cash reserve – your personal VAR fund Why a cash reserve? How much? Where do I invest it? –Cash reserve pay for an emergency: as job loss Not to go on a vacation, go to a wedding, or … –Cash reserve should be equal to 3 times your after-tax Monthly salary –Invest it in a Money Market account, interest is low but MMs usually require a min check size of $250 so it discourages using it on little items Build a Cash Reserve

6 How do you build a cash reserve? Sell something –Garage sale –Extra vehicle –Move to cheaper house, etc. Get a part time job –Deliver papers before work –Deliver pizza after work –Start a business doing something other people do not want to do for themselves This is not permanent just to get a reserve How to Build a Cash Reserve

7 Sort debts from low to high: D1, D2,.., Dn Pay the maximum extra you can on the smallest debt (D1) until it is paid off Use money you had been paying on D1 and add it to the payment on D2 until it is paid Continue this until all debts are paid off Euphoria from paying off a debt is great so get the feeling early by attacking the lowest debt (D1) first, then move to D2 ….. Making double and triple payments Develop a Plan to Pay Off Debts

8 Do Not Get into Trouble with Credit Card Debt! Look how long it takes to pay off a credit card debt: here I tested 2 different interest rates Do Not Get Back Into Debt

9 Use Cash or Debit Cards Can I ever use a Credit Card again? –Yes if your job reimburses your travel expenses –Have one separate card for ONLY travel that will be reimbursed Avoid all kinds of debt –Save money to buy a car –Do not take vacations until can pay cash –Stay off of cruise ships –Save money for a house Do Not Get Back Into Debt

10 The total cost of a $40,000 car Financed 72 months =$46,382 to $49,101 Shorter the loan, the lower total cost Years and Cost to Finance a Car

11 Renting –Provides no income tax deductions But do you have sufficient income to itemize deductions? Probably not when starting out –Does not build equity Ownership –Builds equity (very slowly) –Often get over extended with large payments –Small income tax deductions on the whole –Do not acquire debt to reduce income taxes! –Save for a house; make a large down payment Housing: Buy or Rent

12 Examine total cost of a $100,000 home Financing for 15 vs. 30 years is $77,076 Years and Cost to Finance a Home

13 Stochastic Equity Growth for a Home Loan After 5 Years, how much equity do you have? Depends on how long you financed Will your job let you stay for 30 years?

14 Do not change standard of living -- SAVE Save for what? –Retirement –Childrens educ – #529 College Savings Plan Where do you invest your savings? –Low load mutual funds – lots to choose from American Funds, ING, etc. –Make sure you can move money among the Funds Family without a cost –Get a broker, but do not let them make trades for you – can lead to account churning Once You Are Debt Free, Whats Next?

15 Example of Mutual Funds

16 When do I start? How much should I save? Is it to late? What about Social Security for your retirement? In the future, businesses will not provide retirement accounts You will be on your own to save through an IRA –Some businesses will provide matching funds –Some will offer managed IRAs with limited options Retirement Savings

17 Start saving the day you graduate Save as much as you can but at least save 15% of your gross salary annually Keep working and paying into Social Security so I can collect it after I retire –Do not depend on Social Security to cover your retirement needs –Today estimate SS will pay me 19% of my current take home pay; after paying for 48 years Retirement Savings

18 Social Security has no store of money Congress will be forced to act on these entitlements –Debt ceiling, sequestration, budget reductions from Super Committee –All these add up to changes Probable changes –Extending retirement age –Means testing based on wealth or income –Reduced payment rates Social Security and Medicare/Medicaid

19 Tax DEFERRED savings –Traditional IRA - $5,000/year per person unless over 60 then save $6,000/year –If you are in a company retirement plan can still use the maximum Traditional IRA –If you are self employed you can have a SEP IRA – 25% of business income up to $50,000 tax deferred KEOGH plan – 25% of self-employed income up to $49,000 tax deferred Not tax deferred savings –You can save as MUCH as you want IRS and Retirement Savings

20 Variables to consider –Current age and amount you have saved –Current salary and expected raises –Age you want to retire –Consumption expenditures after you retire –Annual rate of inflation pre & post retirement –Returns you expect on savings until retirement –Returns on savings after you retire –How long do you & spouse expect to live Which of these variables are stochastic? Retirement Savings is a Risky Investment

21 I made a Monte Carlo simulation model to calculate retirement savings With lots of stochastic & input variables Retirement Calculator

22 Output: Annual Value of Cash Reserves

23 Output: Probability of Positive Cash

24 Enter your own values Simulate using the KOV table starting in row 177 What age do you have a zero wealth? How much do you have to save to give yourself a 95% chance of having wealth when you are 90 or 95 or even 100? Did you marry the right person ($s)? Remember divorce cuts your wealth in half so it takes longer to save for retirement Open the Retirement Calculator

25 Linear programming – what ought to be Probabilistic forecasting – capabilities of forecasting with multiple regression, exponential smoothing, seasonal analysis, and time series analysis Monte Carlo simulation – what could be …. –Frame your problem in a systems framework –Model design and development –Parameter estimation for stochastic variables and deterministic component of a forecast –Validate simulated variables –Univariate and MV distributions Apply these tools for business and personal decision making using stochastic efficiency Summary of AGEC 622

26 Improved Excel skills Applied econometrics Ability to organize & build a business model Make any business model a risk analysis tool Rank risky alternatives Deterministic and probabilistic forecasting Simetar –Available as long as you are a fulltime student –After you graduate, buy it at If you do not have Simetar, you can use @Risk =NORM() same as =RISKNORMAL() =UNIFORM() same as =RISKUNIFORM() What can you take to the job?

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