1. Lecture 20 Annual Payment.XLS Lecture 20 Monthly Payment.XLS Lecture 20 Equity Growth.XLS Lecture 20 Retirement Calculator.XLS Dave Ramsey -- The Total Money Makeover: A Proven Plan for Financial Fitness available at most book stores and on line Materials for Lecture 20

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?” Recall I told you 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 The 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 – If you think about it, you are paying for the car plus interest PLUS someone else’s profits Steps to Becoming Debt Free

5. Yes, before you start paying off debt build a cash reserve 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 Net 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 I build a cash reserve, I am in debt Sell something –Garage sale –Extra vehicle –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 as much more than the minimum as you can on the lowest debt D1 until paid off Use the money 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 The euphoria from paying off a debt is great so get the feeling early by attacking the lowest debt you have Making double and triple payments Need 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: 2 interest rates Do Not Get Back Into Debt

9. Can I ever use a Credit Card? –Yes if your job reimburses your travel –Have 1 separate card for ONLY travel that will be reimbursed Avoid all kinds of debt –Save money for a car or a house –Do not take vacations until you can pay cash –Save 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 Years/Cost to Finance a Car

11. Renting –Provides no income tax deductions But do you have sufficient income to itemize deductions? –Do not build equity Ownership –Builds equity (very slowly) –Often 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 to Buy or Rent

12. Notice the total cost of a $100,000 home Financing for 15 vs. 30 years is $77,076 Years/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 Critical decision if your job may get you transferred

14. SAVE – do not change standard of living Save for what? –Retirement –Children’s education – Use 512 tax free accts. 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 – account churning Now You are Debt Free, What’s Next?

15. When do I start? How much should I save? Is it to late? What about Social Security for my retirement? Today and in the future business 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

16. 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 Retirement Savings

17. 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 $46,000 KEOGH plan – 25% of self-employed income up to $49,000 Not tax deferred savings –You can save as MUCH as you want IRS and Retirement Savings

18. Variables to consider –Current age and amount you have saved –Current salary and expected raises –Age you want to retire –Consumption pattern after you retire –What is the annual rate of inflation –Returns you expect on savings between now and retirement –Returns on savings after you retire –How long do you expect to live Which of these variables are stochastic? Retirement Savings is an Risky Investment

19. Guess What? I made a Monte Carlo simulation model to calculate retirement savings With lots of stochastic variables Retirement Calculator

20. S

21. Output: Annual value of Cash Reserves

22. Output: Probability of Positive Cash

23. Enter your own values Simulate using the KOV table starting in row 172 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 guys, divorce cuts your wealth in half so it takes longer to retire Open the Retirement Calculator

24. 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

25. 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 www.simetar.comwww.simetar.com 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?