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Financial Planning Basics
An Overview of the Financial Planning Process
Financial Planning
Fundamentals
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The Ground to Cover
Setting goals
Budgeting
Emergency fund
Insurance
Using credit
Investing
Tax planning
Saving for college
Retirement planning
Estate planning
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Setting Your Goals
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How SMART Are Your Goals?
• Specific
• Measurable
• Attainable
• Relevant
• Timely
Write down and prioritize your goals.
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Budgeting
Income 1. Paycheck 2. Rental income 3. Government benefits 4. Interest 5. Investment income
Expenses 1. Fixed expenses 2. Discretionary expenses
−
Surplus = Deficit
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An Emergency Fund
An emergency fund is the foundation for any successful financial plan.
Where you
keep your
emergency
fund is
important
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Risk Management with Insurance
Health insurance
Auto insurance
Life insurance
Property insurance
Liability insurance
Disability insurance
Long-term care insurance
Common types of insurance that help protect you and your assets from different risks:
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Using Credit
“Remember that credit is money”
Benjamin Franklin
The three Cs of credit
Capacity
Character
Collateral
How creditors determine your creditworthiness
Credit application
Credit report
Credit score
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Using credit creates debt
Types of debt
Secured
Unsecured
Important considerations
Amount
Term
Rate
Debt
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Investment Fundamentals
What Is Investing?
Speculating?
Investing--A carefully planned and prepared approach to managing and
accumulating money.
Saving?
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Investment Fundamentals--
The Effect of Inflation Purchasing Power of $200,000 at 3% Annual Inflation
$108,759
$59,142
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Investment Fundamentals--
The Effect of Compounding
Growth of Annual $5,000 Investments • $5,000 invested
annually at the end
of each year
• 6% annual growth
rate
• All earnings
reinvested
This is a hypothetical example
and is not intended to reflect
the actual performance of any
specific investment.
Investment fees and
expenses, and taxes are not
reflected. If they were, the
results would have been
lower.
“Rule of 72”
72 ÷ Rate of Return = Years Needed to Double in Value
$395,291
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Investment Fundamentals--
Sooner Is Better Don’t put off investing
The sooner you start, the longer your investments have to grow
Playing “catch-up” later can be difficult and expensive
$3,000 annual investment at 6% annual growth, assuming reinvestment of all earnings and no tax
$679,500
This is a hypothetical example and is not intended to reflect the actual performance of any investment. Investment fees and expenses, and taxes are not reflected. If they were, the results would have been lower.
$254,400
$120,000
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Investment Fundamentals--
Identifying Goals and Time Horizons Investment goals
Retirement
Education
Special purchase
Financial security
Short-term goals vs. long-
term goals
In general, the longer your
investment horizon, the more
risks you can afford to take
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Investment Fundamentals--
Risk Tolerance
Ability of investment
plan to absorb loss
Personal tolerance for
risk
Aggressive
Moderate
Conservative
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Investment Fundamentals--
Relationship Between Risk & Return
Risk
Po
ten
tia
l Ret
urn
Options & futures
Corporate bonds Government bonds
CDs Treasury bills
Common stock Preferred stock
Stability
Growth Income
Risk-Return Tradeoff
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Investment Options--
Types of Investments
Cash alternatives
Bonds
Stocks
Other investments
Funds
401(k) plans and IRAs are not investments--they are tax-advantaged vehicles
that hold individual investments
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Investment Options--Cash Alternatives
Low risk, short-term,
relatively liquid
Examples of cash
alternatives include:
Certificates of deposit
(CDs)
Money market deposit
accounts
Money market mutual
funds
U.S. Treasury bills
(T-bills)
Po
ten
tia
l Ret
urn
Cash alternatives
Risk
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Investment Options--Cash Alternatives
Disadvantages
Relatively low returns
May not keep up with
inflation
Advantages
Predictable earnings
Highly liquid
Little risk to principal
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Investment Options--Bonds
Loans to a government
or corporation
Interest typically paid at
regular intervals
Can be traded like other
securities
Value fluctuates
Po
ten
tia
l Ret
urn
Cash alternatives
Risk
Bonds
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Investment Options--Bonds
Types of bonds include:
U.S. government securities
Agency/GSE bonds
Municipal bonds
Corporate bonds
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Investment Options--Bonds
Advantages
Steady and predictable
stream of income
Income typically higher
than cash alternatives
Relatively lower-risk
(compared to options
such as stock)
Low correlation to stock
market
Disadvantages
Risk of default
Value of bond will
fluctuate with interest
rates
Lower risk means
lower potential returns
(than stock, for
example)
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Investment Options--Stocks
Shares of stock
represent an ownership
position in a business
Percentage of
ownership determines
your share of profit /
loss
Earnings may be
distributed as dividends
Shares of stock can be
sold for gain or loss
Po
ten
tia
l Ret
urn
Cash alternatives
Risk
Bonds
Stocks
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Investment Options--Stocks
Common vs. preferred
Categories:
Small cap
Midcap
Large cap
Stock terminology:
Growth stock
Value stock
Income stock
Blue chip stock
American Depositary Receipts (ADRs)
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Investment Options--Stocks
Advantages
Historically, have
provided highest long-
term total returns
Ownership rights
Can provide income
through dividends as
well as capital
appreciation
Easy to buy and sell
Disadvantages
Poor company
performance affects
dividends / value of
shares
Subject to market
volatility
Greater risk to principal
May not be appropriate
for short term
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Investment Options--Other Investments
Real estate
Stock options
Futures and
commodities
Collectibles
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Investment Options--Mutual Funds
Your money is pooled with that of other investors
Fund invests dollars according to stated investment strategy
You own a portion of the securities held by the fund (instant diversification)
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Investment Options--Mutual Funds
Before investing, investors should carefully consider a fund’s investment objectives, risks, and charges and expenses. These can be found in the prospectus available from the fund, which should be read carefully before investing.
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Investment Options - Mutual Funds
Bond funds
Three major investment categories:
Money market funds
Bond funds
Stock funds
Mutual funds fall all along the risk-return spectrum (e.g., balanced funds, international funds)
Active vs. passive management
Po
ten
tia
l Ret
urn
Money market funds
Risk
Stock funds
Balanced funds
International funds
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Investment Options--Mutual Funds
Advantages
Diversification
Professional
management
Small investment
amounts
Liquidity
Disadvantages
Value of shares can
fluctuate daily
Portion of fund dollars
may be tied up in cash
for liquidity needs
Potential tax inefficiency
Mutual fund fees and
expenses
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Investment Options --
Exchange-Traded Funds (ETFs)
Most ETFs are based on an index
Passive management may lower fund costs
Can be traded throughout the day, bought on margin, and shorted, like stocks
May provide tax efficiencies
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Investment Options --
Exchange-Traded Funds (ETFs)
Before investing, investors should carefully consider a fund’s investment objectives, risks, and charges and expenses. These can be found in the prospectus available from the fund, which should be read carefully before investing.
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Investment Methods--Dollar Cost Averaging
Invest same dollar amount at
regular intervals over time
You buy more shares when
price is low, fewer shares
when price is high
Average cost of shares will
be lower than average
market price per share
during your investment time
period
This is a hypothetical example and does not reflect the performance of any specific investment. Dollar cost averaging can’t guarantee you a profit or protect you against a loss if the market is declining.
Jan Feb Mar Apr May $0
$10 $5
$20 $25
$35
$15
$30 10 shares
30 shares
15 shares
20 shares
12 shares
Five Hypothetical Investments
Average market price per share
($30 + $10 + $20 + $15 + $25) ÷ 5 = $20
Investor’s average cost per share
$1,500 invested ÷ 87 shares bought =
$17.24
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Asset Allocation--Considerations
Factors:
Diversification
Risk tolerance
Time frames
Personal financial
situation
Liquidity needs
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Asset Allocation --
Sample Allocation Model
These asset allocation suggestions should be used as a guide only and are not intended as financial advice. They should not be
relied upon. Past performance is not a guarantee of future results.
A conservative asset
allocation model will
tend to focus on
preserving principal
Stocks25%
Bonds50%
Cash Alternatives
25%
Conservative
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Asset Allocation --
Sample Allocation Model
These asset allocation suggestions should be used as a guide only and are not intended as financial advice. They should not be
relied upon. Past performance is not a guarantee of future results.
A moderate asset allocation model will tend to balance predictable income with potential growth
Stocks50%
Bonds40%
Cash Alternatives
10%
Moderate
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Asset Allocation --
Sample Allocation Model
These asset allocation suggestions should be used as a guide only and are not intended as financial advice. They should not be
relied upon. Past performance is not a guarantee of future results.
An aggressive asset allocation model will tend to focus primarily on potential growth
Stocks75%
Bonds15%
Cash Alternatives
10%
Aggressive
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Income Tax Considerations
Pretax Dollars
Deductions are made
from your paycheck
before taxes are
calculated
The result can be lower
out-of-pocket costs
Some examples:
Health or dependent care
Transportation costs
Retirement plan
contributions (e.g., 401(k))
Tax-Deferred Growth No taxes are due until funds
are withdrawn from the account
In certain cases, qualified distributions are tax free
Some examples:
529 college savings and prepaid tuition plans
Retirement plans--traditional and Roth IRAs
Penalty tax applies in some situations (early withdrawals, nonqualified distributions)
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The Value of Tax Deferral
$20,000 invested in
Year 1
6% annual growth
rate
28% tax rate
Taxes paid with
account assets $0
$10,000
$20,000
$30,000
$40,000
$50,000
$60,000
$70,000
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
Taxable vs. Tax-Deferred Growth
Taxable investment Tax-Deferred Investment
This hypothetical example is for illustrative purposes only, and its results are not representative of any specific investment or mix of investments. Actual results will vary. The taxable account balance assumes that earnings are taxed as ordinary income and does not reflect possible lower maximum tax rates on capital gains and dividends which would make the taxable investment return more favorable thereby reducing the difference in performance between the accounts shown. Investment fees and expenses have not been deducted. If they had been, the results would have been lower. You should consider your personal investment horizon and income tax brackets, both current and anticipated, when making an investment decision as these may further impact the results of the comparison. This illustration assumes a fixed annual rate of return; the rate of return on your actual investment portfolio will be different and will vary over time, according to actual market performance. This is particularly true for long-term investments. It is important to note that investments offering the potential for higher rates of return also involve a higher degree of risk to principal.
$57,435 ($41,353 after tax)
$35,565
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Investors should consider the investment objectives, risks, charges and expenses associated with 529 plans carefully before investing. More information about 529 plans is available in the issuer's official statement, which should be read carefully before investing. Also, before investing, consider whether your state offers a 529 plan that provides residents with favorable state tax benefits. The availability of the tax or other benefits mentioned may be conditioned on meeting certain requirements.
Saving for College
Tax-deferred growth and
potential tax-free earnings
Withdrawals not used for college subject to income tax and a penalty
Fees and expenses with each type of plan
529 plans • Individual account
• Pre-established portfolios
• Returns not guaranteed
• Can be used at any college
• Can join any state’s plan
College savings plans
• Prepay tuition today
• Return guaranteed--in form of tuition coverage
• Limited to your state’s plan
• In-state public colleges
Prepaid tuition plans
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Retirement: Start Now
Don’t put off planning and investing for retirement
The sooner you start, the longer your investments have a chance to
grow
Playing “catch-up” later can be difficult and expensive
$0
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
$700,000
$800,000
20 25 30 35 40 45 50 55 60 65
Age 20 Age 35 Age 45
$3,000 annual investment at 6% annual growth, assuming reinvestment of all earnings and no tax
$120,000
$679,500
$254,400
This is a hypothetical example and is not intended to reflect the actual performance of any investment. This illustration assumes a fixed annual rate of return; the rate of return on your actual investment portfolio will be different and will vary over time, according to actual market performance. This is particularly true for long-term investments. It is important to note that investments offering the potential for higher rates of return also involve a higher degree of risk to principal.
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Retirement: Basic Considerations
What kind of retirement
do you want?
When do you want to
retire?
How long will retirement
last?
What kind of retirement do you want?
• Financial independence
• Freedom to travel, pursue hobbies
• Ability to live where you want (e.g., in current home, vacation home)
• Opportunity to provide financially for children or grandchildren
When do you want to retire?
• The earlier you retire, the shorter the period of time you have to accumulate funds and the longer those dollars will need to last
• Social Security isn’t available until age 62
• Medicare eligibility begins at age 65
How long will retirement last?
• Average life expectancy is likely to continue to increase
• Retirement may last 25 years or more
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Retirement: Tax-Advantaged Savings
Vehicles
Tax deferral can help your
money grow
Take full advantage of
401(k)s and other employer-
sponsored retirement plans
Contribute to a traditional or
Roth IRA if you qualify
10% additional penalty tax
applies for early withdrawals
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Estate Planning Fundamentals
Intestacy
Wills
Trusts
Planning for incapacity
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Estate Planning: Intestacy
Intestacy laws vary from
state to state
Typical pattern of distribution
divides property between
surviving spouse and
children
Your actual wishes are
irrelevant
Many potential problems
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Estate Planning: Wills
A will is the cornerstone of an estate plan
Directs how your property will be distributed
Names executor and guardian for minor children
Can accomplish other estate planning goals (e.g., minimizing taxes)
Must be written, signed by you, and witnessed
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Estate Planning: Planning for Incapacity
Incapacity can strike
anyone at any time
Failing to plan means a
court would have to
appoint a guardian
Lack of planning
increases the burden on
your guardian
Your guardian’s decisions
might not be what you
would want
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There’s a Lot to Consider
Ask questions, and start planning now.
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Financial Planning Why Bowers?
CPA – Most Trusted Advisor
CPA approach to planning
Tax considerations in all planning
Clients best interest!!!!
All services but the legal documents
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Disclaimer
*Diversified Capital Management is a financial planning firm,
securities offered through Cadaret, Grant & Co. Inc. Member
FINRA and SIPC, B&C Planning Services, LLC; Diversified
Capital Management, LLC and Cadaret, Grant & Company are
separate entities, 110 West Fayette Street, 5th Floor, Syracuse
NY 13202 with five planners offering a full range of security and
insurance products