financial tools you need to know to survive money management
TRANSCRIPT
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 72
72 =Interest Rate
6 % doubles in years
8 % doubles in years
÷Number of Years to Double
How Money Works
The Magic of Compound Interest
$150,000
$100,000
$50,000
$0
Years 5 10 15 20 25
Investing $100/month8% compounded monthly
How Money Works
Tax-Deferred Compounding
$350,000
$300,000
$250,000
$200,000
$150,000
$100,000
$50,000
$0
Years 10 25 30
$361,887
$209,960$216,364
$139,563
$35,062
$29,904
Taxed Every YearTax-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 PollyProcrastinating Pete
Assumes 10% annual rate of return
Guaranteed Rates of Return
How Money Works
Also known as… Going broke safely
$1000
Interest: 3% +30
1030
Tax: 30% -9
1021
Inflation: 3% -30
$991
Dollar Cost Averaging - When is the Best Time to Invest?
How Money Works
0
200
400
600
800
1000
1200
1400
1600
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
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
$0
$1
$2
$3
$4
$5
$6
$7
$8
$9
$10
$11
JAN FEB MAR APR MAY JUNE JULY AUG SEP OCT NOV DEC
A
B
Dollar Cost Averaging - When is the Best Time to Invest
How Money Works
$0
$1
$2
$3
$4
$5
$6
$7
$8
$9
$10
$11
JAN FEB MAR APR MAY JUNE JULY AUG SEP OCT NOV DEC
Investing $100/month
2017
14
20
B
A
Dollar Cost Averaging
How Money Works
$0
$1
$2
$3
$4
$5
$6
$7
$8
$9
$10
$11
JAN FEB MAR APR MAY JUNE JULY AUG SEP OCT NOV DEC
$0
$1
$2
$3
$4
$5
$6
$7
$8
$9
$10
$11
JAN FEB MAR APR MAY JUNE JULY AUG SEP OCT NOV DEC
Investing $100/month
2017
14
20
17
14 14 13 13
11
11
10
Total Shares: 174 x $10 = $1,740A
B
Dollar Cost Averaging
How Money Works
$0
$1
$2
$3
$4
$5
$6
$7
$8
$9
$10
$11
JAN FEB MAR APR MAY JUNE JULY AUG SEP OCT NOV DEC
$0
$1
$2
$3
$4
$5
$6
$7
$8
$9
$10
$11
JAN FEB MAR APR MAY JUNE JULY AUG SEP OCT NOV DEC
Investing $100/month
2017
14
20
17
14 14 13 13
11
11
10
40
3340
Total Shares: 174 x $10 = $1,740A
B
Dollar Cost Averaging
How Money Works
$0
$1
$2
$3
$4
$5
$6
$7
$8
$9
$10
$11
JAN FEB MAR APR MAY JUNE JULY AUG SEP OCT NOV DEC
Investing $100/month
20 17
14
20
17
14 14 13 13
11
11
10
40
3340
66
33
25
33
3540
25 20
Total Shares: 174 x $10 = $1,740
Total Shares: 410 x $5 = $2,050
A
B
Debt Inflation Taxes
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
8% $684,848
$100,000 - 25 years
Asset Allocation
The Power of Diversification
8% $684,848
$20,000
-100%
$0
$100,000 - 25 years
Asset Allocation
The Power of Diversification
8% $684,848
$20,000 $20,000
-100% 0%
$0 $20,000
$100,000 - 25 years
Asset Allocation
The Power of Diversification
8% $684,848
$20,000 $20,000 $20,000
-100% 0% 5%
$0 $20,000 $67,727
$100,000 - 25 years
Asset Allocation
The Power of Diversification
8% $684,848
$20,000 $20,000 $20,000 $20,000
-100% 0% 5% 10%
$0 $20,000 $67,727 $216,697
$100,000 - 25 years
Asset Allocation
The Power of Diversification
8% $684,848
$20,000 $20,000 $20,000 $20,000 $20,000
-100% 0% 5% 10% 15%
$0 $20,000 $67,727 $216,697 $658,379
$100,000 - 25 years
Asset Allocation
The Power of Diversification
8% $684,848
$20,000 $20,000 $20,000 $20,000 $20,000$962,800
-100% 0% 5% 10% 15%
$0 $20,000 $67,727 $216,697 $658,379
$100,000 - 25 years
Asset Allocation
The Costs of Volatility
Year 1 Year 2 Year 3 Year 4 Year 5
-10%
10 % 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 1970-1995. Portfolios presented are based on Modern Portfolio Theory. For illustrated purposes only.
Risk (Standard Deviation)
Ret
urn
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 ofa 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