Planning Your Financial Future

A. Gene NelsonSenior Professor

Department of Agricultural EconomicsNovember 12, 2012

Survey about Topics to Cover

TopicsMean Rating

(1=important, 10=not)

1 How do we use budgeting to meet our goals? 2.67

2 How do we track our financial progress? 3.43

4 How can I get a better return on my savings? 4.14

5 What’s an investment portfolio and why have one? 4.62

6 How can I increase income left after taxes? 4.95

8 When should I begin saving for retirement? 5.81

3 Why is debt both good and bad? 6.05

10 Where should I go for financial advice? 7.00

9 What about Social Security? 8.05

7 Why do I need insurance? 8.29

Other Suggested Topics

• Preparing economic down turns– Liquidity – emergency fund (12 months)

• Making a good budget– We will discuss

Why Do You Need a Financial Plan?• What you have or will have is closely related

to your ability to earn, plan, and manage the use of your money.

• Financial planning is the means we use to get the things we want.

• Through financial planning we attain the goals we have in life.

• But it’s not all about the money . . . or is it?

Example Financial Mission Statement

"To achieve financial independence and to avoid catastrophic financial occurrences

that may result in financial dependence."

How to Get Rich

Hint: You’re Almost There

Roger Pine – CFA, CFP®

What is the present value of all of your future earnings?

• Hint: You likely are already a millionaire…

22 26 30 34 38 42 46 50 54 58 62 66 70 74 $-

$20,000.00

$40,000.00

$60,000.00

$80,000.00

$100,000.00

$120,000.00

Salary by Year

=

22$0.00

$200,000.00

$400,000.00

$600,000.00

$800,000.00

$1,000,000.00

$1,200,000.00

Present Value

$43,000 starting salary2% raises annually5% discount rateSemi-retirement at 66Full retirement at 71

$1,043,000!

For most college graduates just starting out, human capital is the most valuable asset.

Human Capital

Financial Assets

Asset Mix:Typical Graduating Senior

At this stage in life, it pays to focus on earning power.

Human Capital

Financial Assets

Asset Mix:Typical Graduating Senior

Which bar would you prefer to increase by 5%?

If you save wisely, your financial capital will eventually catch up with your human capital

Human Capital

Financial Assets

Asset Mix:Approaching Comfortable Retirement

There is more to the story. Expenditures also have a present value.

Human Capital

Financial Assets

Lifetime Expenses

This is how you get rich.

Human Capital

Financial Assets

Lifetime Expenses

This is not how you get rich.

Human Capital

Financial Assets

Lifetime Expenses

USING BUDGETING TO MEET GOALS

Budgeting

• The process of projecting, monitoring, adjusting, and controlling future income and expenditures– Savings and consumption habits

• We establish a budget to keep track of how we spend our money

• Compare your total income to your total expenses. To get ahead, you should be spending less than you earn.

How Budgeting Works

• Track income and spending and saving, and see how actual differs from the plan.

• Comparing what was planned and what actually happens is valuable part of budgeting.

• First step to gaining control.

• Controlling one’s financial affairs begins with a plan of where money should go.

Budgeting – How to get started . . .

• Here are some examples:

• Use Quicken – http://quicken.intuit.com/

• Use Mint – http://www.mint.com/

mint.com

Positive cash flow => set a goal

Emergency Funds and Reserves• A standard emergency fund among financial

planning professionals is 3 to 6 months expenses.

• Clients with irregular income need more.

• Cash reserves above and beyond the emergency fund can be invested in short-term CDs, etc., since credit cards can be used to take advantage of a sale on a big-ticket item, or emergency funds can be used and replenished from the short term investment.

Thought for the Day

The biggest barrier to becoming rich is living like you’re rich before you are.

Knight Kiplinger

HOW TO TRACK FINANCIAL PROGRESS

How to Track Financial Progress?• Statement of Financial PositionTotal assets – total liabilities = net worth(what you (what you (what you’re own) owe) worth – equity)• Net worth is what’s left if all assets were sold

and liabilities paid.• Prepared at a specific date in time.• Need to define the owner: individual,

household, business and household.• Assesses solvency.

Sample Statement of Financial Position

Assets LiabilitiesCash/Cash Equivalents Current Liabilities

JT Checking 2,100 JT Credit Cards 10,000 JT Savings 48,000 JT Home Mortgage 4,200

Total Cash/Cash Equiv. 50,100 Total Current Liabilities 14,200

Invested Assets Long-term LiabilitesJT Stock Portfolio 15,000 JT Mortgage on Home 288,000 W 401(k) 9,000 Total Long-term Liabilities 288,000 H IRA 14,500

Total Invested Assets 38,500 Total Liabilities 302,200

Personal-Use Assets Net Worth $213,900

JT Home 420,000 W Jewelry 5,000 JT Automobile 2,500

Total Personal Assets 427,500

Total Assets $516,100 Total Liabilities & Net Worth $516,100

Statement of Financial PositionJanuary 1, 2012

How Net Worth Changes Over Time• https://www.forefieldkt.com/kt_dt/dt_trns.aspx?xd=NetWorth&il=ff

SAVING AND INVESTING

Saving and Investing

•Start early.

•Look for low cost investments.

•Diversify among asset classes.

•Some tax advantaged and some not.

•Keep it simple.

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Required Savings Rates for RetirementBeginning Savings at

AgesSavings as % of Gross

Pay

25-35 10-13%

35-45 15-18%

45-55 20-25%

55-65 30-35%

Assumes appropriate asset allocation for reasonable risk, 80% wage replacement, and Social Security normal retirement age.

Time/Savings Example

Range in compound annual returns for different holding periods.

Saving and Investing

•Start early.

•Look for low cost investments.

•Diversify among asset classes.

•Some tax advantaged and some not.

•Keep it simple.

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INCREASING INCOME AFTER TAXES

DEBT: GOOD OR BAD?

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WHERE TO GO FOR FINANCIAL ADVICE

Where to Go For Financial Advice• Seek a Certified Financial Planner™ (CFP®)• Certifying entity is the Certified Financial

Planner Board of Standards, Inc.• Website: http://www.cfp.net/ • The CFP Board has more than 66,802 CFP®

certificants.• Of that total, there are 4,526 certificants

in Texas.

http://www.youtube.com/watch?feature=player_embedded&v=HLIhtnshN6A

The CFP® Board (www.cfp.net)Mission:• The mission of Certified Financial Planner Board

of Standards, Inc. (CFP Board) is to benefit the public by granting the CFP® certification and upholding it as the recognized standard of excellence for personal financial planning.

Public Awareness Campaign:• “Let’s Make a Plan”

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Behavior – Required Reading

• The Millionaire Next Door: The Surprising Secrets of America’s Wealthy – Thomas J. Stanley and William D. Danko

1 – Read it2 – Loan it to a friend and make them read it3 – Discuss it

• FREE money management workshops (presented multiple times each semester on a variety of current and relevant money topics for college students).

• FREE workshops and presentations to classes, community groups, and campus organizations upon request.

• FREE individual appointments with Money Wise Aggie Counselors to seek personalized money management information.

• NEW! Online workshops: – Money Management for College Students (19 minutes)– Eating Smart on a Budget (15 minutes) – I'm Graduating Now What (20 minutes) – Taking Out a Student Loan (12 minutes) – Repaying Your Student Loans (12 minutes)

https://moneywise.tamu.edu

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Spring 2013AGEC 435

Personal Financial Planning for Professionals

Instructor: Dr. A Gene Nelson

TR 11:10 p.m. to 12:25 p.m.AGLS Building 114

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Spring 2013AGEC 489 Spec Topics

Risk and InsuranceInstructor: Dr. A Gene

NelsonTR 2:20 p.m. to 3:35 p.m.

AGLS Building 110

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Financial Planning

@Texas A&M University

Course Schedule

Fall SemesterSpring

SemesterSummer Session

First Year

Fin Planning Fundamentals

(AGEC 435)

Insurance Planning

Income Taxation

Second Year

Investment Planning

Retirement and Estate Planning

Financial Plan Development

(capstone)

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Factors Favoring the Outlook for Personal Financial Advisors

1. Millions of new retirees expected in next 10 years.

2. Increasing size of personal investments as baby boomers approach retirement.

3. People are living longer.

4. Growing number and assets of the very wealthy.

5. More employers have retirement savings programs, rather than traditional pension plans.

6. The increasing complexity of financial and investment products.

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