PART 5 LIFE CYCLE ISSUES Chapter 18 Fitting

PART 5: LIFE CYCLE ISSUES Chapter 18 Fitting the Pieces Together

The Ingredients of Success n It is impossible to succeed financially unless you: Evaluate your financial health. n Plan and budget. n Manage your cash and credit. n Control your debt. n Make knowledgeable consumer decisions. n 18 -2

The Ingredients of Success n It is impossible to succeed financially unless you: Have adequate health, life, property, and liability insurance. n Understand investing principles. n Make investment decisions that reflect your goals. n Plan for retirement. n Plan for what happens to your accumulated wealth and your dependents after your die. n 18 -3

The Financial Life Cycle n Recent graduates make many financial decisions after leaving college. They: May purchase a car and possibly a home. n Will establish credit and pay taxes. n May get married and begin a family. n n Set up an emergency fund, start saving for your goals, and begin a retirement account. 18 -4

The Financial Life Cycle At age 19, put away $2000 at the end of each year for 7 years in an IRA that earns 11%, and then nothing thereafter; at age 65 you will have more than $1. 2 million. n If you wait until you are 25 to start that IRA and make payments every year for 40 years, you still won’t catch up (you’ll have $1. 164 million). n Start at 30, make 35 payments, and end up with less than $700, 000. n 18 -5

Women and Personal Finance n While the basic principles of personal finance don’t change whether you’re a man or a woman, it is tougher for women to achieve financial security. n Women: n n Generally earn less Are less likely to have pensions Qualify for less Social Security Live longer than men 18 -6

Women and Personal Finance n Consider these facts: Over 90% of all women take sole responsibility for their financial decisions at some point. n Nearly half of all women over 65 get 90% of their income from Social Security, compared to 35% of comparable men. n 75% of women don’t know how much they need to save for retirement. n Women tend to be more conservative in their investments, so they earn less. n 18 -7

Women and Personal Finance n Consider these facts: Only 28% of women over 65 receive pension benefits, compared to 45% of men, and the average men’s pension was twice that of women. n At age 65, women outnumber men 3 to 2, by 85 they outnumber them 5 to 2. n While 12% of the elderly live in poverty, 75% of them are women. n In 2001, median personal income for 65 year-old women was $11, 313, while for 65 year-old men it was $19, 668. n 18 -8

Women and Personal Finance n How does a woman start to take charge? n Acquire knowledge. n Make things happen – create a plan. n See a financial planner about specific concerns. 18 -9

Financial Life Events n Life Event 1: Getting Started Lay the groundwork – understand investments and personal finance and assess current finances with planning for the future: n n n Expenses and a budget Control debt Establish an emergency fund Insure yourself Control your credit score Keep current on personal finance 18 -10

Financial Life Events n Life Event 1: Getting Started Identify your goals: n Identify and prioritize financial goals. n Set a time frame. n Identify the costs of your goals. 18 -11

Financial Life Events n Life Event 1: Getting Started Begin saving for your goals: n Save more than you think you can. n Make savings automatic. n Don’t procrastinate. n Catch your matches. n ROTH. n How much risk can you tolerate? n Put together a strategy. n Control your spending. 18 -12

Financial Life Events Life Event 2: Marriage n Get Organized – review and reorganize finances. Work together – discuss approaches to handling money. n Update financial records. n Gain control of your debt and your credit score – clear up debt issues to work towards getting a mortgage. n Merge finances to make good decisions. n 18 -13

Financial Life Events n Life Event 2: Marriage Revisit Your Financial Goals – revisit both long- and short-term goals n n n Reexamine your financial goals. Begin saving for new goals. Make saving automatic. Make sure you have an emergency fund. Begin working towards retirement. 18 -14

Financial Life Events Life Event 2: Marriage n Reexamine your insurance and benefits: may change beneficiaries, buy additional insurance, and coordinate benefits. Review your beneficiaries. n Include all family members. n Review your insurance. n Coordinate your benefits. n 18 -15

Financial Life Events Life Event 2: Marriage n Reexamine your taxes: your tax status and the tax -advantaged benefits from your employer may change. Update W-4 form. n Take advantage of tax breaks. n n Make a will. n Review your beneficiaries. 18 -16

Financial Life Events n Life Event 3: Buying a Home Does the purchase fit your financial plan? n n Keep track of your credit score. Consider the tax implications. n n n Take advantage of tax benefits. Build tax benefits into your budget. Reexamine your investments. Update your employer records. Know your state. 18 -17

Financial Life Events n Life Event 4: Having a Child Survey your finances. n n Assess your current financial situation. Reexamine your financial goals. Revise your budget. Plan for college. n n Estimate costs. Automate your savings. 18 -18

Financial Life Events n Life Event 4: Having a Child Reconsider your insurance needs. n n Update wills and trusts. n n n Review and update insurance. Update or make a will. Update your retirement account beneficiary. Take advantage of tax savings. n n Apply for Social Security number. Update W-4. 18 -19

Financial Life Events n n Life Event 5: Inheritances, Bonuses, or Unexpected Money Examine the priorities of your goals. Reexamine your goals. Consider estate planning. Examine the tax implications. n n Plan for tax implications. Consider estate taxes. 18 -20

Financial Life Events n Life Event 6: A Major Illness Reexamine your finances. n n n Assess current financial situation. Emergency fund – adequate liquidity. Reexamine financial goals. Reexamine investment strategy. Revise budget. Take advantage of tax breaks. n n Understand the tax implications. Explore flexible spending accounts (FSAs). 18 -21

Financial Life Events n Life Event 6: A Major Illness Alternatives to Finance Your Illness. n n n Reverse mortgage Life insurance Disability insurance 18 -22

Financial Life Events n Life Event 7: Caring for an Elderly Parent Health care and estate planning concerns. n n Oversee your parents’ financial affairs. n n Understand their goals and budget. Discuss long-term health care options. n n Talk to your parents. Long-term health care insurance. Estate planning. n Discuss estate planning. 18 -23

Financial Life Events n Life Event 8: Retiring Develop a retirement income plan. n n n Mental and financial preparation. Plan how to use your retirement savings. Manage your income in retirement. n n n Withdrawal strategy. Monitor your investments. Emergency fund. 18 -24

Financial Life Events n Life Event 8: Retiring Review your insurance coverage and your will. n n n Employer retiree health care. Medicare and Medicare supplemental insurance. Long-term health care insurance. Homeowner’s insurance. Review your will. Keep track of important retirement planning dates. 18 -25

Financial Life Events n n Life Event 9: Death of a Spouse Organize financial material. Contact sources of survivor benefits. n n Insurers. Social Security. Past Employers. If you are the executor, carry out your responsibilities. n Distribution of assets. 18 -26

Financial Life Events Life Event 9: Death of a Spouse n Change ownership or title to assets. Insurance policies. n Automobiles. n Bank accounts, stocks, bonds, and safe deposit boxes. n Credit cards. n Determine if your benefits change. n Review your insurance. n 18 -27

Financial Life Events Life Event 10: Divorce n Nearly ½ of all marriages end in divorce and money problems are a main cause. n Prepare for divorce. Pay down debt. n Keep the costs down. n Protect yourself with the help of a financial planner. n Consider a prenuptial agreement. n 18 -28

Financial Life Events n Life Event 10: Divorce Avoid Credit Damage. n n n Revisit your financial goals. n n n Late payments and your credit report. Have your account re-aged. Insurance coverage. Child support and alimony. Rework your budget. n n Retirement savings. Reexamine your expenses. 18 -29

Making Financial Success Happen n Wealthy Americans: Net worth from $1 million-$5 million, not inherited. n Most have incomes less than $100, 000. n They own a home valued at $278, 000. n They are self-employed or a partner. n In their original marriage, have 3 kids. n They are frugal – clip coupons, buy on sale or do without. n 18 -30

The Keys to Success: A Dozen Decisions Number 1: Become Knowledgeable – avoid financial pitfalls and bad advice, handle unwanted financial surprises. n Number 2: Don’t Procrastinate - your financial future starts now. n Number 3: Live below your means – don’t spend at your level or earning. n 18 -31

The Keys to Success: A Dozen Decisions Number 4: Realize You Aren’t Indestructible consider life and health insurance, stay healthy. n Number 5: Protect Your Stuff – have insurance to protect you from financial ruin. n Number 6: Embrace the “B” Word (Budget) – the budget is a means to reach your goals. n 18 -32

The Keys to Success: A Dozen Decisions Number 7: Reinvent and Upgrade Your Skills – prepare for job insecurity by having the right skills. n Number 8: Hide Your Plastic – credit cards are a dangerous threat to your financial well-being. n Number 9: Stocks Are Risky, But Not as Risky as Not Investing in Them – invest long-term in stocks and keep up with inflation. n 18 -33

The Keys to Success: A Dozen Decisions Number 10: Exploit Tax-Favored Retirement Plans to the Fullest. n Number 11: Plan for the Number of Children You Want. n Number 12: Stay Married. n 18 -34

Successful Debt Management Key #1: The Obvious: Spend less than you earn and budget your money. n Key #2: Know the costs. n Key #3: Understand the difference between good and bad debt. n 18 -35

Successful Debt Management Key #4: Make sure you can repay what you borrow – set your own standards. n Key #5: Keep your credit score strong – it keeps costs down and is a source of emergency money. n Key #6: Don’t live with bad (and expensive) debt. n 18 -36

Getting Started: Just Do It Start today – don’t procrastinate. n Begin with budgeting and planning. n Pay attention to managing your cash. n Rid yourself of bad debt. n Your safety net should be in order. n Start investing. n 18 -37