Personal Finance 101 - PowerPoint Presentation

Slide1

Personal Finance 101

By Kirsten Crame & Chris Morton

Disclaimer: the opinions expressed in this presentation are those of Chris Morton and/or Kirsten Crame and are not necessarily the opinions of Crowe Horwath. Slide2

EVERYTHING YOU NEED TO KNOW ABOUT FINANCESpend less money than you make.-The endSlide3

AgendaSavings & DebtPersonalGovernmentInvesting

Credit Cards & Credit ScoresInsuranceHSA vs FSA’sYour new job and where to moveBuying a House

Q & ASlide4

Personal Savings & DebtSlide5

Some not so fun facts about America’s saving problem…

http://www.economist.com/blogs/freeexchange/2013/04/saving

We’re right back where we started before

the crisis…. at a 2% savings rate!

Switzerland 13.9%

Germany 10.3%

Australia 10.2%

Sweden 12.4%

Other OECD Countries 2013 Personal Savings Rates

http://www.oecd-ilibrary.org/economics/household-saving-rates-forecasts_2074384x-table7Slide6

US Government Savings & DebtSince 2008, the government debt has nearly doubled.Deficit= Annual Spending – Annual Revenue

Debt = Cumulative DeficitsHarmful effects of high government debt:Reduced private investment in productive capitalFederal spending on interest payments rises Higher taxes are needed to cover interest obligationsRisk of fiscal crises

www.brillig.com/debt_clock/

http://research.stlouisfed.org/fred2/data/GS10.txtSlide7

US Government – A Going Concern ProblemWhy don’t we feel the pain of the US debt doubling over the last ~5/years?

Historically low interest ratesThe gov’t is currently rolling over their debt in short term >5/yr maturities (although the trend is to lengthen maturities in the future)

No current

f

ire sale

Here’s a hypothetical; if interest rates on the 2 year went up to what they were in 2000, interest expense would be

$1

TRILLION, up from

$416 billion

! (using the current

$16.7T

outstanding debt

) – Larger than the Social Security Administration

Currently, the

FED gov’t

takes in

$2.7T

in gross receipts, that would mean 37% of our taxes/fines/

etc

would go to servicing the debt alone! (

currently 15

%)

http://

www.usgovernmentrevenue.com/fed_revenue_2013USrn

http://

www.treasurydirect.gov/govt/reports/ir/ir_expense.htmSlide8

Saving (“The aim of the wise is not to secure pleasure, but to avoid pain.” – Aristotle)

The first step to living debt free is to create a budgetKnow what to prioritizeEg

. Room/board, then food, then transportation,

etc

Separate out your needs (rent/food/beer) versus wants (new phone/restaurants/movies)

There are plenty of resources to create your own budgets including…

Excel default spreadsheets

https

://www.mint.com/how-it-works/accounts

/

(1:30/min video)

Learning to save is critical in today’s world of immediate gratification and a global flexible work force

Above all else, do SOMETHING!Slide9

Once you’ve got the savings down, now the fun part… Investing!

Rule of 72 (doubling time)Ex, if you were to invest $1,000 with compounding interest at a rate of 9% per annum, the rule of 72 gives 72/9 = 8 years required for the investment to be worth $2,000.

“

Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it

.”

― Albert

Einstein

How to invest?

401k: $17.5k for 2013 annual limit

IRA & Roth IRA: Lesser of earned income or

$5.5k for 2013 annual limit

Be careful of expense ratios…

Start your own business! Slide10

Traditional IRA vs. Roth IRATraditional IRA- money contributed is pre-tax and will be taxed when it is distributed

“tax deferred” earnings & current year deduction on page 1 of your 1040Qualified distributions begin at age 59½. Required minimum distributions begin at age 70½.No AGI limits on who can contributeBeneficiaries pay taxes on inherited IRAs.

After 5 years, up to $10k can be withdrawn penalty free to cover first time homebuyer expenses, but tax will be due on the distributions.

Roth IRA- money contributed is post tax and will not be taxed when distributed

“tax exempt” earnings because the principal was taxed, and now will grow tax free

Single people- Modified AGI< $125k

Married people- Modified AGI< $183k (this is an example of a marriage penalty)

Qualified distributions begin at age 59½.

No required minimum distributions

wealth can be transferred without beneficiaries owing income tax

After 5 years, up to $10k can be withdrawn penalty free to cover first time homebuyer

expenses, no tax on distribution

http://www.rothira.com/traditional-ira-vs-roth-iraSlide11

Traditional IRA vs. Roth IRA- so which one should I have?You can have both!

People who believe their current tax rate is lower now than it will be when they retire typically invest in Roth IRAs so that they are taxed currently at their low rate, and then they plan to take distributions tax free when taxes are higher.People who are currently in a high tax bracket contribute to their traditional IRA to reduce their taxable income in the current year. The higher your tax rate is currently, the more benefit you get by contributing to a traditional IRA. People can “hedge” themselves by investing in both- just not more than $5.5k total for 2013 amongst IRA & Roth IRA accounts

http://www.taxpolicycenter.org/taxfacts/content/pdf/individual_rates.pdf

2013 Income Tax RatesSlide12

What if you need to take money from your retirement account?Avoid taking money from your retirement if possible

401k withdrawals before age 59 ½ are subject to tax and a 10% penaltyEarly Roth IRA distributions of income are subject to tax (they wouldn’t be if it was a regular distribution instead of an early distribution) and a 10% penalty.There are some exceptions that will get you out of tax & penalty such as certain medical expenses, home purchases, disability & a few other things.

Major point: You can withdraw the

Principal

you contributed to a Roth IRA at any time with no tax or penalty!

If you change jobs, you can rollover many types of retirement accounts from one company to another (usually must happen in a 60 day window)

The tax document you will receive if you do this is a 1099-R

Double check the coding in box 7 to make sure its coded correctly

Report any early distributions (regardless of if they are taxable or not) on form 5329 of your tax return.

http://taxes.about.com/od/retirementtaxes/a/early_penalty.htmSlide13

What should I invest in?

This is ultimately your decision and based on risk tolerance, however someone under 40 typically should be in high risk assetsSmall cap stocks (Russell 2000) (2012 returns of 17.28%) – Source Russell.com

Using the rule of 72, your investment will double in 72/17.28 ~=4.2/years!

Mutual

Funds

An investment program funded by shareholders that trades in diversified holdings and is professionally managed

Exchange Traded Fund (ETF)

ETFs seek to track an underlying index’s performance over time

A

mutual fund that is traded on a stock exchange

Emerging

market or foreign stocks through an ETF

What’s

an index

?

An

imaginary portfolio of securities representing a

particular

market

or a portion of it

It’s

a group of stocks, bonds, or both!

Ex. Vanguard Total World Stock

Idx

Fd (Symbol VT)2012 performance of 15.55% - Source Google FinanceSlide14
Slide15

ETF expense ratio comparison

Similar ETFs

 Slide16

Personal Risk Tolerance There are several risk tolerance calculators on the internetThese help you decide how to invest

For example, a young professional with no children and a full time job probably has a higher risk tolerance than an older person who is not working and is dependent on social security.Investments for people with low risk tolerance tend to be value stocks/mutual funds/ETFs and short/medium term bonds.Investments for people with high risk tolerance tend to be growth oriented stocks/mutual funds/ETFs Slide17

DiversificationStocksBondsCommodities

CropsSteelPrecious metalsTimberREITSCashPersonal HomeRental Properties

CollectablesSlide18

Credit CardsThese can be a blessing or a curse depending on how you use them, here are some things you should know:

Is there an introductory rate? When, and by how much, will it increase?Is there an annual fee? How much is it?

What

is the grace period?

Is online banking available

?

What is the credit limit

?

No interest if you pay the full bill every month

What

other fees are attached to the card and how are they assessed? (ex: transaction fees foreign exchange fees)?

Are

there any offers or rebates associated with the card

(ex: frequent flyer miles

)?

What type of offers/rebates are relevant to you? (e.g. do you travel, like to shop, need 0% intro APR)Slide19

Credit Cards www.creditcards.com allows people to compare credit cardsSlide20

Typical Current Interest RatesStudent Loans- about 6%Credit Card Debt- about 19% - 25%

Cash Advances (such as AMSCOT) 10% - 250%Checking Accounts 0%Short Term CDs .25%Long Term CDs 1.1%

Car Loans- about 2% - 9%

House Loans- about 3% - 7%

Savings Accounts .1%-.25%

Money Market .2%

https://partnersfcu.org/everyday-banking/rates/#certificatesSlide21

How to Get out of DebtPay off your highest interest rate debt first

For most people, this is usually credit card debt. It is normal for credit card debt to accrue interest at 20% APR or more. The average household has $15,950 of credit card debt. Some student debt loans are higher than others, you may be able to chose which ones you pay firstDon’t put double payments towards your mortgage if you’ve got other debt at a higher rateWrite down everything you buy so you see where your money goes, then eliminate nonessentials.

Pay credit cards in full monthly- do not carry a balance

Be a member at a credit union instead of a bank- usually lower fees/no fees

http://money.cnn.com/magazines/moneymag/money101/lesson9/index.htmSlide22

How to Get out of Debt…continuedDo a balance transfer to a 0% balance transfer credit card to buy yourself time to pay off credit card debt with little or no interest (there usually is a 4% fee for this.)

Absolutely do not take PayDay loans or cash advances. These typically have interest rates of 10%-250%!Be weary of things like Angie’s List:Automatic credit card charges & renewals Almost impossible to get out of

Bad reviews all over the internet

Allegations of “rigged” ranking of vendors

You can get the info

you’re

looking for from the Better Business Bureau for free

Learn how to cook & buy groceries. It’s cheaper and healthier than restaurants

Consolidate/Negotiate debt down

Alternative

methods

Pay off lowest “total debt” first to feel accomplished that you have less debts.

This is less rational than the methods above, but it may give you an emotional boost.Slide23

Your Credit ScoreDO NOT SIGN UP FOR “FREE CREDIT REPORT SERVICES” or any kind of credit monitoring

Can pull your credit once a year from each of the 3 bureausI pull mine once every 4 monthsFICO score doesn’t matter as long as you pay your credit card off each month and use less than 50% of your credit card limits

Check out

www.creditkarma.com

for free account monitoring and FICO score

Worried about identity theft? Freeze your credit!Slide24

Building CreditStart building credit by getting a credit card- preferably one with no annual fees and some sort of rewards.Open credit accounts with stores you love- Macy’s, Rooms to Go etc.

Have things in your name such as apartments, utilities and phone contracts Don’t carry high balances on lines of credit.Buy a car (if you need one)Get a job and keep itDon’t get evictedPay your bills in full and on time.Open a savings account if you don’t already have one

Avoid bankruptcy- “the credit equivalent of poison”

Mars

your

credit report for 10 years

Don’t get arrested

Criminal convictions stay on your credit report forever Slide25
Slide26

Sneaky Bank TricksSubtracting Electronic payments earlyP

ayments were deducted from customer accounts but not paid to the creditor on same dayWachovia (now Wells Fargo) and other banks got in trouble when customers learned funds were taken out 2-5 days before payment was due, thus giving the banks several days of float

Ordering transactions from high to low

Banks used to post transactions chronologically, but now are choosing to process transactions by size paying the highest ones first when they realized this increased customers chances of over drafting

Debit Card Overdraft

Fees

The purpose of debit cards was to prevent the customer from spending more than hey had

Banks found that approving over draft fees for the “convenience” of their customers was very lucrative

In fact, many banks now make it difficult to opt out or even say they cannot prevent payments from clearing even though there is no money in the account

“Privacy Assist” security monitoring services offered by banks

Unneeded and difficult to get out of- monthly automatic fees deducted from accounts

Prey on the poorest people by then charging overdraft fees

http://www.huffingtonpost.com/2010/02/25/bank-of-america-sued-for_n_475694.html

http://www.businessweek.com/articles/2013-06-11/debit-card-overdraft-fees-remain-profitable-for-banksSlide27

InsuranceRemember that the goal of insurance is solely to mitigate risk

Only buy the coverage you absolutely need When you need life insuranceIf no one is depending on your income (children/spouse) then you probably don’t need life insurance.

Most accounting firms give life insurance to workers as one of their benefits.

Whole

vs

term

Whole

Can access up to 2/3

of value while still alive if there is a terminal illness

More expensive

C

ash

surrender

value

Guaranteed

rate of

return

Term

Cheaper

F

or specified time

Only pays out if someone passes

How much do you need and why?Slide28

HSA & FSAHealth Savings Accounts (HSA) and Flex Spending Accounts (FSA) are becoming more common health insurance

plans.HSA details:Contribution limits- Individuals $3,250 & Families $6,450

Requires a HDHP (high deductible health plan) and minimum required deductibles

Deductibles- Individuals $1,250 & Families $2,500

L

ower

premiums and much higher deductibles than a traditional health

plan.

Also called catastrophic illness plans, great for young people due to low premiums

Contributions to HSAs can be carried over year to year, and they can be invested.

FSA Details

$2,500 employee cap

Allows

you to contribute money to the FSA for costs not covered by insurance: deductibles, co-pays, and coinsurance. In addition, you can use your FSA to pay for health care costs that health insurance doesn’t cover

.Slide29

HSA & FSA continued…

Compare/ContrastUnlike HSA’s, funds in FSA’s that are unused over $500 when the plan year is over are lost and cannot be carried over to the following year. (updated 11/1/13)

Neither allow expenses for over the counter drugs except insulin or if prescribed

Unlike health savings accounts or health reimbursement accounts, FSAs are more commonly offered with traditional medical

plans

Contributions to HSAs can be made for the 2013 tax year up until April 15, 2014.

Contributions to traditional and Roth IRAs

for the 2013 tax year

also can be made up

until April 15,

2014.Slide30

New job and where to moveCheck out the Robert Half salary guide (2014 now available)

Know what the cost of living will be when looking at salariesOther things to look for: (Google/Wikipedia)Total unemployment/job growth

Cost of living/median home price

Average Salary

School system

Age

Things to doSlide31

Buying a house How much down payment?

How much house can you afford?Items to be wary of when buyingAsk your lender/Realtor how they make money

Closing costs (Typically 3% of home cost)

Buying furniture after the purchase, security deposits, etc.

Consider 10 or 15 year loan instead of 30 year loan

15 year loans typically are .25% lower interest than 30 year

http://www.realtor.com/home-finance/buyers-basics/what-are-my-mortgage-options.aspx?source=webSlide32

Mortgage OptionsConventional mortgages

Meet the funding criteria of Fannie Mae or Freddie MacAbout 35-50% of the market (depending on location)May be fixed-rate or adjustable-rate (certain circumstances interest-only)Fixed = interest rate doesn’t change

Adjustable = interest rate adjusts to prevailing rate (usually based on an index plus a certain margin – ex-

libor

+1)

Interest only – Pay only interest, balloon payment due after certain duration

http://

www.usa.gov/topics/family/homeowners/buyingselling/mortgages/types.shtmlSlide33

Mortgage OptionsFHA mortgagesBenefits include 100% financing (minimum of 3% down, can be gifted and applied to closing costs) Sellers must pay part of the closing costs

Disadvantage is that the PMI (private mortgage insurance) does not go away after meeting a certain equity threshold (usually 20% for conventional)In most cases, borrower pays 1.5% of loan amount at closing along with a .5% annual renewal premium paid over life of loanMay qualify for partial refund after 5/yrs under certain

circumstances

http://www.bankrate.com/finance/mortgages/4-mortgages-that-require-little-money-down-2.aspxSlide34

Mortgage OptionsFirst time home buyer loan programsOffers vary by state and lender

Little or no down payment & reduced closing costs and feesAllow lower credit scores & higher debt ratiosTypically total loan would be less than conventional loanMust be primary residence & may be difficult to refinanceDepartment of Agriculture (USDA) Rural Development loans

No mortgage insurance, but 2% guarantee fee

Intended for first time home

buyers

Not confined to farmland

Income restrictions

Veterans Administration (VA loan)

Qualified veterans can get zero down payment mortgages with no mortgage insurance and reduced rates (2.15%-3.3%)

http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/pred/predlend

http://www.bankrate.com/finance/mortgages/4-mortgages-that-require-little-money-down-2.aspxSlide35

For more information, contact:Kirsten Crame

Direct 813-209-2464Kirsten.Crame@crowehorwath.com

Chris Morton

Direct

813-209-2466

Chris.Morton@crowehorwath.comSlide36

Mint.com https://www.mint.com/how-it-works/accounts/Choose to save.org

http://www.choosetosave.org/calculators/Debt Clock http://www.usdebtclock.org/Vanguard

https://

personal.vanguard.com

Free credit monitoring & FICO score

www.creditkarma.com

Freeze your credit

http://www.clarkhoward.com/news/clark-howard/consumer-issues-id-theft/credit-freezes-are-effective-tool-against-data-bre/nMgx3

/

Credit Cards.com

www.creditcards.com