PERSONAL FINANCES FOR FAMILIES Dr. David G. Baker

LIFE STAGE PURCHASES Young adult (20-30): Education, car Young professional (30-45): Home, debt reduction, child rearing Peak Accumulation (45-55): Debt elimination Pre-retirement (55-65): Investment growth Retirement (65-70+): Know what you want to do! (otherwise  boredom, mental & physical decline)

Guidelines to Wealth Live below your means (budget) Start early: it takes 35-40 years Financial independence is more important than social status Develop healthy financial habits

Guidelines to Wealth Minimize bad debt (CC, borrowing for vacations, leasing cars, etc ) Set financial goals with target dates Work smart and hard! (Success = 20% knowledge + 80% behavior) Note that there is not one big thing you can do to grow wealth- it is a series of small, consistent practices done over time.

Common Sense Buy most items with cash/debit card OR use credit card and pay off monthly (only 40% do that). If you don’t have the $ then don’t buy it!! In 2015, the average American family had $132,158 in debt; $15,355 in credit card debt at 18-22% interest.

Common Sense Bring your lunch to work. Why pay someone to make a sandwich for you? Limit alcohol ($) when out and in home Buy things in quantity when possible Limit travel Do things for yourself if you can (wash car, mow yard, etc)

Common Sense Know the difference between nice to have & need to have Eat out sparingly at moderately priced restaurants Use discount coupons Don’t buy new cars Plan and set aside tithe and gift money (family, church, other charities, etc. )

Money Management Mistakes Not having a financial plan & specific goals Not keeping a budget Living beyond your income Failing to diversify investments Not saving enough for long enough

Money Management Mistakes 6. Too much bad debt (home & educational debt = good debt within reason) 7. Not maintaining a cash reserve 8. Failure to use “experts” (Attorney, CPA, CFP- be careful with these) Focusing on short term (vs power of time) 10. No current will (probate = state takes 50%)

Getting Started Once you have selected a job compatible with your spiritual principles and objectives, negotiate the highest starting salary possible because future salaries may be based on it.

INVESTMENTS- “RULE OF 72” The rule of 72 approximates the number of years it takes to double your money 72 Interest Rate

DOUBLE YOUR MONEY 72 / 3% 72 / 6% 72 / 12% 24 YEARS 12 YEARS 6 YEARS

Growth of $170 per Month (~$2,000/Yr) for 35 Years 3% Interest 6% Interest 12% Interest $126,380 $243,411 $1,104,195

Start Early! Geometric Progression (Save ≥ 15 % of your income) “Nothing is more powerful than the power of compounding interest. It is the 8th wonder of the world” Albert Einstein

Growth of $417 per Month Invested at 8% Interest

Diversity Investments “Don’t put all your eggs in one basket”: Real estate Stocks & mutual funds Bonds Money market Collectibles (coins, art, antiques = no liquidity)

Never Invest in Anything You Do Not Fully Understand

Use Tax Deductible or Sheltered/Deferred Investments Roth IRA (tax-free on payout) SEP/IRA 401(k) 403(B)

U.S. Debt (2015) Mortgages: $165,892; $8.12T total Student loans: $47,712; $1.21T total Auto loans: $26,530; $1.03T total Credit Card: $15,355; $713B total Interest payout: $6,658/year

Credit Card Debt 2015 Avg. family CC debt = $15,355. 60% do not pay off monthly, and 75% of people seeking credit counseling have debt on ≥ 2 cards. Avg. person has 4 CC (1/10 have 10!) Avg. interest rate >19% when penalties are included. Limit spending and pay balance monthly even if you have to borrow at a lower rate to do so. Use just one card (to consolidate rewards).

Home Mortgage A home is an excellent investment Leverages money Profit is tax free up to $1 million at age 55 Take out a fixed rate loan (vs ARM) Pay off ASAP i.e. 15 year fixed loan- make one extra payment per year will cut loan term about in half (depending on interest rate), saving a lot of $.

Payment Schedule for $250,000 @ 5.0% Over 30 Years Monthly Payment $1,342 Yearly Payment $16,104 Total Interest $233,141

Payment Schedule for $250,000 @ 5.0% Over 15 Years Monthly Payment $1,977 Yearly Payment $23,724 Total Interest $105,858

Automobile Poor “investment” (even most collector cars) Should not have value of >50% income Pay cash for a used car (5 – 7 yrs old) Certified used (less depreciation/better warranty than new) Zero interest good but usually must pay full sticker price (40% depreciation in 2 years!) Always pay 8-10% less than asking or blue book. See www.kbb.com or www.nada.com

Student Loan Debt Just behind home mortgages and ahead of credit card debt and car loans as the source of greatest debt for American families Pay off ASAP (depending on amount & interest rate) (See debt payoff calculator for impacts of making additional principal payments)

Questions?