Planning Your Financial Future A. Gene Nelson Senior Professor Department of Agricultural Economics November 12, 2012

Survey about Topics to Cover Topics Mean Rating (1=important, 10=not) 1How do we use budgeting to meet our goals?2.67 2How do we track our financial progress?3.43 4How can I get a better return on my savings?4.14 5What’s an investment portfolio and why have one?4.62 6How can I increase income left after taxes?4.95 8When should I begin saving for retirement?5.81 3Why is debt both good and bad? Where should I go for financial advice?7.00 9What about Social Security?8.05 7Why 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… = $43,000 starting salary 2% raises annually 5% discount rate Semi-retirement at 66 Full 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 – Use Mint –

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 Position Total 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

How Net Worth Changes Over Time

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. 27

Required Savings Rates for Retirement Beginning Savings at Ages Savings as % of Gross Pay % % % % 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. 31

INCREASING INCOME AFTER TAXES

DEBT: GOOD OR BAD? 33

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: The CFP Board has more than 66,802 CFP® certificants. Of that total, there are 4,526 certificants in Texas.

embedded&v=HLIhtnshN6A The CFP® Board ( 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” 36

Behavior – Required Reading The Millionaire Next Door: The Surprising Secrets of America’s Wealthy – Thomas J. Stanley and William D. Danko 1 – Read it 2 – Loan it to a friend and make them read it 3 – 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)

39 Spring 2013 AGEC 435 Personal Financial Planning for Professionals Instructor: Dr. A Gene Nelson TR 11:10 p.m. to 12:25 p.m. AGLS Building 114

40 Spring 2013 AGEC 489 Spec Topics Risk and Insurance Instructor: Dr. A Gene Nelson TR 2:20 p.m. to 3:35 p.m. AGLS Building 110

41 Financial Texas A&M University

Course Schedule Fall Semester Spring Semester Summer Session First Year Fin Planning Fundamentals (AGEC 435) Insurance Planning Income Taxation Second Year Investment Planning Retirement and Estate Planning Financial Plan Development (capstone) 42

43

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. 44