Prentice-Hall, Inc.1 Chapter 18 Your Financial Future Starts Now

Prentice-Hall, Inc.2 Your Financial Future Starts Now  Challenges ahead: –Student loans –Credit card debt –Budgeting, spending, saving –Marriage –Children  Choose wealth NOW!

Prentice-Hall, Inc.3 A Look Back at the Financial Life Cycle  Increase awareness and discussion of personal finance issues.  Financial decisions affect your lifestyle; make sure they reflect your financial goals and values.  Prepare for the financial challenges, and changes, of the next few years.  Use your strongest ally on the road to personal financial success – time.

Prentice-Hall, Inc.4 Women and Personal Finance: Why It’s Important  Achieving financial security is tougher for women  Know the facts that make women financially vulnerable

Prentice-Hall, Inc.5 Why Are Women Financially Vulnerable?  90% of women will be solely responsible for their financial decisions at some time in their lives.  20% of women will never marry.  47% of first marriages and 49% of second marriages end in divorce.

Prentice-Hall, Inc.6 Why Are Women Financially Vulnerable? (cont’d)  75% of women do not know how much they need to save for retirement.  Women invest more conservatively than men, therefore earning less.

Prentice-Hall, Inc.7 Why Are Women Financially Vulnerable? (cont’d)  Women live longer than men. –Age 65, women outnumber men 3 to 2 –Age 85, women outnumber men 5 to 2  75% of married women are widowed, with the average age of widowhood 56.

Prentice-Hall, Inc.8 Why Are Women Financially Vulnerable? (cont’d)  Of the 12% of elderly people living in poverty, almost 75% of them are women.  80% of the widows living in poverty were not living in poverty before widowhood.

Prentice-Hall, Inc.9 Financial Independence, Especially During Retirement?  Women generally –earn less than men. –are less likely to have pensions than men. –because of lower earnings, qualify for less Social Security than men. –live longer than men.  Consequently, planning for retirement is more difficult for women than for men.

Prentice-Hall, Inc.10 A Dangerous Myth…  Women must dispel the myth that “someone” will take care of them!

Prentice-Hall, Inc.11 Take Responsibility for Your Financial Future  Gain knowledge.  Get involved in family investment decisions.  Develop and implement your financial plan.  Seek professional help if you lack confidence to act.

Prentice-Hall, Inc.12 Financial Principles Are Gender- Neutral, But Women Should  Recognize that you live longer and may be divorced.  Get involved in your husband’s pension decisions.  Fund retirement plans and IRAs to the max.  See a financial planner, if needed.

Prentice-Hall, Inc.13 Life Events: Marriage  Learn your partner’s financial history, habits, goals.  Track your expenses.  Develop a budget.  Review and revise the plan annually or when life changes occur.

Prentice-Hall, Inc.14 Life Events: Marriage (cont’d)  Talk, talk, talk about your financial situation.  Seek help from a professional. –A financial planner –A financial counselor »National Foundation for Consumer Credit »Debt Counselors of America, now Myvesta.com

Prentice-Hall, Inc.15 Life Events: Marriage (cont’d)  Two other important decisions –Joint or separate checking account(s) –Joint or separate credit cards

Prentice-Hall, Inc.16 Life Events: Children  Birth through age 18, $153,600  For a medium income family (i.e., $41,000 income per year), the investment increases to $1.45M by age 22 with education costs and lost wages from child-rearing.

Prentice-Hall, Inc.17 Life Events: Children (cont’d)  How do you prepare? –Keep your insurance current and premiums paid – health, life, and disability –Consider a tax-free flexible spending account –Maintain adequate income and savings –Update your will and name a guardian –Review your financial plan –Start saving for education costs

Prentice-Hall, Inc.18 Keys to Financial Success  How the rich become rich –Understand the difference in income and wealth –Live like a millionaire – practice frugality  Choose wealth – consider the 12 decisions

Prentice-Hall, Inc.19 Why Frugality?  Sets the stage for personal finance success  Helps you spend less and save more  Helps you stretch your money  Helps you ignore marketers and realize that money, and what it buys, is not happiness

Prentice-Hall, Inc.20 Choose Wealth #1: Become Knowledgeable  Knowledge –Makes it easier to avoid financial pitfalls and bad advice. –Spurs your commitment. –Helps you handle money surprises.

Prentice-Hall, Inc.21 Choose Wealth #2:Don’t Procrastinate  Bad advice SLOWS your financial progress. Procrastination STOPS it……and makes your future work a lot harder.

Prentice-Hall, Inc.22 Choose Wealth #3: Live Below Your Means  Spend less than you earn.  Change your attitude toward spending.  Track your spending and cut out extravagances.  Make savings automatic.

Prentice-Hall, Inc.23 Choose Wealth # 4:Realize You Aren’t Indestructible  Do you need it? –Life insurance – it depends? –Health insurance – YES! –Disability insurance – YES!  Lead a healthy lifestyle.

Prentice-Hall, Inc.24 Choose Wealth #5: Protect Your Stuff (Look Out for Lawyers)  Home and auto insurance – a necessity.  Liability coverage – too little can ruin your financial future.  Raise deductibles to keep costs down.  Increase your emergency fund.  Consider an umbrella policy.

Prentice-Hall, Inc.25 Choose Wealth # 6: Embrace the “B” Word (Budget)  A budget, or cash flow plan forces you to control spending and save by –Using restraint when spending. –Thinking about what you buy. –Living below your means. –Being frugal.  To develop a budget, track your spending and eliminate expenses.

Prentice-Hall, Inc.26 Choose Wealth #7: Reinvent and Upgrade Your Skills  To prepare for future job insecurity, –Make sure your talents and skills are needed. –Continue to educate yourself – your best investment for the future.

Prentice-Hall, Inc.27 Choose Wealth #8: Hide Your Plastic  Use restraint to avoid credit card DEBT. –20% of college students have 4 or more cards. –People spend about 30% more with cards than with cash.

Prentice-Hall, Inc.28 Choose Wealth #9:Stocks Are Risky, But Not as Risky as Not Investing  If your investment horizon is long, invest in stocks and ride the risks up and down!  Use diversification to reduce risk.  Use your time horizon to guide your asset allocation.  Consider a stock index mutual fund.

Prentice-Hall, Inc.29 Choose Wealth #9:Stocks Are Risky, But Not as Risky as Not Investing  Don’t let the fear of stock risk keep you from attaining your goals – don’t ignore the greater danger of inflation and taxes.

Prentice-Hall, Inc.30 Choose Wealth #10: Exploit Tax- Favored Retirement Plans to the Max  Remember the advantages of tax- deferral: –Contributions aren’t taxed. –Earnings aren’t taxed –Eligibility for employer match

Prentice-Hall, Inc.31 Choose Wealth #11: How Many Children You Have  Balance your values, goals, personal life, and finances – and remember, children cost money. Plan on it!

Prentice-Hall, Inc.32 Choose Wealth #12: Stay Married  Married people tend to earn more and accumulate more than single people living alone or together.  Income of divorced women with children is 40% of that of married couples.

Prentice-Hall, Inc.33 Choose Wealth #12: Stay Married  Why do married couples do better financially? –Cooperation skills from marriage translate into a job skill. –Money management is necessary. –Unnecessary spending is reduced. –The single lifestyle is expensive.

Prentice-Hall, Inc.34 The Trap of Too Much Debt  Little capacity, but the potential for lots of debt – college students and credit  Part of the culture: borrowing more than you should  Bankruptcies at an all-time high

Prentice-Hall, Inc.35 Six Keys to Successful Debt Management  Key #1: The Obvious: Spend Less Than You Earn and Budget Your Money –Use a budget to control spending and build savings. Pay yourself 1 st !  Key #2: Know The Costs –Know the long-term costs of borrowing and avoid “high-priced” lenders.

Prentice-Hall, Inc.36 Six Keys to Successful Debt Management (cont’d)  Key # 3: Understand the Difference Between Good and Bad Debt –Borrowing makes sense when you can afford the downpayment and the future payments, and the purchase »fulfills one of your goals »outlives the financing »provides a return that is greater than the cost (i.e., the effects of depreciation)

Prentice-Hall, Inc.37 Six Keys to Successful Debt Management (cont’d)  Key # 4: Make Sure You Can Repay What You Borrow – Set Your Own Standards –Apply the 28%, 36% mortgage ratios –Apply the debt limit ratio Debt limit ratio = total monthly nonmortgage debt payments total monthly take-home pay

Prentice-Hall, Inc.38 Six Keys to Successful Debt Management (cont’d) Key #5: Keep a Clean Credit Record – It’s a Source of Emergency Money  Your credit history determines the cost of borrowing.  Your borrowing capacity is available for emergencies.

Prentice-Hall, Inc.39 Six Keys to Successful Debt Management (cont’d)  How Can You Avoid Credit History Problems? –Avoid borrowing up to your limits –Pay your bills on time –Check your credit report every 2-3 years for errors

Prentice-Hall, Inc.40 Six Keys to Successful Debt Management (cont’d) Key #6: Don’t Live with Bad (And Expensive) Debt In 1998, the typical U.S. family had credit card debt of $5,800

Prentice-Hall, Inc.41 How Can You Avoid Bad and Expensive Debt?  Negotiate down the rate on your current credit card(s).  Eliminate the lifestyle pattern that lead to the debt.  Pay more than the minimum payments.

Prentice-Hall, Inc.42 How Can You Avoid Bad and Expensive Debt? (cont’d)  Liquidate an investment, or savings, that is paying less than the interest rate charged on debt.  Try to find a cheaper source of money (home equity loan, life insurance, friends or family).

Prentice-Hall, Inc.43 How Can You Avoid Bad and Expensive Debt (cont’d) To follow this path, a serious lifestyle change may be necessary!

Prentice-Hall, Inc.44 Getting Started on Your Financial Future  Begin with a budget and a plan.  Manage your cash – monitor bank fees and ATM charges.  Avoid “bad” debt; get rid of it if you have it.  Build a safety net – health, disability, property and liability, and life insurance.  Start investing for future goals.  Take advantage of tax-favored retirement plans.

Prentice-Hall, Inc.45 Nothing Helps Your Financial Plan if You Procrastinate THE MOST IMPORTANT STEP! Follow Axiom15

Prentice-Hall, Inc.46 Summary  Financial independence for women is tougher – be aware of the problems and start planning NOW!  Consider how marriage and children can help you match your financial future with your values and goals.  Share the habit of the wealthy – frugality.

Prentice-Hall, Inc.47 Summary (cont’d)  Learn and implement the 12 decisions that will help you “choose wealth.”  Meet the financial challenge of controlling debt; follow the 6 keys to successful debt management.  Develop a basic financial plan for your future….but remember to “Just Do It.”