1. FINANCIAL DECISION MAKING
CHAPTER 13
FINANCIAL
DECISION
MAKING

2. FINANCIAL PYRAMID CREDIT SAVINGS & GOAL PLANNING FINANCIAL
DECISION MAKING
NEGOTIATING
BUDGETING
(first seminar)

3. PRINCIPLES OF FINANCIAL DECISION MAKING
Thinking with your head, not your emotions.
Determining which decision will provide the greatest amount of benefit.
Know the length of benefit you are interested in maximizing. (short term, intermediate term or long term)
Forgetting about lost cost!
Calculating opportunity cost.
Don’t use long term debt to pay off short term needs.

4. DECISION MAKING
HOW MANY MAJOR FINANCIAL DECISIONS WILL YOU MAKE IN YOUR LIFE? (AVG.) 23

5. MAJOR DECISIONS Buying vehicles (8) Purchasing primary residence (6)
When you start saving for retirement (1)
When you start saving for college for your children or do you? (1)
Should you go back to get additional education? (3)
When do you get married or do you? (2)
Should you have a child (2)

6. WHEN TO START SAVING FOR RETIREMENT
AGE 22 AGE 45
YEARLY DEPOSIT $4,000 $4,000
YEARS TO SAVE
RATE OF RETURN 8% 8%
RESULTS $1,318, $183,047

7. WHEN TO START SAVING FOR COLLEGE EDUCATION
19 YEARS PRIOR YEARS PRIOR
MUST SAVE $266/MO MUST SAVE $3,300/MO
FOR MOST PEOPLE $266/MO IS AN OPTION, HOWEVER FOR THOSE WHO WAIT, MOST TAKE A SECOND MORTGAGE OUT TO PAY FOR COLLEGE WHICH WILL END UP COSTING THEM AN ADDITIONAL $240,000 OF INTEREST.

8. TRADITIONAL IRA OR ROTH IRA
RETIREMENT TAX BRACKET
15% %
DED. IRA $2, $1,720
ROTH IRA $1, $1,838
TAX. INV $ $ 318
THE DECISION IS BASED ON YOUR FUTURE TAX BRACKET AND INCOME.

9. REBATE VS INTEREST RATE
WHICH ONE IS A BETTER DEAL?
PERCENTAGE RATE 0% %
CASH REBATE $1, $2,500
SAVINGS RATE % 2.5%
SAVINGS $1, $1,446
WHICH METHOD
IS BETTER? INTEREST CASH REBATE

10. CREDIT CARD INTEREST HOW IMPORTANT IS THE INTEREST RATE? 12% 22%
12% %
AMOUNT OWED $8, $8,000
FUTURE CHARGES 200/MO /M0.
MONTHLY PAY. $ $ 350
INTEREST CHARGES $9, $55,506
TOTAL COST DIFF. $46,462

11. NEW OR USED VEHICLE? NEW USED AVG. COST PER YEAR $1,978 $1,660
MONTHLY PAYMENT
TOTAL DEPRECIATION 18, ,886
TOTAL INTEREST PAID 1, ,115
BEST DECISION $317/yr.
(The used car will save you $317/yr times 10 years will save you $3,170 plus inv. return.

12. REFINANCE OR NOT? CURRENT LOAN $140,000 CURRENT INTEREST RATE 7.50%
TOTAL COST TO REFINANCE $ 2,100
STAY IN HOUSE YEARS
REFINANCING WILL SAVE YOU $3,847 OVER THE SEVEN YEARS.

13. SHOULD SPOUSE WORK OR NOT?
First you must consider why you need the extra money. Is it to increase your status or is it to save for emergencies? Know the why so you can have a plan and work your plan.
Scenario:
Extra Income $3,000
Less: Taxes 1,139
Less: Extra Exp
Monthly Benefit $ or $10,980/yr.
______

14. CONSOLIDATE DEBT OR NOT?
If you have two different loans and three credit cards, would it be wise to consolidate using a home equity line of credit:
Current Loans Consolidation Loan
Total Principle $ 9, $ 9,800
Total interest , ,424
Other cost
Investment Savings (634)
Tax savings (819)
Total Cost $14, $ 11,146
TOTAL SAVINGS OF $ 3,671

15. FIXED OR ADJUSTABLE RATE?
2 YR. 7 YR. 15 YR.
LOAN AMT. $140K $140K $140K
TERM 30 YR. 30 YR. 30 YR.
DISC. PT % 1.0% 1.0%
VARIABLE BEST
(SAVINGS) $400
FIXED BEST
(SAVINGS) $4,813 $10,613

16. WHAT IS IT WORTH TO REDUCE MY SPENDING?
1 yr yrs yrs.
Waiting to buy a new car $2, $32, $152,434
Eating out less , ,644
Buying fewer clothes 1, , ,288
Taking fewer trips , ,644
Going to fewer movies , ,786
Paying off credit cards 1, , ,932
Carpooling to work , ,322
Total Savings by reducing
spending and saving the
difference: $ 7, $ 92, $433,051

17. WHAT IS THE VALUE OF HIGHER EDUCATION?
Should you strive for a graduate degree? At what age is this useful? (Break even point is 45)
Income with Bachelors $2,125,433
Income with Masters ,004,433
(Subtotal) $ 879,000
Less: Educational Cost ,000
Lost wages ,000
Increased Taxes ,000
Total Financial Benefit $ 339,000
_________

18. SHOULD I PAY POINTS TO LOWER MY INTEREST?
The average family stays in their home for an average of seven years prior to moving!
LESS MORE
POINTS POINTS
LOAN AMOUNT $140,000 $140,000
INTEREST RATE % %
DISCOUNT POINTS % %
FINANCIAL BENEFIT
(SAVINGS): $1,956

19. TERM OR UNIVERSAL LIFE?
INVESTING IN LIFE INSURANCE IS A PERSONAL CHOICE AND A FINANCIAL CHOICE. BOTH CHOICES DON’T ALWAYS COINCIDE WITH EACH OTHER.
UNIVERSAL TERM
POLICY AMOUNT $350,000 $350,000
PREMIUMS $150/MO. $50
CASH VALUE
(AFTER 50 YRS) % %
ROR ON INV.
BEST FIN. DEC. (May or may not be wisest choice) x
(Assuming the insured invests the difference in premiums at 4% return.)

20. SHOULD I MAKE EXTRA PAYMENTS ON MY HOUSE?
No With
Extra Extra
Pmts Pmts
Principal & Int. $885/mo. $985/mo.
Taxes
Mortg. Ins
Total Interest Paid $178,562 $128,255
TOTAL SAVINGS N/A $50,307

21. 15 YR OR 30 YR MORTGAGE?
In terms of cash flow a 15 yr. mortgage will be more demanding, but will always cost you less in interest.
15 yr yr.
Payment $1, $839.37
Interest % % %
Total Payments $199, $302,173
Savings $102,893

22. COST OF MAKING THE WRONG DECISIONS!
VEHICLES $171,636
HOMES $305,800
RETIREMENT $817,405
COLLEGE $240,000
ADDITIONAL EDUCATION $339,000
WHEN AND WHO TO MARRY $200,000
HAVING CHILDREN TOO EARLY OR TOO MANY TO PROVIDE FOR $241,000
TOTAL COST $2,314,841