April 21, 2017 Presented by Dr. Rebecca Neumann for Academic Staff University of Wisconsin – Milwaukee
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April 21, 2017
Presented by Dr. Rebecca Neumann
for Academic Staff
University of Wisconsin – Milwaukee
Mind your Money, Mind your Future� Goals for today:
� Basic money management skills� Tracking expenses
� Budgeting
� Saving
� Credit� Credit report and credit scores
� Establishing good credit
� Protecting your wealth (insurance)
� How do you make your money grow?� Retirement
� Investing for growth
2
Mind your Money, Mind your Future
� What is financial freedom?
� Being rich?
� Not worrying about money?
� Being able to buy anything you want?
3
Mind your Money, Mind your Future
� Financial freedom
� Ensuring that your net inflows are greater than your net outflows
� This allows you to save and buy what you want.
� Requires making choices!
4
The Role of Budgeting in Your Financial Plan
� What is a budget?
� Plan for income and expenditures!
� The key budgeting decisions for building your financial plan are related to cash flow planning.
� How can I improve my net cash flows in the near future?
� How can I improve my net cash flows in the distant future?
6
Creating a BudgetCash Inflows
� Earned income
� Savings
� Gifts or other
� Note: Gross versus Net income
Cash Outflows
� Rent/Mortgage
� Debt (school, car)
� Fixed Expenses
� Variable Expenses
� Note: fixed versus variable expenses
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Creating a Budget� Forecast net cash flows over several months
� Start with a typical month� Adjust it for unusual expenses
� seasonal shopping, holidays
� Allow for unexpected expenses� medical care, car repairs, home maintenance
� Create an annual budget by extending your budget out for longer periods� Revise and update as needed!
� Include saving as part of your budget� Pay yourself first!
Budget worksheet
9
May planned May actual June planned June actual July planned July actual
Cash Inflows
Income 1 wages
Income 2 wages/tips
Gifts
Interest, dividends
Alimony, child support
Government payments
Financial Aid
Other
Total Inflows 0 0 0 0 0 0
Cash Outflows
SAVINGS pay yourself first!
Emergency funds
Retirement
Mutual funds
College savings
Stocks and bonds
Fixed
rent or mortgage
electricity
cell phone
internet
cable
water/sewer
other utilities
insurance premiums
tuition, child care, etc
Debt payments
credit card 1
credit card 2
Auto loan
installment loan
Flexible
Groceries, food
food away from home
entertainment
travel
gifts
books
clothes
medical/dental
Total Outflows 0 0 0 0 0 0
Net Cash Flows 0 0 0 0 0 0
Saving� Tips for saving
� Set up a budget
� Pay yourself first
� Direct deposit
� Avoid check cashing stores and payday loans
� Save early – power of compounding
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The Benefits of Saving EarlyKelly
� Starts at age 22� Saves $100 per month for 10 years ($12,000)
John � Starts at age 35� Saves $100 per month for 30 years ($36,000)
The interest rate is 8% compounded annually.
Who will have more money at age 65?
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The Benefits of Saving Early
$148,015
$253,199
0
50000
100000
150000
200000
250000
300000
John Kelly
Money Saved
Total Savings atage 65
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The Benefits of Saving Early
$148,015
$427,140
0.00
50,000.00
100,000.00
150,000.00
200,000.00
250,000.00
300,000.00
350,000.00
400,000.00
450,000.00
John (started atage 35)
Kelly (started atage 22)
MoneySaved
TotalSavings atage 65
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What if Kelly had continued to save $100 per month until retirement?
How much do you need to save?� 50 – 20 - 30 budget
� 50% of income for essentials (needs)
� Living expenses – housing, food, utilities, transportation
� 20% of income for financial goals
� Savings, investment, debt reduction
� 30% of income for personal spending
� Flexible spending
� Lifestyle choices
� Vacations, eating out, cell phone, cable, charitable giving
� Wants versus needs
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Credit� What is it?
� Credit is money that is lent to you.
� You pay it back over time, with interest.
� Credit allows you to buy now and pay later.
� Your ability to get credit is based on your borrowing history.
15
Credit Cards – How they work
When you use a credit card it is like taking out a LOAN
from the issuer of the card.
Item Price APR
Min.Monthly Payment
(3% of Balance)
InterestPaid
How Much
You End Up
Paying
Total Years to Pay Off
TV $500 18% Start at $15 $198 $698 ?
Computer $1,000 18% Start at $30 $698 $1,698 ?
Furniture $2,500 18% Start at $75 $2,198 $4,698 ?13
8
4
Credit Cards – What they cost
17
If only the minimum payment is made:
This is how some people end up…
18
Credit Cards – What they costThe benefit to paying more than the minimum:
OriginalBalance
APRMonthly Payment
Total Years to Pay Off
Total of Payments
$2,500 18%3% of bal.
(start at $75)13 $4,698
$2,500 18% $100 2.5 $3,098
$2,500 18% $2,500 0 $2,500
Credit Card Tips
Avoid carrying a balance.
Don’t use your card for cash advances.
Think before you buy.
Debt Analysis� Not all debt is viewed the same
� Student loans
� Credit card debt
� Mortgages
� Car loans
� Ratios can help you calculate positions for different types of debt and/or different types of cash flow.
How much can I borrow?� Debt payments to income ratio =
monthly debt payments / take-home pay
� Divide monthly debt payments (not including a house payment) by net (after-tax) monthly income
� Debt payments to income ratio <20%� Financial advisors typically suggest a debt payment to income ratio
below 20%.� Some say 15% is a better guide
� May be called Debt payments ratio� Indicates how much of a person’s earnings go toward debt payments
(excluding a home mortgage).
How much can I borrow?� Debt to equity ratio = liabilities / net worth
� Divide total liabilities by your net worth� Net worth = total value of assets minus liabilities� leave out home value and mortgage
� Lower is more desirable and above 0.5 is less desirable. � May look more reasonable at about 0.33.
� May also be called Debt ratio
� Can be calculated as Total Debt/Net Worth or Long-term debt/Net Worth
How much home can I afford?� Front End Ratio = 28%
(Principle + Interest + Taxes+ Insurance)Gross Monthly Income
� “PITI to income” or “housing expenses to income” or “annual income percentage” or “front end ratio”� Basically the total monthly cost of the house (PITI = principal, interest, taxes, and
insurance) relative to gross monthly income (before deductions),
� Back End Ratio = 36%(Principle + Interest+ Taxes+ Insurance + Other Debt Payments)
Gross Monthly Income
� “debt to income” or “debt ratio” or “total annual income debt percentage” or “back end ratio”� Basically all monthly debt payments relative to gross monthly income.
Credit Report and
Credit Score
� A credit report is a record of how you have paid your debt.
� Your credit score is a number based on the information in your credit file that shows how likely you are to pay a loan back on time.
Free Credit Report
www.annualcreditreport.com
� You will need some sort of history to verify. � Credit card or banking info.
� Previous addresses.
� 3 Credit Agencies –� Experian, Transunion, Equifax
� Credit report is free! (Credit score may not be).
What’s In Your Credit Report?
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Amounts
Owed
Payment
History
Length of
Credit
History
New Credit
Types of
Credit Used
35%15%
10%
10%
30%
Credit score: FICO Score� Payment History 35%
� MOST IMPORTANT!!!!!!
� On time payments, Late payments, bankruptcy
� Amounts Owed 30%
� Proportion of credit line used (suggestions to use <30% of available)
� Number of accounts with balances, total amount owing on accounts
� Length of Credit History 15%
� How long you have been established with credit
� New Credit 10%
� How many applications/requests for credit have you submitted?
� Okay to shop around, but if you seem desperate, that is bad
� Types of Credit Used 10%
� It’s good to have more than one type of credit successfully used
What’s not in your credit score?
Your race, color, religion, national origin, sex and marital status
Your age
Your salary, occupation, title, employer, date employed or employment history
Where you live
Any interest rate being charged on a particular credit card or other account
Any items reported as child/family support obligations or rental agreements
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Does Good Credit Matter?
FICO score APRMonthly
paymentTotal Interest
720-850 3.19% $361 $1,662
690-719 4.61% $374 $2,433
660-689 6.57% $392 $3,516
620-659 9.69% $422 $5,311
590-619 14.61% $472 $8,300
500-589 14.77% $473 $8,404
400-499 DENIED
Actual rates on 7/13/15 for a 60 month
new auto loan for $20,000
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Does Good Credit Matter?
FICO score APRMonthly
paymentTotal Interest
760-850 3.77% $697 $100,757
700-759 3.99% $716 $107,618
680-699 4.17% $713 $113,125
660-679 4.38% $750 $119,901
640-659 4.81% $788 $133,744
620-639 5.35% $838 $151,779
600-620 Denied
Actual rates on 7/13/15 for a 30-year
fixed rate mortgage for $150,000
What will Improve your Credit Report or Score?
� No quick fixes� Most measures are longitudinal
� Consider components of the credit score for possible actions� Consider their weightings� Consider how these are actually measured
What will Improve your Credit Report or Score?� Payment History Tips
� Pay your bills on time every month!� Get help with a debt repayment plan if you need it.
� Amounts Owed� Keep balances low on credit cards and other “revolving credit”.� Pay off debt; do not move it around. Moving it around will not help your score, and if you are taking out
new cards, it may actually hurt.
� Length of Credit History� Opening new accounts will hurt your length of credit history.� Closing unused accounts may impact your credit history – if you’ve had an account open for a while, then
that establishes a longer credit history.
� New Credit� Shop around
� Types of Credit� Apply for and open new credit accounts only as needed.� Having credit cards and installment loans (and making timely payments) will raise your score.� Someone with no credit cards tends to be higher risk than someone who has managed credit cards
responsibly.
How do you Build Credit?� Pay your bills on time.� Apply for a small loan at the bank or credit union where you have
checking and savings accounts.� Apply for credit with a local store.� Make a large down payment on a purchase and negotiate credit
payments for the balance.� Get a co-signer?!?!
� Worried about temptation?� Request a low limit� Get a card with usage restrictions, such as a gas card� Consider sticking with a secured card
� Do not apply for many cards at once!!!
Important Things to Remember
� No quick fixes
� People who promise a quick fix� Usually some form of debt consolidation
� Does this help?
� Consider the FICO score
� It is important to request and check your own credit report at least once per year.
� If you are denied credit, you may request a free report within 60 days.
Protecting your wealth� Insurance
� Health
� Life
� Disability
� Renters or homeowners
� Automobile insurance
� Check university benefits website.� Remember to enroll spouse/domestic partner and/or
kids if there is a life change. � Check options when this first occurs!
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How do you make your money grow?
� Savings
� Emergency funds
� For specific uses – travel, home loan deposit, car
� Savings, checking, money market, CDs
� Saving for the future (investing)
� Retirement funds
� Education
� Edvest
� Investment vehicles
� Stocks, bonds, mutual funds
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What about retirement?� WRS (Wisconsin Retirement System)
� Supplemental� 403b or TSA (Tax-sheltered annuity)
� Wisconsin deferred compensation plan
� IRA, Roth IRA
What about retirement?� Wisconsin Retirement System (WRS):
� Automatically enrolled once eligible
� Work at least 2/3 of full time for one year.
� Employee contribution is 6.8%
� Employer contribution is 6.8%
� Vested after 5 years.
� Also provides disability, separation, and survivor benefits.
� Payout options – formula benefit or money purchase.
� https://www.wisconsin.edu/ohrwd/benefits/ret/
What about retirement?� 403(b) or TSA – tax sheltered annuity
� University’s version of a 401(k)� The funds can be invested in a variety of stocks, bonds,
mutual funds. You then get the earnings in retirement. � If there is a match, contribute at least up to the maximum
amount that your employer will match!� No match at the university.
� https://www.wisconsin.edu/ohrwd/benefits/ret/tsa/
� Wisconsin deferred compensation plan (WDC)� IRA (pre-tax $)� Roth IRA (taxed now but not at withdrawal)
� https://www.wisconsin.edu/ohrwd/benefits/ret/wdc/
Investment Vehicles� Once you’ve got emergency funds set up.
� And you’ve started contributing to retirement funds.
� What else do you use?
� Money Market
� CDs
� Stocks
� Bonds
� Mutual Funds
� Consider risk, return, duration, tax implications
Types of Saving/Investment Products
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What is it?
Interest
Term
Conditions
+
_
Savings
Bank Account
Variable and Low
No term
Can open with small amount
Low monthly fee,no risk
Low interest
Certificate of Deposit
Bank Account
Fixed, a bit higher
Fixed Term
Need larger amount to open
Higher interest, Compounds daily
Penalty if withdrawn early
Stocks
Shares in a company
Pays dividends
No term
Can be bought and sold in the market at any time
Produces highest return on average
Risk (short-term market fluctuation)
Types of Saving/Investment Products
� Savings accounts � Allow you to withdraw as needed; also called share accounts
at a credit union.
� CDs – certificate of deposit� pays you interest over a specified period of time; penalties for
early withdrawal; usually pays higher interest than a savings account since you lock your funds away for a specific time period.
� Money market funds � a savings account with a minimum balance; usually tied to
changing market interest rates. The fund itself buys short-term money-market assets and then pays out interest on the shares you hold.
Types of Saving/Investment Products� Stocks
� You buy a share of a company; you gain ownership in that company; you then share in the profit of that company via dividends; and you can also gain based on a capital gain (i.e., you can sell your share for a higher price than you paid).
� Corporations issue stock in order to raise funds to invest in physical capital (e.g., new machinery, production processes, new technology, etc…)
� Corporate Bonds� You lend to a company by buying a bond; you earn interest on that bond as a
payment for loaning the funds to the company.� Corporations issue bonds in order to raise funds to invest in physical capital (as
above with stocks).� The bond is the corporation’s written pledge to repay a specified amount of money
with interest.
� Government Bonds� You lend to the government by buying a government bond.� The bond is the written pledge of a government or municipality to repay a specified
sum of money along with interest.� These are often very liquid (trade a lot) and usually have low risk of default.
Financial Assets:
Types of Saving/Investment Products
Mutual Funds � A mutual fund pools money together from a bunch of small investors
to buy stocks, bonds, other financial securities. � You can buy small shares of lots of different stocks and bonds by
purchasing a share in a mutual fund. � Funds can be weighted toward particular types of assets:
� Bonds, Municipal bonds, Balanced funds, Stocks, and Growth funds.
� Funds may focus on a specific investment strategy� Income, growth, income and growth.
� Or have a specific investment objective� Green funds - made up of shares of companies that are green or
environmentally friendly.� Social justice funds - made up of shares of companies that someone has
deemed as socially beneficial.
Financial Assets:
Types of Saving/Investment Products� Diversification
� Spread the risk of loss in a variety of savings and investment options. � “don’t put all your eggs in one basket.”
� Mutual funds offer automatic diversification � Buying one share of the mutual fund gets you a percentage of all the various
companies in which that fund invests. Compare this to buying one share of one company, which doesn’t offer you any diversification (if that stock falls, you lose money).
� You can buy shares in a mutual fund via a bank or other financial institution or directly online.
� Look for no-load funds or check to see that you’re getting something in return for any fees charged.
Setting financial goals� SMART goals
� Specific, significant, stretching
� Measurable, meaningful, motivational
� Attainable, agreed-upon, action-oriented
� Realistic, rewarding
� Time-based, timely
� Talking about finances
� Emotions matter
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Setting financial goalsSetting financial goals for multiple timeframes (and following through on them)
is an important step on your path to financial freedom.
Timeframe Time Horizon
Dollar Amount Description Action to be taken
Short-Term (0-2 years)
IntermediateTerm (2-5 years)
Longer Term (5+ years)
Example 4 months $200 Save for an upcoming vacation
Put away $50 from the next 4 paychecks
Go do it now!� Start tracking expenses.
� Set up a budget.
� Check your credit report.
� Set a financial goal and take a specific step toward that goal.
� Start saving!
Some Online Resources� Financial planning
� https://www.ubs.com/microsites/ubs-financial-wellness-center/en/home.html
� https://www.mint.com/� https://www.wisconsin.edu/ohrwd/americasaves/� https://www.wisconsin.edu/ohrwd/benefits/download/ret/financial-
wellness-plan.pdf
� Life insurance calculator:� https://web1.lifebenefits.com/sites/lbwem/home/insurance-
basics/insurance-needs-calculator#
� UW System benefits� https://www.wisconsin.edu/ohrwd/benefits/� https://www.wisconsin.edu/ohrwd/benefits/download/summaries/fasl
� UWM benefits links:� http://uwm.edu/hr/home/benefits/current-employee-benefits/� https://uwservice.wisconsin.edu/help/wrs-benefits-statement.php
Some Online Resources
� My page
� Excel versions of the expense tracking worksheet, budget worksheet, balance sheet worksheet.
� Word version of the financial goals worksheet.
� http://people.uwm.edu/rneumann/
Passing on financial skills to the next generation
� Talk about finances!
� Make a Difference – Wisconsin
� http://makeadifferencewisconsin.org/
� Empowers teenagers with financial literacy educational resources and real-world lessons.
� Engaging volunteers, dynamic schools, and generous supporters share a vision of stronger communities built by an investment in “money smart” teens.
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