While there is a great deal of hype and interest in investing, the more important issue is saving. Without systematic and increasing savings, investing programs will get you nowhere. Spending less than you are making is the key tactic.
University of California, Irvine
University Extension
List of Calculators for Fundamentals of Personal Financial Planning, Module 1
Click to access each calculator, or use the numbered tabs below.
1Finding a Future Value Using a Present Value and an Interest Rate When There are No Payments
2Finding a Future Value Using a Present Value and an Interest Rate When There are Payments
3Calculator for Accumulation and Savings
4Calculator for Depletion / Distribution of an Account or Payoff of a Loan
5Calculation of Payment to Accumulate a Given Amount
6Calculation of Interest to Deplete a Given Amount, or Pay Off a Loan
7Time to Deplete a Given Amount, or Pay Off a Loan
8Time to Save a Given Amount
9Calculator for Evenly Spaced Payments of Equal Amounts
10Calculator for Equally Spaced Payments of Unequal Amounts
11Accumulation / Distribution Calculator
2Finding a Future Value Using a Present Value and an Interest Rate When There are Payments
3Calculator for Accumulation and Savings
4Calculator for Depletion / Distribution of an Account or Payoff of a Loan
5Calculation of Payment to Accumulate a Given Amount
6Calculation of Interest to Deplete a Given Amount, or Pay Off a Loan
7Time to Deplete a Given Amount, or Pay Off a Loan
8Time to Save a Given Amount
9Calculator for Evenly Spaced Payments of Equal Amounts
10Calculator for Equally Spaced Payments of Unequal Amounts
11Accumulation / Distribution Calculator
University of California, Irvine
Fundamentals of Personal Financial Planning
Module 1: Goals – Preparing to Plan
List of Documents to Gather Before Preparing Your Net Worth & Cash Flow Statements
Most Recent Payroll Stub
Income Tax Returns
Personal Employment Benefit Statements
Company Benefit Plan Booklets
o Group Pension Plans
o Group Life Insurance
o Group Disability Insurance
o Medical, Dental, Vision Insurance
Insurance & Annuity Contracts
o Life Insurance
o Health Insurance
o Hospital & Major Medical
o Disability Insurance
o Automobile Insurance
o Property and Casualty
Statements of Bank Accounts, Stocks, Bonds or Other Investments
Mortgage Statements
o Primary Mortgage Statement
o Second Mortgage Statement
o Home – Equity Line of Credit Statement
o Fair Market Value
Other Real Property Information
o Mortgage Statement
o Rental Info,
o Fair Market Value
Wills/Trusts
o Business Arrangements
o Partnership Agreement
o Buy/Sell Agreements
o Deferred Compensation
o Stock Option/Bonus Plan
Fundamentals of Personal Financial Planning
Module 1: Goals – Preparing to Plan
List of Documents to Gather Before Preparing Your Net Worth & Cash Flow Statements
Most Recent Payroll Stub
Income Tax Returns
Personal Employment Benefit Statements
Company Benefit Plan Booklets
o Group Pension Plans
o Group Life Insurance
o Group Disability Insurance
o Medical, Dental, Vision Insurance
Insurance & Annuity Contracts
o Life Insurance
o Health Insurance
o Hospital & Major Medical
o Disability Insurance
o Automobile Insurance
o Property and Casualty
Statements of Bank Accounts, Stocks, Bonds or Other Investments
Mortgage Statements
o Primary Mortgage Statement
o Second Mortgage Statement
o Home – Equity Line of Credit Statement
o Fair Market Value
Other Real Property Information
o Mortgage Statement
o Rental Info,
o Fair Market Value
Wills/Trusts
o Business Arrangements
o Partnership Agreement
o Buy/Sell Agreements
o Deferred Compensation
o Stock Option/Bonus Plan
Consider this: An investment portfolio that is 60% bonds and 40% stocks would be considered quite conservative and fairly stable by most financial planners. Looking at all the ten-consecutive-year periods since 1926, we find that the median (half the cases were higher and half the cases were lower) annual rate of return is 7.5%. In money terms, that means that if you invested $100,000, you would have about $206,000 at the end of ten years.
Historically, during the periods 1926 to 2005, your $100,000 could have turned out to be as little as $144,000 or as much as $395,000. Through the wizardry of statistics we can estimate that 83% of the time, a portfolio of 60% bonds and 40% stocks would return at least 4.8%. (You may remember from some class in your distant past, that this assumes a normal distribution at one standard deviation below the median. Not perfect statistics, but about as good as there are.)
Here again, there is not much else to go on other than the historic record. The following gives you something you might want to use as a predicted rate of return when planning.
Stock / Bond Mix
75% Bonds - 25% Stocks
60% Bonds - 40% Stocks
50% Bonds - 50% Stocks
40% Bonds - 60% Stocks
25% Bonds - 75% Stocks
10% Bonds - 90% Stocks
Median Fifteen-Year Return
5.9%
7.8%
9.1%
10.2%
11.8%
12.4%
Return you can expect to be exceeded most of the time
3.3%
5.3%
6.5%
7.5%
8.7%
8.7%
Look carefully at the expected rate of return for the 90% stock portfolio, the last line in the table. The return that you can expect is the same as the 75% stock portfolio (8.7%). This is because portfolios which are high in stocks also exhibit high variability. The maximum you might get is higher, but the variability also pulls down the minimum return that you might expect.
We have provided a worksheet for you to fill out to create a basic net worth statement.
http://learn.uci.edu/oo/getDemoPage.php?course=AR0102092&lesson=10&topic=9&page=1
Arranging your affairs in ways that reduce taxes is a way of increasing your disposable income. Unfortunately, it takes a lot of time and thought.
Five D’s of tax planning[Roll your cursor over each of the D’s to read more]
Deduction: Make sure that all deductions are taken, all records are kept to support the deductions and the payments are timed to cause the deductions to have the most effect.
Diversion: Take steps to make investments from which the returns will escape taxation or be taxed at a reduced rate.
Deferral: Taking steps to defer taxes until future years.
Deflection: Take steps to transfer income to someone in a lower tax bracket.
Diminution: Diminution is a catch all category of specific ideas or concepts that can reduce taxes.
Arranging your affairs in ways that reduce taxes is a way of increasing your disposable income. Unfortunately, it takes a lot of time and thought.
Five D’s of tax planning[Roll your cursor over each of the D’s to read more]
Deduction: Make sure that all deductions are taken, all records are kept to support the deductions and the payments are timed to cause the deductions to have the most effect.
Diversion: Take steps to make investments from which the returns will escape taxation or be taxed at a reduced rate.
Deferral: Taking steps to defer taxes until future years.
Deflection: Take steps to transfer income to someone in a lower tax bracket.
Diminution: Diminution is a catch all category of specific ideas or concepts that can reduce taxes.
http://learn.uci.edu/oo/getDemoPage.php?course=AR0102092&lesson=12&topic=2&page=2
Dealing with the risk
There are generally four choices in dealing with risk. Roll over each choice to read more.
»Avoid the Risk
» Ameliorate the risk
» Retain the Risk
» Transfer or Share the Risk
Dealing with the risk
There are generally four choices in dealing with risk. Roll over each choice to read more.
»Avoid the Risk
» Ameliorate the risk
» Retain the Risk
» Transfer or Share the Risk
Investment does not always guarantee return. You can suffer investment losses as well.
Ameliorating the Risk In the individual sense, you can ameliorate risk by thoroughly understanding the investments you are making, and by buying only high quality investments.
In the aggregate sense, you can ameliorate risk by creating a well-diversified portfolio. While this might be seen as sharing the risk, you can choose to consider it as a way to ameliorate risk. This is because a well-diversified portfolio creates a “smoother ride” with less chance of placing you in an undesirable position when the funds are needed. This is a philosophical position that could be attacked by active investors. They would say you are sharing the risk because you are giving up the opportunity for higher return in exchange for a smoother ride. All investors have to decide for themselves what level of active investment they believe is correct.
Present value of an investment is the discounted value of all its future cash flows that you derive from it.Collecting the data for life insurance needs analysis is similar to collecting for a retirement analysis. If a retirement needs analysis has already been completed, it is a good place to start. You need to consider:
Those costs you feel should not change by the loss of a spouse:
Quite probably the cost of housing
Costs of elementary and secondary school
Personal needs of the surviving spouse and children
Costs you feel are likely to increase because of the loss of a spouse:
One time costs associated with death
Child care
Education or training for the surviving spouse
Insurance costs due to loss of employer coverage
Costs you feel are likely to decrease because of loss of a spouse:
General family living costs
Medical and dental costs
Property and casualty insurance (fewer people to insure)
Costs you feel are likely to be eliminated because of loss of a spouse:
Life insurance
Disability insurance
Second automobile
Deceased spouse’s hobbies
Modification of goals because of loss of a spouse:
Change of education goals
Change of retirement goals
Change of legacy goals
Those costs you feel should not change by the loss of a spouse:
Quite probably the cost of housing
Costs of elementary and secondary school
Personal needs of the surviving spouse and children
Costs you feel are likely to increase because of the loss of a spouse:
One time costs associated with death
Child care
Education or training for the surviving spouse
Insurance costs due to loss of employer coverage
Costs you feel are likely to decrease because of loss of a spouse:
General family living costs
Medical and dental costs
Property and casualty insurance (fewer people to insure)
Costs you feel are likely to be eliminated because of loss of a spouse:
Life insurance
Disability insurance
Second automobile
Deceased spouse’s hobbies
Modification of goals because of loss of a spouse:
Change of education goals
Change of retirement goals
Change of legacy goals
http://learn.uci.edu/oo/getDemoPage.php?course=AR0102092&lesson=21&topic=2&page=3
Implicit Statement
My children will be able to attain the level of education that is most appropriate to them.
Explicit Statements
A. It is a fundamental responsibility of parenthood to provide a child with the maximum education the child can achieve. I want to do everything that I can to help my children achieve that.
B. I want to provide my children with access to at least a basic post-secondary education.
C. Getting a college education is a cooperative effort between me and my child. While I will gladly pay some of the costs, my children will need to bear some themselves.
D. College is the first real adult decision that my children will have to make. My idea is to be able to hand them $_________ and let them make their own decisions.
E. College is important but so is retirement. I do not want to sacrifice my retirement for my children’s college education. However, I am prepared to make some sacrifices in my current lifestyle.
F. College is important, but so is retirement and my current lifestyle. I do not want to sacrifice either for my children’s education. If there is extra money, then I would consider saving for their education.
G. Let’s see how things evolve. As best we can, we will pay for it out of cash flow at the time.
Implicit Statement
My children will be able to attain the level of education that is most appropriate to them.
Explicit Statements
A. It is a fundamental responsibility of parenthood to provide a child with the maximum education the child can achieve. I want to do everything that I can to help my children achieve that.
B. I want to provide my children with access to at least a basic post-secondary education.
C. Getting a college education is a cooperative effort between me and my child. While I will gladly pay some of the costs, my children will need to bear some themselves.
D. College is the first real adult decision that my children will have to make. My idea is to be able to hand them $_________ and let them make their own decisions.
E. College is important but so is retirement. I do not want to sacrifice my retirement for my children’s college education. However, I am prepared to make some sacrifices in my current lifestyle.
F. College is important, but so is retirement and my current lifestyle. I do not want to sacrifice either for my children’s education. If there is extra money, then I would consider saving for their education.
G. Let’s see how things evolve. As best we can, we will pay for it out of cash flow at the time.
Analyzing these explicit statements about college savings goals, we see that the first four (A-D) are statements about how much is needed for college and the next two (E-F) are about how much you can afford now. (The last explicit statement, of course, does not address savings goals at all, so we won’t analyze it here.)
How much is needed for college later?
How much can I afford now?
A. It is a fundamental responsibility of parenthood to provide a child with the maximum education the child can achieve. I want to do everything that I can to help my children achieve that.
B. I want to provide my children with access to at least a basic post-secondary education.
C. Getting a college education is a cooperative effort between me and my child. While I will gladly pay some of the costs, my children will need to bear some themselves.
D. College is the first real adult decision that my children will have to make. My idea is to be able to hand them $___ and let them make their own decisions.
E. College is important but so is retirement. I do not want to sacrifice my retirement for my children’s college education. However, I am prepared to make some sacrifices in my current lifestyle.
F. College is important, but so is retirement and my current lifestyle. I do not want to sacrifice either for my children’s education. If there is extra money, then I would consider saving for their education.
Clearly these two points of view require a different style of analysis.
1. The first group requires you to analyze the school(s) or school type that you might consider, create a target amount, and then analyze the amount you should save to meet that goal.
2. The second group requires you to analyze how much you think you might have and then compare it to what might be needed. Then, determine if you feel this amount is sufficient.
How much is needed for college later?
How much can I afford now?
A. It is a fundamental responsibility of parenthood to provide a child with the maximum education the child can achieve. I want to do everything that I can to help my children achieve that.
B. I want to provide my children with access to at least a basic post-secondary education.
C. Getting a college education is a cooperative effort between me and my child. While I will gladly pay some of the costs, my children will need to bear some themselves.
D. College is the first real adult decision that my children will have to make. My idea is to be able to hand them $___ and let them make their own decisions.
E. College is important but so is retirement. I do not want to sacrifice my retirement for my children’s college education. However, I am prepared to make some sacrifices in my current lifestyle.
F. College is important, but so is retirement and my current lifestyle. I do not want to sacrifice either for my children’s education. If there is extra money, then I would consider saving for their education.
Clearly these two points of view require a different style of analysis.
1. The first group requires you to analyze the school(s) or school type that you might consider, create a target amount, and then analyze the amount you should save to meet that goal.
2. The second group requires you to analyze how much you think you might have and then compare it to what might be needed. Then, determine if you feel this amount is sufficient.
http://learn.uci.edu/oo/getDemoPage.php?course=AR0102092&lesson=21&topic=3&page=2
Saving for college and paying for college may seem like two different topics and in many ways they are. However, in one important way, they are linked. The amount that you have saved often impacts the amount of financial aid that your child may be eligible to receive. This is particularly important because it is among the ways that your child can support their “share” of the cost.
There are many programs that may be available to your child. They fall into three categories:
Scholarships
Grants
Loans
All of them are considered financial aid, and applying for any of them involves an analysis of the child’s ability to pay for college. Three important factors in this analysis are your child’s savings, your savings, and your current income. The ways that colleges look at these factors differs between colleges and changes over time; therefore, we can only address this with generalizations. We will only consider the savings methods. We will not consider potential loan sources. Let’s look at types of accounts next.
Saving for college and paying for college may seem like two different topics and in many ways they are. However, in one important way, they are linked. The amount that you have saved often impacts the amount of financial aid that your child may be eligible to receive. This is particularly important because it is among the ways that your child can support their “share” of the cost.
There are many programs that may be available to your child. They fall into three categories:
Scholarships
Grants
Loans
All of them are considered financial aid, and applying for any of them involves an analysis of the child’s ability to pay for college. Three important factors in this analysis are your child’s savings, your savings, and your current income. The ways that colleges look at these factors differs between colleges and changes over time; therefore, we can only address this with generalizations. We will only consider the savings methods. We will not consider potential loan sources. Let’s look at types of accounts next.
Estate Planning
There are five primary ways in which you can make your desires known. They are all legal documents, and while some are simple enough not to need the assistance of a lawyer, using a lawyer helps assure you that your desires will be met. Used together they can provide a sufficient estate plan for even moderately substantial estates (a few million dollars).
By contract
Will
Last Medical Directive (sometimes called a Living Will)
Power of Attorney
Trust
Each of these has a slightly different context and is directed at a slightly different audience.
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