Being Money Wise: More than Just Dollars and Cents

Presented by Scott H. Payne, PhD, CPA

IntroductionWhy Saving MattersWhat About DebtUnderstanding ExpensesWhat Else Can I Do?ConclusionQuestions?

Being Money Wise - Agenda

“Successful family finances begin with the payment of an honest tithe and the giving of a generous fast offering. The Lord has promised to open the windows of heaven and pour out great blessings upon those who pay tithes and offerings faithfully (see Malachi 3:10)” (“Prepare Every Needful Thing”, lds.org).

“If you want to change the fruits, you will first have to change the roots. If you want to change the visible, you must first change the invisible” (“Secrets of the Millionaire Mind”, T. Harv Eker).

Charitable Giving

Peter Skillman, currently an executive at Nokia, ran an experiment to see who could build the tallest tower to support a marshmallow in 18 minutes using spaghetti, tape, and a piece of string.

There Are Many Ways to Financial Independence

◦ Most successful – Kindergarteners◦ Second – Engineers◦ Least successful – Lawyers and Business Students.

He later stated, “Multiple iterations almost always beats single-minded focus around a single idea. If you have a short amount of time, it’s more important that you fail. You fail early to succeed soon” (“The Up Side of Down”, Megan McArdle).

Why Saving Matters

Delaying the start of your saving ◦ by 5 years requires a 28% increase per year for

the remaining 35 years.◦ by 10 years requires a 67% increase per year for

the remaining 30 years.◦ by 15 years requires a 122% increase per year

for the remaining 25 years.◦ by 20 years requires a 206% increase per year

for the remaining 20 years.◦ by 25 years requires a 345% increase per year

for the remaining 15 years.

Putting the Graph in Perspective

Starting with 3% at 25 and increasing it by 1% every two years until you reach 18% at age 55 and then adjust it to 18.65% from age 57 through age 65 will allow you to save the $1 million.

You will have to save about the same amount as if you began at age 35 ($369,894).

The biggest advantage, however, is that you are in the habit by age 35 of saving some of your income over not saving at all.

Something is Better than Nothing

These models all assume no company match. When a company match exists, you will need to

save a much smaller portion of your own income.

Make sure you understand when the vesting occurs with a company match. ◦ It could be a gradual vesting. For example, you vest

20% a year beginning in year three. If you worked the required time but left in year five, you would receive 60% of the match.

◦ It could be 100% earned in a specific year. Consider your career path when making your

determination of whether or not to count the company match in your calculation.

Benefits of Company Match

What About Debt

“Since the early days of the Church, the Lord's prophets have repeatedly warned against the bondage of debt. One of the great dangers of debt is the interest that accompanies it. When it is necessary to incur debt, such as a reasonable amount to purchase a modest home or to complete one's education, the debt should be repaid as quickly as possible” (Debt, lds.org).

“Some forms of credit, such as credit cards, have particularly high interest rates. Once you are in debt, you find that interest has no mercy. It continues to accumulate, regardless of your situation…Discipline yourself in your purchases, avoiding debt to the extent you can. In most cases, you can avoid debt by managing your resources wisely…When you have paid your debts and accumulated some savings, you will be prepared for financial storms that may come your way. You will have shelter for your family and peace in your heart“ (“True to the Faith”, pg. 48-49).

LDS Perspective on Debt

U.S. household consumer debt profile as of January 2014:◦ Average credit card debt for indebted

households: $15,270◦ Average credit card debt for all households: $7,123◦ Average mortgage debt: $149,925◦ Average student loan debt: $32,258

As of 12/30/2012 46.7% of households carried a credit card balance.

Total US student loan debt grew at 11% from 2012 to 2013.

Personal Debt Statistics

Information taken from http://www.nerdwallet.com/blog/credit-card-data/average-credit-card-debt-household/

If you use a credit card, get in the habit of paying it off monthly.

Only use debt when there are financial benefits associated with it (i.e. 10% discount, 1% - 3% rebate, no interest for 6 months).

ALWAYS make debt payments on time.

Accelerate debt repayment when possible.

Debt Management Tips

If you have savings pay off your high-rate debt.

Transfer debt from high-interest-rate loans to lower-rate loans.

The amount of debt you have compared to your income shouldn’t exceed 35% to 45% of your income.

Debt Management Tips

Information taken from “Get a Financial Life” by Beth Kobliner

If you carry a balance on a credit card then consider the following:◦ Pay your bill the day you get it.◦ Never miss a payment, even

when there are special offers to miss payments for holidays.

◦ Make sure you understand how the interest is calculated.

Debt Management Tips

Information taken from “Get a Financial Life” by Beth Kobliner

Understanding Expenses

“A need is something required for survival. It provides a means to go on living, accomplishing, or contributing. A want, on the other hand, is something that provides greater convenience, enrichment, or pleasure” (“Love & Money”, Benard Poduska).

Needs Versus Wants _

Needs are things we generally can not survive without having, such as: ◦ Nutritious food ◦ A place to live ◦ Appropriate clothing◦ Transportation

Wants are things we'd like to have, but will be able to survive without. Examples include: ◦ Designer clothing ◦ Entertainment (i.e. Movies, video games)◦ Technology (i.e. An iPad, cell phone, computer)◦ Recreational equipment (i.e. A snowboard, boat)Information taken from http://pbskids.org/itsmylife/money/managing/article2.html

Needs Versus Wants _

Mandatory Expenses ◦ Spending typically required to sustain life.◦ Examples include rent or mortgage payments, monthly

utilities, tax payments, and debt payments. ◦ Not easy to cut out of the budget as not paying them

may have severe long-term legal consequences.

Discretionary Expenses◦ These items are usually related more to personal wants

than actual needs.◦ They are typically variable in nature.◦ Examples include going out for dinner, entertainment,

and vacations.

Evaluating Expenses - Definitions

Information taken from http://www.ehow.com/info_8487558_differences-discretionary-vs-mandatory-expenses.html

Always pay your tithing first before any other bill.

Never miss a mortgage, debt, utility, or any other payment that you have a commitment to pay.

Always pay your bills on time. Use credit cards wisely and manage wisely.

Look for opportunities to reduce costs through their use, but never carry a balance.

Managing Mandatory Expenses

Buy a car that is cheaper and maybe more economical, but as reliable to reduce your monthly car payment.

Refinance a mortgage with a lower interest rate. You could also take some cash out to pay off higher debt which would provide a tax advantage.

Evaluate some items that you are required to pay monthly to determine if they are really necessary.

Reducing Mandatory Expenses

What Else Can I Do?Marital Quality & Family

Financial Prudence

Education

Materialism

Versus

Note: * p ≤ .05, ** p ≤ .01, *** p ≤ .001; Standardized regression coefficients are reported in the figure. R2= amount of variance accounted for in endogenous variables. Model fit for this model was: Chi-square = 437.01, df = 234, p ≤ .001; CFI = .998; RMSEA = .039.

Structural equation model retirement savings rates predicted by marital quality, materialism, financial prudence, age, household income, and education

Marital Quality

Materialism

Financial

PrudenceAge

Household Income

Education

Retirement Savings

Rate

.21***

-.22***

.12**

.53***

.09*

.18***

.38***

R2=.45 R2=.21

Do I work to find a happy medium on issues where there is disagreement?

Do I try to make my spouse happy? Do I try to strengthen my relationship with

my spouse and family? Do I teach gospel centered values in the

home? Do I take time to listen and improve

relationships in the home?

Marital Quality & Family

Do I demonstrate the value of education by identifying lifelong learning goals?

Do I place the highest value on getting and having things in my life?

Do I make it a priority to minimize my debt and to pay my bills on time?

Am I more concerned with having things and less concerned with making sure I have the money to pay for those things?

Education, Materialism, & Financial Prudence

1. Center your life around being charitable.2. Save early and save often.3. Make interest work for you instead of having

to work for it.4. Express gratitude daily for what you do have,

and then manage your resources wisely to get some of the things you want.

5. Your relationship with your spouse and children is the most important key to your success.

6. Remember that Becoming is a long-term proposition. Keep learning.

Conclusion – Take Aways

The following sources from flickr.com were used: inspiyr, StockMonkeys.com, Mindful One, kenteegardin, eric731, 401(K) 2013, Tax Credits, Josh Kenzer, kenteegardin, One Way Stock, jiazi, Håkan Dahlström, Voxphoto, JD Hancock, Vít Hassan, Thrift Store Addict, jDevaun, Maia C, lumaxart, Stuck in Customs, Alex E. Proimos, Glyn Lowe Photoworks, 2 Million Views, Thanks, joiseyshowaa, Stewf, Winning Automotive Photography, unicefiran, crdotx, marfis75

Image Credits

Questions?