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Lindsey Thompson

Fin 101
Assignment #7- Final Part A
Personal Financial Management
Id first talk to them about personal financial management as a whole.
More than ever before, we need to learn and apply the principals of
economic self-reliance. We do not know when the crisis involving sickness or
unemployment may affect our own circumstances. We do know that the Lord
has decreed global calamities for the future and has warned and forewarned
us to be prepared. For this reason, the Brethren have repeatedly stressed a
back to basics program for temporal and spiritual welfare. Knowing how to
manage your personal finances provides the critical thinking and application
skills to achieve personal economic success and promote the financial
progress of our society.
Financial Independence
Then Id talk about financial independence, because thats what they are
seeking.
Financial Independence means you are self-sufficient and do not depend on
anyone for your financial support. A husband and wife can be financially
independent when they provide for their financial needs, preferably with little
or no debt.
They need to understand the importance of being debt free.
A Lifelong Financial Plan
Managing personal finances is a lifelong plan, not short-term. They need to
get into the habit of thinking about their future.
The skills of saving, budgeting, accounting, using credit and financial
services, making major purchases, managing risks, investing, and retirement
planning will give you the power to achieve your goal of financial
independence throughout your life and independent wealth during your
retirement.
Knowing correct principles and following the counsel we receive from the
Brethren provide a sure and steady course to guide and direct our lives.

I also couldnt leave out the 5 keys to Personal Financial Success so Id


mention them:
1. Pay the Lord first, and then yourself
2. Collect interest
3. You cannot retire until your money goes to work
4. Do not pay interest
5. Prepare Financial Goals and Make Wise Financial Decisions

Chapter 2
Net Worth
First, we need to take a look at all their assets and liabilities to see where we
stand and be able to move on to the next two points.
I think a lot of people think theyre worth more than they actually are and I
want them to understand how this works.
Budgeting
You have to learn how to budget if you want to manage your personal
finances. Budgeting is where you will gain financial independence, so I would
mention the the 3 keys to budgeting:
Spend less than you earn
Spend for needs rather than wants
Save for emergencies, major expenditures, and investments
They are currently $422.50 over their budget each month. They need to cut
out a couple things. I would suggest, the bowling league, dry cleaning, home
phone service, cable tv, and the newspaper. That would save them
$310/month.
I would then explain how to.
Preparing a Budget
They then need to learn how to prepare one.
1. Prepare a budget for each month over the next year

2. Use an electronic spreadsheet to provide (a) a place to record


budgeted and actual income and expenses and (b) a record of a
variance between budget and actual cash flows.
3. Include columns for the percentage that each months budget
and actual expenses are of the total income
4. Determine a yearly total
This will be the start of getting them on the right track.
Chapter 3/9
An important thing I learned from these chapters was about the IDEAL
investor. I think its a good place to start before we get into actually
investing. The IDEAL investor does the following:

Invest consistently and does not attempt to time the market


Diversifies and ignores confusing world events
Expects the market to go up and down
Always selects investments that outspace inflation
Looks at investing with a long-term perspective

I didnt realize that you need a long-term perspective on investing. I doubt


many people know that. I would like to emphasize that to them and that just
because the market goes down, it will always go back up too.
Dollar Cost Average
Another thing that was super helpful to me was learning about Dollar cost
averaging. It means you invest the same amount every month in the same
investments. When the stock is up you buy fewer shares and when the stock
is down you buy more shares. On average you will buy stocks at the best
possible cost. You do not try to time the market by attempting to buy low and
sell high. Instead you allow the market fluctuations to give you an overall low
average cost.
This will be super helpful to me when I start investing.
Basic Investment Strategy Rules
The last thing from these chapters I would like them to understand is the
basic investment strategy rules. Before jumping into investing, we need to
have a general guideline to follow or we risk losing a lot of money. These
rules are:

Have an emergency savings fund so you do not need to liquidate


investments quickly.
Determine your investment goals and risk tolerance and invest
accordingly.
Take a consistent and long-term approach to investing.
Do not let current events or economic conditions determine your
investment strategy.

If you would have given me $10,000 last year to invest in a company, I would
have put the majority of it in Chipotle stock. They were one of the fastest
growing chains and the company was doing well overall. Then, in late 2015,
their Ecoli outbreak happened. I wouldve lost a lot of money because I would
have jumped on the Chipotle train. Investors make mistakes when they let
current events or economic conditions determine their investment strategy.

Chapter 5
Disadvantages of Credit
I assume they know the disadvantages of credit, but I think its very helpful
to use Excel to see exactly how much youre paying for something with
interest. I would show them how much more theyre paying on their car in
the next 28 months using this formula:
Excel Formula: =PMT(.07/12,28,-5200)*28
= $5651.34
They will be paying an extra $651.34 in the next 28 months if they dont get
that payment paid off faster. When people purchase something with interest,
I dont think they realize how much interest theyre actually paying. Before
taking this class, I thought if you purchased a car at $10,000 at 7% interest,
you were only paying ($10000*.07) $700 in interest which is still a lot. But
its actually more than double that if you have a 5 year loan.
People need to understand exactly how much theyll really be paying before
purchasing something on credit.

Because Im teaching them the above, I would then teach them the
about

Saving Vs Borrowing
Showing them how much more theyd have if they saved for so many
months instead of borrowing would be valuable to their future.
Credit Capacity
Then Id talk about how much you can afford to spend on debt.
Financial experts say you can afford to spend 15-20 percent of your
net monthly income on credit payments. This estimate is based on an
average family with average income with adequate savings for
emergencies.
The amount of your net worth will also determine how much debt you
can afford.

Chapter 6 is all about owning a car.


I touched on the payment of a car on the last chapter, so in this one Id like
to point out What You Can Afford. I would show them this example:
You want to know how much car you can afford. First determine what
monthly car payment you can afford. Assume your take home pay is
$3500, and you determine your affordabele debt is 15% fo your take
home pay. Assume you already owe $250 in debt payments. You can
now determine an affordable car payment as follows:
Take home pay:
=$350
Affordable debt:
=$525 (15%*$3500)
Already owe:
=$250
Affordable car payment:
=$275 ($525-$250)
Maybe they need to reevaluate their car and look at selling it and leasing for
a while or buying a cheaper alternative. Maybe they could survive with just
using their older car for a while.
Vehicle Financing

Pay cash if possible. Saving for the purchase of a vehicle is an excellent


financial planning strategy. You will earn interest on your savings and save
finance interest charges. If you must finance the purchase, obtain the lowest
cost financing available. Credit unions are among the best sources of vehicle
financing.
Their interest is quite high on their car payment. Maybe they could refinance
with a credit union for a lower rate.

If they do want to buy a cheaper alternative, I would talk to them about.


Negotiating the Deal

Know in advance what you are willing and able to pay


Do enough comparative shopping to know the fair market price
Be willing to walk out on the negotiation when the counter offer is
unacceptable. If you feel pressured to buy now and you are
uncomfortable with the deal, you should leave and seek a more
customer-oriented dealership and a better deal.

I found this information super helpful and will apply it the next time Im
looking for a car.

Chapter 7
Housing Alternatives
Brother and Sister Hopeful have an extreme amount of debt and extremely
high interest on most it. In chapter 7 we learned about housing. They have 2
mortgages. With the amount of their debt, I might ask them if they know
anyone going on a mission soon and they could sell their house and take
care of someone elses for a couple years while they save money and pay off
old debt. They may also be able to move in with a parent for a while. Even 1
year with no house payment would save them $20,785.20. They could get
the majority of their debt paid off in that time.
Amortization Schedule

This was my favorite piece of advice from class. Its so helpful because even
if you find an extra $100 in a budget (which I found $310 above) it pays it off
SIGNIFICANTLY faster.
A very important component of increasing your personal wealth is to
purchase a home and then pay extra each month on your payment. This
extra amount goes directly to reduce the principal and significantly
decreases the cost of credit. A valuable tool to help you analyze the benefit
of payments over time is an amortization schedule. It can help you see the
benefits of extra principal payments.
I would then show them theirs using both mortgages.

They already know about mortgages so I would touch on the..


What Can You Afford

Should not spend more than 25-30% of your take-home pay on


housing
Can afford a home valued at about 2 times your annual
income

Chapter 8
This was the risk chapter. They do have medical/car/house/life insurance so
they know they importance of having them. I hate telling people to get
cheaper policies because its like crossing your fingers nothing bad will
happen.
I would just talk about:

Guideline

Easy Method

Non-Working Spouse Method

Guideline
A general rule suggest by some life insurance companies is $10,000 of
coverage for every $1000 of annual income. This means that if you have a
$50,000 income you should have $500,000 in insurance.
Easy Method
Based on the assumption your family will need 70% of your salary for seven
years to make the financial adjustment brought on by your death. A simple
way to approximate this number is to multiply your gross income by 5 (70%
*7years= 4.9, which is rounded to 5.)
Non-Working Spouse Method
This method estimates that $10,000 per year would be required to provide
homemaker services while children are young. An estimate of the life
insurance needs of a stay-at-home mother or father can be determined by
multiplying $10,000 by the number of years until the youngest child reaches
age 18.

Chapter 10
Retirement Planning
Luckily, they have $150/month going into a profit sharing plan, but they
arent contributing any of their own money. Once they eliminate their debt,
they need to seriously start thinking of retirement.

Ultimate Financial Independence


You are independently wealthy when you have accumulated enough funds
to live comfortably and no longer need to work for the rest of your life. This is
the ultimate financial independence.
The main considerations to properly prepare are:
How much total savings do you need to retire comfortably?
How much do you need to save each working year or month
between now (or whenever you start saving) and your retirement
to accumulate sufficient savings?
They need to start considering retirement.
How Much Do You Need
They need to come up with a plan for their retirement.
Most financial advisors estimate that you can live on about 75% of your preretirement income and that you must allow for an inflation rate of 3-5%.
There are many internet sites that will help you analyze your retirement
needs. Most of them follow a format of asking you to consider your plans for
retirement and ask you to translate those plans into budgeted expenses.
You analyze all of your expected sources of retirement income, and develop a
plan to ensure that your retirement income reaches those goals. This
includes planning what needs to be saved today to ensure you meet your
goals for tomorrow.
Calculating Your Retirement Needs
I need to show them theyre retirement needs. I will show each step, but for
the sake of the length of this paper, I will just do the first 2:
1. Living off of 75% of your income during retirement. So they make
$57,600/year 75% of that is $43,200.
2. Determine the impact of inflation. Assume a 3% inflation rate, youre
retiring at 65, and you want to provide 25 years of retirement, you will
need to provide for 40 yrs of inflation. This means you will need an
average retirement income over 25 years of retirement of almost
$140,920.03/year in 40 years, adjusted for inflation, to have the same
income as $37,500.

The Importance of Starting Early in Life


Starting early is going to make a huge impact on how much you more you
could have in your retirement.
If you save $2000 per year for 10 years and earn 10% interest beginning at
age 25, you will have put $20,000 into savings which will grow to $895,761
by age 70.
Since they are already 35, they need to start now.