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Personal Finance

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Jonathan Underwood

on 25 April 2016

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Transcript of Personal Finance

Personal Finance
Central to control of personal finances
Income and Taxes
Income taxes (minus
tax credits
) are collected on
adjusted gross income (AGI)
Principles of Personal Finance
and Retirement
Debt Management
Debt is common, but it should be eliminated as soon as possible.
PHRM 785 Pharmacy Management
April 25, 2016

Alfred J. Custer II, Pharm.D.
1. Heirst, Keith Nicolas. "Personal Finanace." Pharmacy Management, Leadership, Marketing and Finance & Echapters: Includes Risk Management for Pharmacy .. By Marie A. Chisholm-Burns. Detroit: Omnigraphics, 2010. 501-26. Print.

2. Ramsey, Dave. Dave Ramsey's Complete Guide to Money: The Handbook of Financial Peace University. Brentwood, TN: Lampo, 2012. Print.

Identifies the origin and destination of every dollar
A detailed plan for expenditures
1. Identify signs of poor financial management.

2. Describe the importance of setting financial priorities and goals.

3. Discuss the formation and purpose of a budget

4. State the rationale for aggressively reducing debt and methods for doing so.

5. Explain financial principles such as simple/ compound interest, dollar cost averaging, and asset liquidity.

6. Differentiate the risks and benefits of various investment types.

7. Evaluate the effects of taxation on wages and investment income as well as the impact of tax deductions/credits.
Identifies priorities in spending, wealth building
Matthew 6:21
Budgeting Methods
No "one way" to budget
Requires commitment and discipline
Setting Financial
Priorities and Goals
Personalize and focus your efforts to manage your finances
Priorities and goals should consider short-term and long-term perspectives
Paying off debt should be a top priority due to its short-term and long-term impacts
Example List of
Financial Goals
1. Save $1,000 in a beginner emergency fund.

2. Pay off all debt except the house.

3. Put 3-6 months of expenses in savings.

4. Invest 15% of income into Roth IRAs and pre-tax retirement plans.

5. Save for children's college education.

6. Pay off the house early.

7. Build wealth and give.
"Seven Baby Steps" by Dave Ramsey
Often created as a monthly assessment of expenditures
Focus on accumulating wealth rather than spending money.

Borrow money only when necessary to achieve a goal rather than to make standard purchases.

Recognize that hard work and self-discipline increase the probability of success.

Saving must be a priority.
One consistent rule: Expenses should not exceed income.
Categorize expenses & consider whether they are fixed or variable costs
Fixed: utilities, rent, insurance, etc.
Variable: entertainment, food, clothing
Key Budgeting Principles
Annual/occasional purchases, savings, gifts, etc.
If expenditures exceed income, reduce variable expenses
Alternatives: eliminate non-vital fixed costs (e.g. cable TV), find new income sources
Maximize debt reduction
Debt accumulates if not addressed.
High levels of debt negatively impacts personal credit.
The first rule of debt management:
Stop it before it starts.
Save for major purchases rather than using credit.
Pay off credit cards in full each month.
Do not rely on credit cards for emergencies.
FICO Credit Score
"Creditworthiness" is the assessment of a borrower's ability to repay a debt
Represented by a credit score, most commonly the FICO credit score
Interest rates may be impacted by credit score and down payment.
Limited / poor credit history can be countered by using cash for purchases.
FICO score
Ranges from 300 to 850
Based on: Types of credit, Payment history, Length of credit history, Amounts owed, and New credit
Methods of
Debt Management
"Snowball" strategy
Minimum payments are made on all debts except smallest amount. Once it is paid off, focus is placed on the next-smallest amount and so on.
Benefit of seeing effects sooner- best for debtors that require motivation.
"Minimize Accumulation" strategy
Debt with highest interest rate is paid off first to prevent interest from building up.
Benefit of lower total amount necessary to pay off debts- best for debtors that do not require additional motivation
Choosing Credit
Credit cards have benefits as well as risks
Build credit score if used in moderation
Opportunity for cash back or other benefits
Extremely high interest rates
Easier than cash/checks to spend large amounts without feeling the impact immediately
Considerations for selecting a card
Interest rate- significant impact if the balance is not paid each month.
Don't just sign up for the "free" hat- Consider fees, bonuses, credit limit, participating retailers, etc.
Why Be So Aggressive With Debt?
Time it takes to double total of loan based on an interest rate of:
6.55% (Student loan) =
18% (Discover It ®)=
23% (Chase Freedom ®)=
10 years, 7 months
3 years, 11 months
3 years, 1 month
does not include: pre-tax investments (e.g. traditional IRAs), health care
may be claimed for a spouse and/or qualifying dependants
Tax Rates 2015
Tax credits
directly reduce the tax owed and have a greater impact than
Single Taxpayers
Married Filing Jointly
and Deductions

for single taxpayers: $6,300, married filing jointly: $12,600
: $4000 for yourself, spouse, and each qualifying dependent
may be larger than
Potentially deductible:
Uninsured medical expenses
Charitable donations (including tithes, missionary support)
Interest paid on student loans, mortgage
Un-reimbursed expenses as an employee
Uninsured natural disaster or theft losses
Withheld Taxes
Taxes are withheld from each paycheck
Taxpayers can increase or reduce the amount withheld.

Withheld funds have an opportunity cost equal to their potential investment return, but many prefer a tax return.

The more withheld, the greater the next tax return will be.
On your pay stub:
MEDI (Medicare)
FICA (Social Security)
FITS (Federal income tax)
State income tax (in other states)
Take-Home Pay
You can't just divide your annual pay by 12 to find your monthly income!
Investments: IRA, 401(k), 401(a), 457, 403(b), etc.

Withheld taxes: (state/local income, federal income, Medicare, Social Security)

Health care premium (in addition to employer's subsidy)
Consider take-home pay rather than total compensation when building your budget
Signs of Poor
Financial Management
Building Wealth
"A dollar today is worth more than a dollar tomorrow."
Current inflation rate of 0.9% for past 12 months
$1.00 in 2006 = $1.18 today (cumulative inflation rate of 18.1%)
$1,000 invested with a 5% / year interest compounded annually after 40 years =
Simple / Compounded Interest
Simple interest:
Interest is not added to the premium for the life of the loan/investment
FV = P (1 + rt)
Compounded interest:
Interest is added to the premium after each period and accumulates exponentially
FV = P (1 + r / n) ^(nt)
FV= future value
P= principal amount
r= interest rate (typically annual rate)
n= number of times that interest is compounded per year *
t= number of years *
Debt calculator:
Investment calculator:
Principles of Investing
Low risk generally = low reward but also low chance of losing initial investment
Rate of return must exceed inflation rate for true growth
Ability to convert to cash quickly without loss in value
Portfolio diversification
reduces overall risk
Dollar cost averaging:
Minimizes effect of market fluctuations though regular investing of the same dollar amount regardless of the current stock/bond price
Investment Types
-Cash savings accounts:
lowest risk, highest liquidity of investments but very low return

Ownership shares of a company that fluctuate in value with the corporation (common) or based on current interest rates (preferred); preferred and some common stocks distribute dividends from corporate revenue

Sold by companies to raise capital but do not represent ownership; interest is paid at a stated rate within the bond and value fluctuates based on investors' perception of the company's ability to buy back the bond
-Certificates of Deposit (CDs):
sold by banks or credit unions; low-risk and insured by FDIC but less liquid than cash savings accounts

-Mutual Funds:
an assortment of stocks and bonds managed by a broker/firm on behalf of multiple investors, risk level is variable, but liquidity is low; may be subject to service charges

-Money Market Funds:
type of mutual fund in which shares are always $1 but the interest rate or "yield" fluctuates, a low-risk, high liquidity option without charges for entering/leaving
Types (cont.)
Retirement Investments
Employee-managed plans:
Individual retirement account (IRA):
Pre-tax contributions (up to a specified limit) are invested in markets of the employee's choosing
Roth IRA:
Similar to traditional IRAs but contributions are made after income tax is paid on them; earnings/interest are not taxed upon withdrawal
Employer-managed plans:
Simplified employee pension (SEP) plan:
Similar to a traditional IRA, but the employer can contribute as well
401 (k):
Pre-tax plan similar to a traditional IRA but with higher contribution limits; also, the corporation has more influence in investment and may match employee contributions
Others: 401 (a), 457,
403 (b) -nonprofits only
Net Worth
Net worth
is the sum total of all assets and liabilities.
Building wealth
is the principle of increasing net wealth through
reduction of liabilities
in addition to
growth of assets
An individual with large / valuable assets but a larger amount of debt is not wealthy!
Future value vs. present value
Full transcript