McCombs
Knowledge To Go
January 12, 2015
Financial Overview for Young
Alumni: Achieve Your Goals
by Kelly Kamm, Ph.D. FinanceSenior Lecturer, Department of Finance, McCombs
My Background & Choices
Ph.D. Finance, University career
Undergraduate, graduate, Executive Education
Advisor, MBA Investment Fund
Manage family savings, investments,
insurance
Also children’s education choices
(public & private) & savings
Investor in private enterprises
Homeowner - not too big house
My Background & Choices
Preference for used car, good condition
Pay monthly credit card bill in full
Have had loans / debt
College, home equity loan, etc.
Experience with job changes and need
for emergency savings
Very limited savings when children
young
Reasons to Live Below your means
Gives you lots of flexibility, financial freedom
Ability to take time off from work
Helps weather job changes (liquidity)
You can save for future when responsibilities may grow / retirement
Travel
Contribute to good causes
Forbes / EntrepreneurWhen your material needs meet or
exceed your income, you’re sabotaging your ability to really make it big.
Don’t shackle yourself with golden handcuffs (a fancy car or an expensive
apartment.) …
Be willing and able to take 20% less in the short term, if it could mean 200% more earning potential.
20 Things 20-Year-Olds Don't Get,
by Jason Nazar
Forbes / Entrepreneur (continued)
No matter how much money you make,
spend 25% less to support your life.
It’s a guaranteed formula to be less
stressed and to always have the
flexibility to pursue your dreams.
20 Things 20-Year-Olds Don't Get
by Jason Nazar
Reasons to Spend / Live at or above
Don’t be miserly, you can’t take it
with you
It’s o.k. to enjoy life or even spend a
bit “too” much for something (not
everything) if it is valuable to you.
It’s temporary … you are pulling
from savings for a short time
Graduate school, job change,
young children
Don’t Have to be an AsceticAll this isn’t say you should be an ascetic.
If you have done a good job saving and prioritizing, there is nothing wrong with
spending some cash.
Your 20s is certainly a time to cut loose and have fun if you lack the responsibilities of a
family and a mortgage.
But it’s also an opportunity to live small and work hard, setting yourself up for bigger
comforts later.
Top 10 Tips … 2015…How to Not Ask Your Parents for Help / Personal Finance (USA Today)
1. Financial Advice: General
Invest in Yourself / Your Career
Pay down college or other debt,
especially if high interest
Build up 3 to 9 months of living
expenses – an emergency fund
2. Advice: Savings & Insurance
Save 10% or more of income toward
retirement
Life insurance – 6 to 10 times annual
income
College Savings for children
Escalating college costs
your retirement comes first
3. Advice: Home and Car Ownership Home Ownership
Old, but seemingly out of date adage
“buy the most house you can buy”
keep housing costs ≤ 28% of income
recent trend “not too big house”
recent trend rent don’t buy
Automobile
Lease vs. buy
New vs. Used
Recent trend walk, bike, use public transport
Agenda & How it Relates to You
Kamm Commentary, Insights,
Examples
General Financial Advice
Savings and Insurance
Home (and Car) Ownership
No One Size Fits All
Your Stage of Life; but it might change
Your Preferences, Values, Ethics
If something doesn’t apply, goal to show
something interesting to you
1. Financial Advice: General
Invest in Yourself / Your Career
Pay down college or other debt,
especially if high interest
Build up 3 to 9 months of living
expenses – an emergency fund
Invest in Yourself / Your Career
Invest in attire for profession.
Sanity to enjoy life and excel in job
Housekeeper, gym by work
The cost of a professional designation
may be well worth it.
If considering graduate education,
evaluate whether it makes
Financial sense
Personal value
General: Sanity and Careers in U.S.
Sanity to enjoy life and excel in job
Housekeeper, gym by work
Gallup Poll 2014: Of full-time U.S.
workers who are paid a salary (not
hourly), approximate percentages by
hours worked weekly are:
50% report 47 hours or fewer worked
25% report 50 to 59 hours
25% report 60 + hours
Mark Cuban on Paying Down Debt
Pay off your debt first.
Freedom from debt is worth
more than any amount you can
earn.
Mark Cuban, Owner Dallas Mavs, The Best
Financial Advice I Ever Got, WSJ, Jan 6, 2014
Pay off College & Other debt
Pay off credit cards in full each month.
It’s a lot easier to live below your
means than above your means.
Pay off debt, highest rate first.
It can make sense to save while paying
down debt.
Building up Emergency Savings
Saving at least 3 months of
expenditures may sound daunting.
Start small. Put aside something.
Should be liquid. Checking, savings,
money market.
Examples of Unexpected Costs: job
loss or change, computer dies
2. Advice: Savings & Insurance
Save 10% or more of income toward
retirement
Life insurance – 6 to 10 times annual
income
College Savings for children
Escalating college costs
your retirement comes first
Retirement: 401(k)
Defined benefit
Social Security Administration, 2009, Butrica et al
“The Disappearing Defined Benefit Pension…”
401(k) … Defined Contribution
Congress 1981 IRS Code
Employer sponsored, pre-tax payroll deduction
Capital gains grow tax-deferred
Employer may offer matching program
Fairly straight forward to set up through company
Company usually offers set of diversified funds
Retirement IRA Traditional
Traditional IRA
No company plan / to supplement company plan
Set up at a brokerage, mutual fund co., bank
On-line / phone help … to determine maximum
Contributions are / may be tax-deductible
Interest / Capital-gains grow tax deferred
Forced distribution at 70 ½
May be a 10% penalty if you withdraw funds
before retirement
Retirement IRA Roth
Roth IRA
Set up at a brokerage, mutual fund co., bank
On-line / phone help … to determine maximum
Pay taxes now, do not deduct from income taxes
Invest after-tax dollars
(Likely) tax-free gains
Withdrawals of contributions generally not
penalized
No minimum distribution at 70 ½
May earn too much to qualify for Roth
Most likely to qualify for Roth when young
So Many Choices: What to Do
If your company has a retirement plan
start with that
Traditional vs Roth IRA
Read limits on web site / chat on-line / call
Nights and weekends
Which assets or funds to choose? Depends on your preferences
Consider diversification
Retirement Savings Example
You are 27
You will retire in 40 years at 67
$1M needed in 40 years
Rate of return = 8%
Start monthly in 20 years = $1,697.73 / mo
Start monthly in 10 years = 670.98 / mo
Start monthly today = 286.45 / mo
If wait 20 years you will have to save about 6X as
much per month
Asset Allocation Decision Common Advice to Young Savers
Higher percentage in stock market
50%, 70%, 90%
U.S. vs. foreign markets
Smaller percentage in other assets
Fixed Income (bonds) / other
Check fees: no load or low fee
Approach Retirement:
Keep shifting into fixed income / money market
SP500 Index over 40 Years
Investment Grade Bond Index 40 Years
Stocks vs. Bonds + 3.44% per year over
Diversification and Indexing, John Bogle
The best way to own stocks is to
own an index fund.
John Bogle, Founder of Vanguard Group, The
Best Financial Advice I Ever Got, WSJ, Jan 6,
2014
Life Insurance and Disability Life insurance – typical advice is 6 to
10 times annual income
No one likes to consider a will or life insurance
Birth of child motivating factor
Cheaper the younger you are Age, less likely to have history of medical
conditions
Might consider policy in addition to company coverage
Kamm opinion: stay at home parent benefits from life insurance too
Disability Insurance
Disability Insurance is meant to provide income should you be disabled and unable to work.
It’s estimated by the Social Security Administration that over 25% of
today’s 20-year-olds will be disabled before retirement.
Business Insider, The 11 Worst Money Mistakes to Make in your 30s, by Kathleen Elkins, July 6, 2015
College Savings for Kids: Example
Suppose child just born and you have
goal to save 50,000 by end of 18 years
Assume 6% return
Start in 3 years = $171.93 / mo.
Start in 6 years = $237.93 / mo.
Start in 12 years = $578.64 / mo.
Start in 15 years = $1,271.10 / mo.
Ratio: start when child is 15 vs. 6
You must invest about 5 ½ times as much per
month
Education Savings Plans
Coverdell Education Savings Accounts
Investment limit of (perhaps) $2,000 per year
Must meet / be under income limit
Invest after-tax dollars; capital gains not taxed
(federal) if used for qualified education expenses
No state-tax deduction / elementary through
college
529 College Savings Plans
Investment limit very, very high
Invest after-tax dollars; capital gains not taxed
(federal) if used for qualified education expenses
Possible state-tax deduction / college only
Education Savings Plans: What to do
Emergency, Retirement, Insurance first
Add college savings plan next if
desired
You can set up with a brokerage or mutual fund
company / planner – check fee arrangement
Automatic electronic transfer
Select funds yourself / or target date fund
Consider Coverdell if might have private
education costs prior to college
3. Advice: Home and Car Ownership Home Ownership
Old adage that seems out of favor
“buy the most house you can buy”
Housing costs far exceed monthly rental
Recent trend “not too big house”
recent trend rent don’t buy
Automobile
Lease vs. buy
New vs. Used
Recent trend walk, bike, use public transport
Reasons to Rent Lifestyle choice / flexibility / other
things more important
Downside: rent often increases
Saving for a down payment
Interest rates are high
Buy less house, floating rate
You might move w/in 2 or 3 years
Costs associated (6% brokerage twice)
Give yourself time to know the location
Traffic, schools, areas of town
11 Reasons I Never Want to Own …
Homes often tempt people to borrow more than they can afford
Houses take a lot of money
You’re still paying a lot of interest
I liked being a homeowner. I just happen to like being a renter more.
Forbes / Taxes, 11 Reasons Why I Never Want to Own a House Again, Sep 27, 2013
Buying a Home: Things to Consider
Build up principal / ownership
Interest may be tax deductible
All costs: Property taxes, insurance, maintenance
Consider larger down payment
Faster build up of principal
Lower overall interest paid
15 years: quicker build up of principal
30 years: lower monthly payment more flexibility in terms of monthly payment
generally no penalty if pre-pay
How Much You …Spend on a Home
For most people, a house is the biggest purchase they will make in their lives, one they will pay off for years, even
decades, to come.
But spending too much on a house could leave you with little money for other
goals in life, such as retirement, college funds and vacation.
The Wall Street Journal, How Much You Should Spend on a Home, How-To Guide, Buying a Home
Tips …Spend on a Home
The cost of your home -- including taxes, maintenance and other costs
-- should not exceed 28% of your monthly income.
The Wall Street Journal, How Much You Should Spend on a Home, How-To Guide, Buying a Home
Buy Less than You Can Afford
Look for a house that costs less than what you can afford…your property taxes and home insurance premiums are going to rise at an
unknown rate. You will also have to budget for future repairs and unexpected non-housing
expenses.
Though a house … will likely rise … the real rate of change may be less than what you
think.
The Wall Street Journal / Wealth Management, Buy Less House Than What You Can Afford, Charles Rotbult, V.P. of
American Association of Individual Investors
No Car, Lease, Buy New, Buy Used
Automobile Purchase or not
logic follows along with most of what we have covered = personal choice
Keep in mind that though home prices usually (not always) rise, not the case with cars
According to edmunds.com: New car loses 11% upon leaving the lot
On average a car depreciates 15-25% each year the first 5 years
On average, at end of 5 years total depreciation is 63%
Last but not least All PPTs represent Kamm view (not
necessarily fact or what you should do).
Talk about financial matters with family, friends, etc. Read about financial matters
Consider different opinions and then pursue what you think is right for you.
Start with one area.
Start small, then you can improve.
If you have a business major, it may make sense to: Hire an advisor to advise you and manage finances
Do discuss benefit and all fees of financial advisor
Or, manage finances yourself
Financial Overview: Hope you enjoyed
the webinar, learned something new
and /or reflected more on your finances
by Kelly Kamm, Ph.D. FinanceSenior Lecturer, Department of Finance, McCombs
Please Give Back to McCombs!
This webinar has been brought to you by the McCombs MBA & BBA Alumni
Advisory Boards, coordinated by alumni for the benefit of the Alumni Network.
Please get involved with the Alumni Network!
All alumni benefit when we work together to build the quality and value of the
Alumni Network and the McCombs brand.
Time: Get involved in your local club
Talent: Mentor another alumni or speak at a future webinar
Treasure: Make a donation to McCombs
www.mccombs.utexas.edu/alumni
Suggested fund: MBA or BBA Alumni Excellence Funds
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