Welcome
Personal Financial Planning
By
Kim Handy
The Financial Plan




Thanks to healthier lifestyles and breakthroughs in medical technology, life expectancy for
Americans has increased significantly during the past half-century. While it's good news that
you can expect to live longer in retirement and have a better quality of life, it also means
your investment portfolio may need to last for 30 years or more.
https://personal.vanguard.com. 2014
At retirement, $1 million in savings could potentially generate about $40,000 in before-tax
annual income (adjusted for inflation). Withdraw more than that amount from the $1 million
annually and you'll run the risk of running out of money. www.dailyfinance.com. 2014
While the published tuition and fees at public and private colleges still increased in 2013, the
growth was smaller than it has been in past years. At public, four-year colleges, for example,
published tuition and fees increased by 2.9 percent – the smallest one-year increase since
the mid-1970s. But net prices – what students and families actually pay after grant aid,
scholarships and tax credits are subtracted – have increased since 2010 because the
growth in financial aid has not kept pace with the increase in college tuition.
www.usnews.com, 2013.
“If you look at people who are financially successful,” he said, “most of them have been
making very smart financial decisions all their life. The sooner you start making smart
decisions, the sooner you know where you want to go, and if you have a plan to get there,
the more likely you are to attain it. www.forbes.com, 2013
Do I need one?
Some questions to ask yourself…
 Do I have clear financial goals?
 Do I honestly know where all my money goes each






month?
Do I know the return I made on my investment
accounts, retirement accounts, bank accounts last
year?
Do I understand my investments or my investment
options?
Do I have the right amount and type of insurance?
Am I financially “set” for retirement?
Should I pay off my credit card or my student loan?
Do I have “financial peace of mind?”
The Financial Planning Process
(six steps)
1. Establish how you will develop a
2.
3.
4.
5.
6.
financial plan
Gather financial information and
establish financial goals
Analyze and evaluate financial status
Develop an action plan
Implement the plan
Monitor and update on a regular basis
1. How will you develop your
plan?
Options:
 Find a professional to assist you (costs
money)
 Take a class (costs significantly less
money, but takes time)
 Do-it-yourself (costs very little money,
but takes significant time)
2. Gather Information/Establish Goals
 Information needs include:






Account balances (savings, investment,
retirement, etc.)
Statements for any financial account (including
credit card, student loans, car loan, etc.)
Insurance policies
Mortgage information
Tax returns
Social Security information
2. Establish Goals
 Examples







Emergency fund with 10k
Retirement salary of 75k each year
House down payment of 20k
College fund for two years
Zero credit card debt
Family vacation
Buy a new car
3. Analyze/Evaluate Financial Status
 Develop a balance sheet – This is your
starting point.
 Develop a cash flow statement – this answers
the question, “Where does my money go?”
Balance Sheet Sample
Balance Sheet - June 2014
Assets
Description
Home
Liabilities
June 2014
Description
350,000 Mortgage
Chase VISA
Amount
290,000
4,200
Personal Investments
Schools MMA
2,000
Retirement Investments
Vanguard 403b
CalPers Pension
113,196
3000/month
College Investment
Scholarshare 529
Total Assets
1,300
Total Liabilities
$294,200
Total Assets minus
$466,496
Total Liabilities
$294,200
466,496 Net Worth
$172,296
Cashflow Statement Sample
Cashflow Worksheet
July
Description
In
August
Out
In
September
Out
In
Out
Fixed:
Mortgage/rent
1200
1200
1200
Car payment
400
400
400
Car Insurance
130
130
130
1030
990
875
300
136
260
0
175
50
25
125
50
Variable:
Grocery
Eating out
Clothing
Gifts
Income:
Salary
Total
Surplus or (Deficit)
3100
$3,100
3100
$3,085
$15
$3,115
3100
$3,156
-$41
$3,059
$2,965
$94
Evaluate Investments
 What investments do I own?
 How have they been performing over time?
 Do I have online access to my account?
 How do I read this?
4. Develop an action plan (for each goal)
Goal - Save 250k in retirement funds over the
next 20 years.
Action plan:
1.
2.
3.
4.
Contribute $5,500 or maximum amount to
Roth IRA.
Contribute $2,500 to my 403b
Plan for 5-6% annual average return over the
next 20 years.
Invest in an appropriate asset allocation for
my risk profile.
5. Implement the plan
6. Monitor and Update
 Semi annual preferred
 Annual required


Update goals
Rebalance accounts
Evaluating Mutual Funds
By
Kim Handy
Investment Goals
 Save enough money to retire on $85k per
year for 30 years.
 Have a $50k college fund for my son.
 Save $20k for a family vacation in two years.
 Build an emergency fund of 5k.
 Save $20 per month at Etrade to begin my
investment in a Roth IRA account (I have a
little job). Use this money to invest in
commission free ETFs. This is from a student, and it is priceless.
Investment Decision Factors
 Life situation – age, family, income, etc.
 Time – investors with a greater time horizon
can assume more risk.
 Risk tolerance – really, just how much risk
can you tolerate before you lose sleep, feel
sick, or even shut-down and ignore your
mail?
Investment Pyramid
Asset Allocation
 How an investor distributes investments
among the different levels of the pyramid.
 Percentage allocation among cash
equivalents (savings, MMA, CDs, MMMFs,
etc.), bonds, and stocks.
 No simple formula for selecting the perfect
allocation, but this is so important!
Why Mutual Funds?
 Popular way to invest in stocks and bonds is
through mutual funds.
 Key advantages are diversity and
professional management
 Other advantages include simplicity,
liquidity, and economies of scale
Mutual Funds
 Investment company that pools money from
many investors and invests in stocks, bonds,
short-term investments, etc.
 Investments in the funds are determined by
the investment objectives.
Making Money w/Mutual Funds
 Bond interest
 Stock dividends
 Capital gains on stocks and bonds in fund
 Fund per share price
Popular Fund Types
 Money Market Funds – contain short-term debt
instruments, usually treasury bills. Very low return,
but very safe.
 Bond/Income Funds – contain government or
corporate debt. Primary goal is to provide a steady
stream of income. Primary risk factor is interest rates.
 Balanced Funds – contain a balance of safety,
income, and capital appreciation (stock). Many are
called asset allocation or target date funds.
Popular Fund Types cont.
 Equity – contain stocks generally with the objective of
long-term capital growth and some income. The style
box below illustrates the categories of equity funds.
 Global/International – invests anywhere in the world
(including the US) and an international fund invest
outside of the US only.
Popular Fund Types cont.
 Specialty Funds – can either focus on a specific
sector (healthcare, technology, energy, real estate),
or a specific region (Latin America, Canada), or
socially responsible companies.
 Index Funds - This type of mutual fund replicates the
performance of a broad market index such as the
S&P 500 or Dow Jones Industrial Average (DJIA). An
investor in an index fund figures that most managers
can't beat the market. An index fund merely
replicates the market return and benefits investors in
the form of low fees.
Selecting a Mutual Fund – Step 1
What is your desired asset allocation? You should
choose one based on your time horizon, risk tolerance,
and financial situation.
Examples - Individual who is within 10 years of retirement
Motley Fool
50% stocks
15% international
35% bonds
Fidelity
51% stocks
18% international
31% bonds
Vanguard
45% stocks
19% international
36% bonds
Selecting a Mutual Fund – Step 2
 Has the fund made money



Review historical returns
Compare the returns with the index
benchmark. Is the fund outperforming the
benchmark?
Review 5yr, 10yr, and since inception returns
Selecting a Mutual Fund – Step 3
Fund Fees – two types:

Ongoing yearly fees captured in the expense
ratio. We like a very low expense ratio.

Transaction fees when you buy or sell the fund
shares (loads). We don’t like these!
Selecting a Mutual Fund – Step 3
 Expense Ratio
Includes management fees, administrative
costs, and 12B-1 advertising costs. Can range
from .2% (index funds) to 2%.
 Again, these costs take away from your
profits.
 The Securities and Exchange Commission’s
website quotes:
"Higher expense funds do not, on average,
perform better than lower expense funds."

Selecting a Mutual Fund – Step 3
Transaction Costs
 Front-end loads – sales commission. If you
contribute $100 to a fund with a 5% front-end load,
then $5 will be the charge, and $95 will be invested in
the fund. That’s just wrong
 Back-end loads (deferred load) – charged when you
sell shares of the fund. The percent of sales charge
decreases with time. Mostly wrong
 No load – no front-end or back-end sales charge.
This is for us!
Selecting a Mutual Fund – Step 4
Risk Factors
 Review Morningstar ratings and risk
 Look at Sharpe ratio. Should be higher than
index.
 Look at Alpha. Should be higher than
category.
Selecting a Mutual Fund – Step 5
 Manager history – has he/she been around a
while? It’s usually a good sign.
Now, let’s evaluate some funds!