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Financial Decision Making: Maximizing Benefits and Planning for the Future

This seminar covers the principles of financial decision making, including thinking with your head, determining the greatest benefit, and calculating opportunity cost. It discusses major financial decisions such as buying vehicles, purchasing a primary residence, and saving for retirement and college. The seminar also explores topics like tax brackets, rebate vs interest rates, credit card interest, new or used vehicles, refinancing, spouse employment, debt consolidation, fixed or adjustable rates, reducing spending, higher education, paying points, term or universal life insurance, and making extra payments on a house.

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Financial Decision Making: Maximizing Benefits and Planning for the Future

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  1. CHAPTER 13 FINANCIAL DECISION MAKING

  2. FINANCIALPYRAMID CREDIT SAVINGS & GOAL PLANNING FINANCIAL DECISION MAKING NEGOTIATING BUDGETING (first seminar)

  3. PRINCIPLES OFFINANCIAL DECISION MAKING • Thinking with your head, not your emotions. • Determining which decision will provide the greatest amount of benefit. • Know the length of benefit you are interested in maximizing. (short term, intermediate term or long term) • Forgetting about lost cost! • Calculating opportunity cost. • Don’t use long term debt to pay off short term needs.

  4. DECISION MAKING • HOW MANY MAJOR FINANCIAL DECISIONS WILL YOU MAKE IN YOUR LIFE? (AVG.) 23

  5. MAJOR DECISIONS • Buying vehicles (8) • Purchasing primary residence (6) • When you start saving for retirement (1) • When you start saving for college for your children or do you? (1) • Should you go back to get additional education? (3) • When do you get married or do you? (2) • Should you have a child (2)

  6. WHEN TO START SAVING FOR RETIREMENT AGE 22AGE 45 YEARLY DEPOSIT $4,000 $4,000 YEARS TO SAVE 43 20 RATE OF RETURN 8% 8% RESULTS $1,318,332 $183,047

  7. WHEN TO START SAVING FOR COLLEGE EDUCATION 19 YEARS PRIOR3 YEARS PRIOR MUST SAVE $266/MO MUST SAVE $3,300/MO FOR MOST PEOPLE $266/MO IS AN OPTION, HOWEVER FOR THOSE WHO WAIT, MOST TAKE A SECOND MORTGAGE OUT TO PAY FOR COLLEGE WHICH WILL END UP COSTING THEM AN ADDITIONAL $240,000 OF INTEREST.

  8. TRADITIONAL IRA OR ROTH IRA RETIREMENT TAX BRACKET 15%38% DED. IRA $2,363 $1,720 ROTH IRA $1,838 $1,838 TAX. INV. $ 369 $ 318 THE DECISION IS BASED ON YOUR FUTURE TAX BRACKET AND INCOME.

  9. REBATE VS INTEREST RATE • WHICH ONE IS A BETTER DEAL? PERCENTAGE RATE 0%4% CASH REBATE $1,500 $2,500 SAVINGS RATE 2.5% 2.5% SAVINGS $1,175 $1,446 WHICH METHOD IS BETTER? INTEREST CASH REBATE

  10. CREDIT CARD INTEREST • HOW IMPORTANT IS THE INTEREST RATE? 12%22% AMOUNT OWED $8,000 $8,000 FUTURE CHARGES 200/MO. 200/M0. MONTHLY PAY. $ 300 $ 350 INTEREST CHARGES $9,044 $55,506 TOTAL COST DIFF. $46,462

  11. NEW OR USEDVEHICLE? NEW USED AVG. COST PER YEAR $1,978 $1,660 MONTHLY PAYMENT 599 308 TOTAL DEPRECIATION 18,316 8,886 TOTAL INTEREST PAID 1,579 1,115 BEST DECISION $317/yr. (The used car will save you $317/yr times 10 years will save you $3,170 plus inv. return.

  12. REFINANCE OR NOT? CURRENT LOAN $140,000 CURRENT INTEREST RATE 7.50% TOTAL COST TO REFINANCE $ 2,100 STAY IN HOUSE 7 YEARS REFINANCING WILL SAVE YOU $3,847 OVER THE SEVEN YEARS.

  13. SHOULD SPOUSE WORK OR NOT? First you must consider why you need the extra money. Is it to increase your status or is it to save for emergencies? Know the why so you can have a plan and work your plan. Scenario: Extra Income $3,000 Less: Taxes 1,139 Less: Extra Exp. 946 Monthly Benefit $ 915or $10,980/yr. ______

  14. CONSOLIDATE DEBTOR NOT? If you have two different loans and three credit cards, would it be wise to consolidate using a home equity line of credit: Current LoansConsolidation Loan Total Principle $ 9,800 $ 9,800 Total interest 4,717 2,424 Other cost -0- 375 Investment Savings -0- (634) Tax savings -0- (819) Total Cost $14,817$ 11,146 ------------ ------------- TOTAL SAVINGS OF $ 3,671

  15. FIXED OR ADJUSTABLERATE? 2 YR.7 YR.15 YR. LOAN AMT. $140K $140K $140K TERM 30 YR. 30 YR. 30 YR. DISC. PT. 1.0% 1.0% 1.0% VARIABLE BEST (SAVINGS) $400 FIXED BEST (SAVINGS)$4,813$10,613

  16. WHAT IS IT WORTH TO REDUCE MY SPENDING? 1 yr. 10 yrs. 30 yrs. Waiting to buy a new car $2,640 $32,454 $152,434 Eating out less 600 7,376 34,644 Buying fewer clothes 1,200 14,752 69,288 Taking fewer trips 600 7,376 34,644 Going to fewer movies 360 4,426 20,786 Paying off credit cards 1,800 22,128 103,932 Carpooling to work 300 3,688 17,322 Total Savings by reducing spending and saving the difference: $ 7,500 $ 92,200 $433,051

  17. WHAT IS THE VALUE OF HIGHER EDUCATION? Should you strive for a graduate degree? At what age is this useful? (Break even point is 45) Income with Bachelors $2,125,433 Income with Masters 3,004,433 (Subtotal) $ 879,000 Less: Educational Cost 150,000 Lost wages 100,000 Increased Taxes 290,000 Total Financial Benefit $ 339,000 _________

  18. SHOULD I PAY POINTS TO LOWER MY INTEREST? The average family stays in their home for an average of seven years prior to moving! LESS MORE POINTSPOINTS LOAN AMOUNT $140,000 $140,000 INTEREST RATE 6.5% 6.0% DISCOUNT POINTS 1.0% 2.0% FINANCIAL BENEFIT (SAVINGS):$1,956

  19. TERM OR UNIVERSAL LIFE? INVESTING IN LIFE INSURANCE IS A PERSONAL CHOICE AND A FINANCIAL CHOICE. BOTH CHOICES DON’T ALWAYS COINCIDE WITH EACH OTHER. UNIVERSALTERM POLICY AMOUNT $350,000 $350,000 PREMIUMS $150/MO. $50 CASH VALUE (AFTER 50 YRS) 5.21%7.95% ROR ON INV. BEST FIN. DEC. (May or may not be wisest choice)x (Assuming the insured invests the difference in premiums at 4% return.)

  20. SHOULD I MAKE EXTRA PAYMENTS ON MY HOUSE? No With Extra Extra PmtsPmts Principal & Int. $885/mo. $985/mo. Taxes 179 179 Mortg. Ins. 37 37 Total Interest Paid $178,562 $128,255 TOTAL SAVINGS N/A $50,307

  21. 15 YR OR 30 YRMORTGAGE? In terms of cash flow a 15 yr. mortgage will be more demanding, but will always cost you less in interest. 15 yr.30 yr. Payment $1,107.11 $839.37 Interest % 5.0% 6.0% Total Payments $199,280 $302,173 Savings $102,893 ------------

  22. COST OF MAKING THE WRONG DECISIONS! • VEHICLES $171,636 • HOMES $305,800 • RETIREMENT $817,405 • COLLEGE $240,000 • ADDITIONAL EDUCATION $339,000 • WHEN AND WHO TO MARRY $200,000 • HAVING CHILDREN TOO EARLY OR TOO MANY TO PROVIDE FOR $241,000 • TOTAL COST $2,314,841

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