1 Chapter 17 Financial Life Events—Fitting the Pieces TogetherProfessor Payne, Finance 4100

2 Learning Objectives Understand the importance of beginning your financial planning early. Recognize the ten financial life events and strategies to deal with them. Understand and manage the keys to financial success. Deal with all kinds of debt in the real world.

3 Introduction Your financial future starts now.Challenges include student loans, credit card debt, budgeting, spending, and saving, financial shocks of marriage and children. Take control now, or put it off and make financial management tougher in the future.

4 The Ingredients of SuccessEvaluate your financial health. Plan and budget. Manage your cash and credit. Control your debt. Make knowledgeable consumer decisions.

5 The Ingredients of SuccessHave adequate health, life, property, and liability insurance. Understand investing principles. Make investment decisions that reflect your goals. Plan for retirement. Plan for what happens to your wealth and your dependents after your die.

6 The Financial Life CycleRecent graduates make many financial decisions in first decade after college. Purchase car and possibly first home Establish credit and pay taxes Get married and begin a family Set up an emergency fund, start saving for your goals, and begin a retirement account.

7 Women and Personal FinanceIt’s more difficult for women to achieve financial security Women generally earn less money Women are less likely to have pensions Women qualify for less income from Social Security Women live on average 7 years longer than men

8 Financial Life Events Life Event 1: Getting StartedLife Event 2: Marriage Life Event 3: Buying a Home Life Event 4: Having a Child Life Event 5: Inheritances, Bonuses, or Unexpected Money

9 Financial Life Events Life Event 6: A Major IllnessLife Event 7: Caring for an Elderly Parent Life Event 8: Retiring Life Event 9: Death of a Spouse Life Event 10: Divorce

10 Life Event 1: Getting StartedStep 1: Manage Your Life Delete discriminating photos from social media Invest in yourself Be able to describe what you do

11 Life Event 1: Getting StartedStep 2: Lay the Groundwork Track expenses and create a budget Control debt Establish an emergency fund Insure yourself Control your credit score Keep current on personal finance

12 Life Event 1: Getting StartedStep 3: Identify Your Goals Identify and prioritize financial goals Set a time frame Identify the costs of your goals Revisit your goals annually

13 Life Event 1: Getting StartedStep 4: Begin Saving for Your Goals Save more than you think you can Make savings automatic Avoid expenses whenever you can Don’t procrastinate Catch your matches

14 Life Event 1: Getting StartedStep 4: Begin Saving for Your Goals Consider a Roth IRA Know your risk capacity and tolerance Pay attention to asset allocation Put together a strategy Control your spending

15 Life Event 1: Getting StartedStep 4: Manage Your Portfolio Monitor your portfolio Stay current Adjust to changes

16 Life Event 2: Marriage Step 1: Get Organized Get talkingUpdate financial records Decide what’s common and what’s separate Gain control of your debt and your credit score Consolidate credit cards Merge finances to make good decisions Set up plan to pay household expenses Set aside an area dedicated to your financial paperwork

17 Life Event 2: Marriage Step 2: Revisit Your Financial GoalsReexamine your financial goals Begin saving for your goals Make your saving automatic Make sure you have an emergency fund Begin working towards retirement

18 Life Event 2: Marriage Step 3: Reexamine Your Insurance and BenefitsReview your beneficiaries Include all family members Review your insurance Disability insurance Coordinate your benefits

19 Life Event 2: Marriage Step 4: Reexamine Your Taxes Update W-4 formTake advantage of tax breaks

20 Life Event 2: Marriage Step 5: Make a Will Make a willReview your beneficiaries

21 Life Event 2: Marriage Step 6: Make it Work Don’t keep money secretsDon’t let one partner take all the financial responsibility Avoid bad debt

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23 Life Event 3: Buying a HomeStep 1: The purchase fits your financial plan Keep track of your credit score

24 Life Event 3: Buying a HomeStep 2: Consider Tax Implications Take advantage of the tax benefits Build the tax benefits into your budget Reexamine your investments Update your employer records Know your state

25 Life Event 3: Buying a HomeStep 3: Take Care of the Details Update your address Update your insurance policies

26 Life Event 4: Having a ChildStep 1: Survey Your Finances Assess your current financial situation Reexamine your financial goals Revise your budget

27 Life Event 4: Having a ChildStep 2: Plan for College Estimate the costs Automate your savings

28 Life Event 4: Having a ChildStep 3: Reconsider Your Insurance Needs Review and update life, health, and disability insurance coverage

29 Life Event 4: Having a ChildStep 4: Update Your Wills and Trusts Update or make a will Update your retirement account beneficiary designations

30 Life Event 4: Having a ChildStep 5: Take advantage of tax savings. Social Security number Update your W-4 form Update your flexible spending accounts (FSAs)

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32 Life Event 5: Inheritances, Bonuses, or Unexpected MoneyStep 1: Examine the priorities of your goals Step 2: Reexamine your goals Step 3: Consider estate planning Transfer of your estate Step 4: Examine the tax implications Plan for tax implications Consider estate taxes

33 Life Event 6: A Major IllnessStep 1: Reexamine Your Finances Assess current financial situation Emergency fund—adequate liquidity Reexamine financial goals Reexamine investment strategy Revise budget

34 Life Event 6: A Major IllnessStep 2: Take Advantage of Tax Breaks Understand the tax implications Explore flexible spending accounts (FSAs)

35 Life Event 6: A Major IllnessStep 3: Alternatives to Finance Your Illness Reverse mortgage Determine how much you can get with a reverse mortgage Life insurance Disability insurance

36 Life Event 7: Caring for an Elderly ParentStep 1: Health Care and Estate Planning Concerns Initiate a dialogue with your parents

37 Life Event 7: Caring for an Elderly ParentStep 2: Oversee Your Parents’ Financial Affairs Organize the paperwork Gain an understanding of their goals and budget Develop a budget Protect your parents Durable power of attorney Living will

38 Life Event 7: Caring for an Elderly ParentStep 3: Discuss Long-Term Health Care Options Long-term health care insurance Step 4: Estate Planning Discuss estate planning

39 Life Event 8: Retiring Step 1: Develop a Retirement Income PlanMental preparation Financial preparation Plan how you will use your retirement savings

40 Life Event 8: Retiring Step 2: Manage Your Income in RetirementWithdrawal strategy Monitor your investments Emergency fund

41 Life Event 8: Retiring Step 3: Review Your Insurance Coverage and Your Will Employer retiree health care Medicare Medicare supplemental insurance Long-term health care insurance Homeowner’s insurance Review your will

42 Life Event 8: Retiring Step 4: Keep Track of Important Retirement Planning Dates Apply for Social Security Benefits Apply for Medicare Benefits Receive distributions for your retirement accounts Take mandatory retirement distributions Become eligible for a reverse mortgage

43 Life Event 9: Death of a SpouseStep 1: Organize Financial Material Assemble the papers The will

44 Life Event 9: Death of a SpouseStep 2: Contact Sources of Survivor Benefits Insurers Social Security Past employers

45 Life Event 9: Death of a SpouseStep 3: If you are the executor, carry out your responsibilities Distribution of assets

46 Life Event 9: Death of a SpouseStep 4: Change Ownership or Title to Assets Insurance policies Automobiles Bank accounts, stocks, bonds, and safety-deposit boxes Credit cards

47 Life Event 9: Death of a SpouseStep 5: Review Your Financial and Retirement Needs Determine if your benefits change Contact the employer Review your insurance Review your medical insurance

48 Life Event 10: Divorce Step 1: Prepare for Divorce Pay down debtKeep the costs down Remember Principle 1: The Best Protection is Knowledge

49 Life Event 10: Divorce Step 2: Avoid Credit Damage Joint accountsLate payments and your credit report Late payments? Have your account “re-aged.”

50 Life Event 10: Divorce Step 3: Revisit Your Financial GoalsReevaluate your goals Social Security and your ex-spouse’s earnings history

51 Life Event 10: Divorce Step 4: Revisit Your Insurance CoverageChild support or alimony—check out life insurance Your life insurance policy

52 Life Event 10: Divorce Step 5: Rework Your Budget Your budgetRetirement savings Reexamine your expenses Emergency fund Tax breaks

53 The Keys to Success: A Dozen DecisionsNumber 1: Become Knowledgeable Number 2: Don’t Procrastinate Number 3: Live Below Your Means Number 4: Realize You Aren’t Indestructible Number 5: Protect Your Stuff (and Look Out for Lawyers) Number 6: Embrace the “B” Word (Budget)

54 The Keys to Success: A Dozen DecisionsNumber 7: Reinvent and Upgrade Your Skills Number 8: Hide Your Plastic Number 9: Stocks Are Risky, But Not as Risky as Not Investing in Them Number 10: Exploit Tax-Favored Retirement Plans to the Fullest Number 11: Plan for the Number of Children You Want Number 12: Stay Married

55 Tying Things Together: Debt and the Real WorldThe Trap of Too Much Debt Students and those with little capacity to repay are being given the opportunity to ring up debts at will. People are encouraged to borrow more than they should; borrowing is becoming part of culture.

56 Successful Debt ManagementKey #1: The Obvious: Spend less than you earn and budget your money Key #2: Know the costs Key #3: Understand the difference between good and bad debt

57 Successful Debt ManagementKey #4: Make sure you can repay what you borrow—set your own standards Key #5: Keep your credit score strong—it keeps costs down and is a source of emergency money Key #6: Don’t live with bad (and expensive) debt

58 Summary No substitute for starting early in financial planning and saving Financial events like marriage and children complicate financial planning—be open with partners and plan ahead

59 Summary To succeed financially, gain an understanding of personal finance, avoid procrastination, live below means, have adequate insurance, become an budgeter, keep skills fresh, avoid credit card debt Controlling debt is a challenge but spending less than your earn, budgeting, and knowing costs of debt are key deterrents against unnecessary debt

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62 End of Chapter 17 Slides