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*Global Education & Career Development Center (GECDC) and Society of Women
Engineers (SWE) Present:*

*Personal Finance 101*

*Date: Tuesday, April 13*

*Time: 7:00 PM – 8:30 PM*

*Venue: Room 4-231*

** Dinner will be provided! ****

Thinking about planning and managing your finances? Come to this panel to learn about basic personal finance!

*Topics include:*

• What is Financial Planning
• Cash Reserves
• Debt Management
• The Power of Savings
• Understanding the types of Accounts
• Understanding the types of Investments
• Basic Estate Planning

*Speaker features:* Mark Porter

Mark Porter  is a Certified Financial Planner with Ameriprise Financial. He has a degree in Finance from M.I.T. with a minor in economics. Mark works with clients through goal based, comprehensive financial planning.

Now that tax season is fully upon us (you’ve got about another 8 days if you haven’t already filed), there are always some latent questions.

One of the more confusing questions for some people (especially if you are self employed or have significant personal investments) is why you might need to pay an additional quarterly amount, vs just paying your taxes once a year.

For most people who solely rely on their day jobs to make money, this won’t apply since your employer should already withhold enough taxes to cover your income tax liability. Every paycheck, your employer takes money out, and then pays your taxes on your behalf (how kind!).

But if you are making money on the side, you will have an unfunded liability to the Federal Government…which sucks. The government, to make it’s own cash payments more regular, requires these people to make quarterly payments of what they estimate their unfunded liability would be.

So for example – lets say I make $50,000 per year, but I’ve got another side business (or investment) that brings in another $10,000. My employer will take off about 30% of the 50k, but I’ve still got 10k in income which needs to be reported. This 10k will add about $3,000 to the taxes you owe, and as such, I will need to pay $750 every quarter to make up for it.

Another, more automatic, route to go is by increasing the amount of withholding that your employer takes each month from your paycheck.

Happy tax season…and happy refunds to all of you (if you get them).

I just came across an interesting site called CreditKarma, thanks to a close friend of mine.  It’s been around for a few years, but I hadn’t yet heard about it. It offers to provide you with a quick, easy and FREE credit score, unlike other sites which cost money each time you use them.

It sounded a bit fishy at first, mostly because I am skeptical of all services which require me to put in lots of personal information. In the name of science and insane curiosity, I checked it out. Sure enough, it was, indeed, quick, easy and free.

Here’s a snapshot of what the CreditKarma dashboard looks like to a signed in user:

Obviously, it provides some nice graphics and easy to read score analysis.  I also learned a few interesting things about my particular credit score. Your score is more or less based on 7 things:

1. Open Credit Card Utilization – Having access to credit but not maxing it out is a GOOD thing.
2. Percent of On Time Payments – Do you pay your creditors back on time?
3. Average Age of Credit Lines – Having an older credit line shows creditors that you’ve got good history.
4. Total Accounts – More people willing to give you credit is seen as a good thing (I think this is nuts, but more later)
5. Hard Credit Inquiries – The number of times new creditors ask for your credit score. More can be seen as a warning sign that you’ve been scrounging for cash from a lot of different people. “Soft” scores like requests made on your behalf are not counted.
6. Total Debt – Obviously, tons of debt is not a good thing.
7. Debt to Income Ratio – Do you make enough money to cover your interest payments?

One of the crazier things to me was the number of accounts opened. I received an “F” rating in this category due to my measly 3 credit accounts (1 credit card, and 2 debit cards…I avoid debt like the plague). Apparently, in order to have an “A” rating, I would need to have over 40 different accounts opened. This is INSANE, and I will never ever ever do this. Nor should you!

Moral of the story is check out your credit score. If you find something a little odd, make sure to go to the Annual Credit Report Agency.

The Wall Street Journal has a pretty revealing article on changes coming to credit cards. Due to the attempts by the Obama administration to cut down on certain credit card shenanigans, the industry as a whole has responded with, guess what, more shenanigans!

Read the fine print the next time you sign up for a credit card, and be prepared for the following:

1) Annual fees

2) Higher annual rates (some touching as high as 20 or 30% APR)

3) Application Fees (yes, you get charged to apply, regardless of whether you are accepted)

4) Fees for not using your credit card enough (yes, fee’s for not using something).

Buyer beware, ladies and gentleman!

Or if you don’t have BoA, dump your Wachovia, Wells Fargo, et. al. accounts where you are saving money at abysmally low rates for below average customer service and ATM fees. It’s insane how much control these guys have of your money.

Where should you put it instead? Try your brokerage account. My Schwab Account has free checking, an ATM card which REIMBURSES me for all fees (yes, no fees), and pays a better interest rate…plus, I can see all of my investments from one dashboard.

Why do I use my BoA account? For the convenience of depositing checks, and that’s it. Switch to your brokerage and you will save a ton on fees and start actually earning interest.

-EDIT-

Not 2 days after I posted this, did BoA charge my account a monthly maintenance fee.  When I signed up for the account, I was told there were no monthly minimums, but apparently this is only applicable if you do direct deposits to the account at least once a month.  Since I switched up my direct deposits to my Schwab account, BoA felt a little threatened . Luckily, calling and complaining led to the cancellation of the fee (lesson: always call and protest fees).

I also learned that Bank of America doesn’t have this requirement on all MyAccess checking accounts created online. Since I have MyAccess checking, I simply asked for them to waive all future fees. In typical bureaucratic fashion, the only way for me to insure that there are no monthly minimums are for me to create a new account online and cancel my old one. Talk about horrendous customer service.

Image via Wikipedia

For those of you who haven’t checked out the About section, Hapi is the Egyptian deification of the Nile flooding. I just found this hymn written to Hapi and it made me smile.

Lightmaker who comes from the dark

Fattener of herds

Might that fashions all

None can live without him

People are clothed with the flax of his fields

Thou makest all the land to drink unceasingly, as thou descendest on thy way from the heavens.

Hapi investing everyone!

There are a lot of different ways to do this, and a variety of different results will come because of it. Personally, I choose to stick to more conservative methodologies, but you can be as aggressive as you like.

Here’s how I calculate the amount you need to retire:

1. Figure out what your yearly expenses are: rent, credit cards, groceries, etc.

• It’s probably easiest to figure this out monthly and then just multiply by 12 (to get an annual amount)
• You don’t necessarily have to be exact. The end result is going to vary widely based on your assumptions.

2. Figure out how many years it’s going to be until you retire (warning, this requires basic subtraction).

3. Gross up your annual expenses by inflation for the next X years until you retire.

• Inflation has historically been about 3% per year
• Here’s the formula: annual expenses x (1.03) ^ years_until_retirement

4.  Now you have your cost of living for when you are retired, but since you are no longer earning any salary (you stopped working, remember?), all income must come from your investments.

• Conservatively assume that you are going to earn all of your income from bonds
• Lets assume that the average bond yields about 5% annually
• Divide your expenses from #3 (the grossed up ones) by .05*(1 – T) where T = your tax rate
• Now you’ll have the amount you need to retire.

5. Stop freaking out – it’s going to seem like a lot of money, but keep in mind you will have been saving for all of those years, and your investments will have appreciated significantly.

Here’s an example of how this might work:

• Lets say I’m 30 years old and I have $2500/month in expenses. Multiply this by 12 and I get $30,000. Multiply 30k by 1.03^35 (since I want to retire at 65 and I’m 30 now) and the result is about $85,000. Now back out the amount you need by dividing by 5%*(1-30%) and the answer is $2,400,000.
• Thus, in the year 2045, my $2.4 million will generate $85,000 in after-tax income every year.

Frequently asked questions:

1. Should I Include Payments from Social Security? To answer a question with a question, are you feeling risky? If you honestly believe that Social Security will still be around, funded and viable when you retire, feel free…but it’s a risky proposition.
2. I can’t possibly save that much money by retirement. What assumptions are flexible? Your expenses and the rate of return during retirement are the two easiest variables to adjust for. Stop spending as much money and you are going to see how you need dramatically less to get by on. Also, if you are able to accept higher risk, you can keep more of your retirement fund in stocks which will increase your returns above 5% per year.
3. How can you possibly predict inflation rates? I can’t, but I can use historical rates to give an indication of what the future holds. Here’s a site which does the calculation.
4. Why should I live only off of interest when I retire? Why can’t I just use the notional savings that I’ve accrued? You can certainly do this, but like I said above, I take the conservative approach. Also, what happens when you live longer than you expected and run out of savings? Lastly, do you really not want to leave your family anything? That takes a certain amount of gumption.
5. I’ve got kids, a job, and other expenses now that I don’t expect to have when I’m retired. Should I still include these in my calculation? In theory, no, but you can expect your costs to increase in other areas, like health care, or more travelling. Just be careful when you start lopping off expenses.

Credit cards are 1 part genius, 2 parts evil. Credit card companies make their money in 2 ways:

1) They charge stores and merchants for the ability to even accept credit card payments in the first place- between 2% and 5% of every transaction goes through payment processors, payment gateways and the lending bank. Ever wonder why you can get “cash back” on a card? Your creditor is basically forcing the merchant to give you a discount. Clever, no?

2) They hope and pray that the consumer keeps a balance on their card. That way they can gouge you with 12% interest rates for the convenience of their loan. It’s about as close as you can get to a legal loan shark.

So why are you carrying a balance on your card? If you have the cash, pay it off now, and if you don’t have the cash, use every last dime you can afford to start paying it off. Avoiding paying 12% interest rates is the economic equivalent of making an investment that appreciates that same amount every year.  Credit card companies make it insanely easy to carry this balance, so don’t let them trap you.

In our last post, we covered exactly how much cash you should keep on hand. 6 months worth of expenses plus any additional known large cash outlays should do just the trick. One thing that wasn’t mentioned is that this assumes that your income is greater than your expenses.  If you are unemployed, or are spending more than you make, step one is to hoard as much cash as possible and step two is to rectify the situation.

Now, for those of you who are not in dire straits, its time to talk interest rates.

As of right now, interest rates on checking accounts, money markets and other short term accounts are hovering right around 0%. This means you’d almost be better off with a cash stuffed mattress.  That also means we should keep a bare minimum in these types of accounts.  Personally,  I have a checking account through Bank of America earning zilch and a Schwab Account which sweeps my free cash into a money market earning 0.1%.  The only reason I have any cash at all in Bank of America is because they’ve got ATM’s all over where I can deposit checks.   Thus, the money market functions as my true checking account, and I have 2 months worth of expenses there.

The remainder of your cash should be in a high interest bearing savings account. Your money will be less liquid than a checking account, but it will be maximizing your return in respect to risk.  As of right now, Ally Bank, American Express and HSBC Direct offer 1.5%, 1.5%, and 1.35% respectively.  Personally, I’ve gone with American Express, but make sure to investigate current rates whenever you decide to invest.

To summarize: 1/3 of your cash in low interest checking, and 2/3 of your cash in high yield savings.

The next step after establishing your emergency cash fund is to figure out where to put the rest of your money (stocks, bonds, CD’s, etc). We’ll get into that next.

A question that people often come across is how much cash to keep on hand (not literally on hand, obviously. Put it  in the bank).  The short answer is 6 months worth of expenses + the value of any large expected cash purchases within that time frame. If you spend $1000 a month and aren’t expecting to buy anything big, keep $6k in your bank account.

Wanna know why? Read on.

The only thing that your cash does for you is provide what’s called “liquidity“. It allows you to quickly and easily pay off any expenses without having to sell assets like stocks, bonds, CD’s, etc, and without incurring penalties or losses for doing so.  Don’t misunderstand here: liquidity is enormously important considering how risk free it is, but it’s extremely costly…you won’t earn hardly any interest. No interest means that inflation and other costs slowly eat away at its value like a tiny termite farm.

Thus, there is a delicate balance between minimizing risk and maximizing returns. That’s why your cash should be your “Emergency” fund.  It should be there to pay daily expenses but also allow for the “oh sh%t” moments in life: layoffs, cell phone fees for your 1-900 calls to television psychics, and other unknowns. Obviously, 6 months worth is fairly arbitrary, but it works well, especially in an economic climate of uncertainty.

The next step, once you’ve figured out how much to keep in cash, is where to put it. We’ll cover that next.