financial planning 101 for early career psychologists · 20% 10% 0% –10% –20% –30% historical...

Financial Planning 101 for Financial Planning 101 for Early Career PsychologistsEarly Career PsychologistsCHRISTOPHER W. LOFTISSymposium Chair

MARCOS SALAZARSalaries & Debt load of Early Career Psychologists

JACK MCKAYStrategies/recommendations for financial solvency & success

GARY C. HAWLEYNational Health Service Corps and Loan Repayment Programs

TABITHA BROWNAPA Affinity products

Early Career Psychologists

Finances for Life

August 19, 2007

Early Career Psychologists

Finances for Life

August 19, 2007

Presentation Overview

Investments:Investments:Five Common MythsFive Common MythsTruths of InvestingTruths of Investing

Credit:Credit:Importance of good creditImportance of good creditMonitor your creditMonitor your creditKnow when to ask for helpKnow when to ask for help

Other important areas:Other important areas:Employer BenefitsEmployer BenefitsInsuranceInsuranceBank/Investment AccountsBank/Investment AccountsLoans/Credit Cards Loans/Credit Cards Financial Advice SourcesFinancial Advice Sources

Why Do You Want to Invest?Why Do You Want to Invest?

Home College Retirement Other goals

5 Myths and Truths of Investing5 Myths and Truths of Investing

““The recent bear market proves The recent bear market proves that stocks arenthat stocks aren’’t worth the risk.t worth the risk.””

““Over the long run, stocks have Over the long run, stocks have historically historically

outperformed other types of outperformed other types of investments.investments.””

Past performance does not guarantee future results.

TRUTH #1

MYTH #1

Myths and Truths of Myths and Truths of InvestingInvesting

Historical Performance of Historical Performance of StocksStocks

Source: Thomson Financial, 2007. The returns shown do not include taxes, fees, and other expenses. Past performance is no guarantee of future results. Individuals cannot invest directly in an index. Actual results will vary.

1987–2006

1/1/87

$93,106

1/31/97 12/31/06

$89,649$100,000

$80,000

$60,000

$40,000

$20,000

$0

Stocks (S&P 500)11.80% avg. annual return37.58% best year (1995)–22.10% worst year (2002)

$10,000 original investment

$49,547

Aug. 2000

Sep. 2002


““Bonds are for conservative Bonds are for conservative investors.investors.””

““Bonds can play a crucial role in anyBonds can play a crucial role in anyportfolio.portfolio.””

TRUTH #2

MYTH #2


U.S. Treasury Corporations Municipalities

Types of BondsTypes of Bonds

Historical Performance of Historical Performance of BondsBonds

Source: Thomson Financial, 2007.Past performance is no guarantee of future results.

1987–2006

1/1/87 1/31/97 12/31/06

$50,326$41,502$36,936

Municipal bonds6.75% avg. annual return17.16% best year–4.77% worst year

Treasury bonds7.38% avg. annual return22.80% best year–5.73% worst year

Corporate bonds8.42% avg. annual return27.20% best year–6.65% worst year

Stocks11.80% avg. annual return37.58% best year–22.10% worst year

$10,000 original investment $100,000

$80,000

$60,000

$40,000

$20,000

$0

$93,106


““If you invest for the long term, If you invest for the long term, you have nothing to worry about.you have nothing to worry about.””

““Even longEven long--term investors have to term investors have to consider inflation and taxes.consider inflation and taxes.””

TRUTH #3

MYTH #3


$37a month

33¢

$687a year

InflationInflation

4.5%

3.2%

3.1%

$50

41¢

$847

Cable TV

Postage stamp

Auto insurance

2000 2007 INFLATION

Sources: The Wall Street Journal, May 8, 2003; J.D. Power & Associates, 2004; Insurance Information Institute, 2004, 2006; U.S. Postal Service, 2006; The News & Observer, December 9, 2006; Future costs are estimates and assume that historical inflation rates remain constant. Actual results will vary.

Source: Tax Foundation, 2006

The top 25% are households with adjusted gross incomes over $60,041.

The top 25% of taxpayers pay85% of allfederal income taxes.

85%

TaTaxexess

Taxes Take a Toll on ReturnsTaxes Take a Toll on Returns

Figure It OutInvestment rate of return 8%

Tax rate 25%

After-tax yield 6%This hypothetical example is used for illustrative purposes only. Actual results will vary.

5 Myths and Truths of 5 Myths and Truths of InvestingInvestingMyths and Truths of Myths and Truths of InvestingInvesting

““Investing is too complicated. I Investing is too complicated. I dondon’’t t have time to think about it right have time to think about it right

now.now.””““Procrastination can cost Procrastination can cost money.money.””

TRUTH #4

MYTH #4

Starting Now Pays LaterStarting Now Pays LaterJim Susan

Investment ValueYear Investment Value

Assumes an 8% return in both accounts

This hypothetical example of mathematical compounding is used for illustrative purposes only. Taxes and investment costs are not considered. Rates of return will vary over time, particularly for long-term investments. Investments offering the potential for higher rates of return also involve a higher degree of investment risk. Actual results will vary.

123456789

10

$ 5,40011,23217,53124,33331,68034,21436,95139,90743,10046,548

$5,0005,0005,0005,0005,000

00000

$ 00000

5,0005,0005,0005,0005,000

$ 5,40011,23217,53124,33331,680

Contributions: $25,000Earnings: $ 6,680

Total value: $31,680

Contributions: $25,000Earnings: $21,548

Total value: $46,548

Aggressive growth funds

Growth funds

Income funds

Growth and income funds

Balanced funds

Tax-exempt funds

Specialized funds

Types of Mutual FundsTypes of Mutual Funds

5 Myths and Truths of 5 Myths and Truths of InvestingInvestingMyths and Truths of Myths and Truths of InvestingInvesting

““I can buy a book on investing I can buy a book on investing and do it myself.and do it myself.””

““Would you operate on yourself?Would you operate on yourself?””TRUTH #5

MYTH #5

1. Diversification

2. Asset allocation

The Benefit of Professional The Benefit of Professional GuidanceGuidance

DiversificationDiversificationInvesting in different Investing in different asset classesasset classes and and investment vehicles in an investment vehicles in an attempt toattempt to limit limit exposure to lossesexposure to losses in in any one sector of the market.any one sector of the market.

1 THE BENEFIT OF PROFESSIONAL GUIDANCE

1. Investment objectives

2. Time frame

3. Risk tolerance

Personalizing Your Personalizing Your Asset Allocation ModelAsset Allocation Model

THE BENEFIT OF PROFESSIONAL GUIDANCE

Stocks13.37% average annual return

Corporate bonds11.10% average annual return

T-bills5.49% averageannual return

50%40%30%20%10%0%

–10%–20%–30%

Historical Investment Historical Investment PerformancePerformance

Source: Thomson Financial, 2007. Past performance is no guarantee of future results. The returns shown do not include taxes, fees, and other expenses. Actual results will vary.

1982–2006

1982 1986 1990 1994 1998 2002 2006


Risk ToleranceRisk ToleranceGenerally, the more potential

for growthoffered by an

investment, themore riskit carries.


CreditCredit

Importance of good creditImportance of good credit

Monitor your creditMonitor your credit

Know when to ask for helpKnow when to ask for help

Importance of Good Credit

Credit impacts many things:Credit impacts many things:

EmploymentEmployment:: many employers have added a credit many employers have added a credit check to the hiring process; not meeting a certain check to the hiring process; not meeting a certain credit standard may prevent you from receiving a job credit standard may prevent you from receiving a job offer.offer.Loans/Credit CardsLoans/Credit Cards:: lending institutions base their lending institutions base their ““riskrisk”” partly on the credit worthiness of the borrower.partly on the credit worthiness of the borrower.Interest ratesInterest rates:: lending institutions base their lending institutions base their ““riskrisk””and set interest rates on the credit worthiness of the and set interest rates on the credit worthiness of the borrower. borrower.

Monitor Your Credit

By law, you are entitled to a free credit report from each of thBy law, you are entitled to a free credit report from each of the e three reporting agencies annually: Equifax, Experian and three reporting agencies annually: Equifax, Experian and TransUnionTransUnion..

To request a To request a freefree copy from all three agencies, go to copy from all three agencies, go to www.annualcreditreport.comwww.annualcreditreport.com. .

(Note: You can elect to pay a nominal one(Note: You can elect to pay a nominal one--time fee to get your FICO credit time fee to get your FICO credit score along with your free credit report if you want to see yourscore along with your free credit report if you want to see your numerical numerical rating on the scale ~300rating on the scale ~300--850; median is 720.) 850; median is 720.)

Many of the companyMany of the company’’s offering free credit reports are really s offering free credit reports are really offering a offering a ““serviceservice”” that results in a modest monthly charge that results in a modest monthly charge described only in the fine print of the offer. Just beware described only in the fine print of the offer. Just beware -- know know what you are getting and what you are paying for.what you are getting and what you are paying for.

Know When to Ask for Help

If you are having trouble making your payments on time, paying If you are having trouble making your payments on time, paying one card with another, or you have a significant change in life one card with another, or you have a significant change in life that impacts your income are just a few signsthat impacts your income are just a few signs……. .

Once you see the signs, donOnce you see the signs, don’’t wait until the problem gets t wait until the problem gets bigger to ask for help.bigger to ask for help.

Here are some solutions to consider when you reach this point:Here are some solutions to consider when you reach this point:Negotiate w/Credit Card CompaniesNegotiate w/Credit Card Companies (to reduce interest rate/change due date)(to reduce interest rate/change due date)

Negotiate w/Vendors Negotiate w/Vendors (to extend payment terms)(to extend payment terms)

Employer Assistance ProgramsEmployer Assistance ProgramsConsumer Credit Counseling Service Consumer Credit Counseling Service

The “FICO Score Scale” site on Google has a wealth of information.

Other important areasOther important areas

Employer BenefitsEmployer Benefits

InsuranceInsurance

Bank/Investment AccountsBank/Investment Accounts

Loans/Credit Cards Loans/Credit Cards

Financial Advice SourcesFinancial Advice Sources

Employer Benefits

Retirement MatchRetirement Match –– if offered, you must take advantage if offered, you must take advantage of this benefit; declining, is the equivalent of turning down of this benefit; declining, is the equivalent of turning down a raise.a raise.Health InsuranceHealth Insurance –– nonnon--optional; some employers have optional; some employers have only one choice others have multiple each with differing only one choice others have multiple each with differing cost structures.cost structures.Flexible Spending Accounts (Flexible Spending Accounts (FSAFSA’’ss)) –– prepre--tax accounts tax accounts that will yield tax savings on medical and child care that will yield tax savings on medical and child care expenses.expenses.Direct DepositDirect Deposit –– elect to have your pay direct deposited elect to have your pay direct deposited into your bank account; you can also elect to divert a into your bank account; you can also elect to divert a portion of your salary to other accounts (credit union, portion of your salary to other accounts (credit union, savings account, stock account, etc.) which is a way to savings account, stock account, etc.) which is a way to ““pay yourself firstpay yourself first”” –– if you donif you don’’t see the money, you wont see the money, you won’’t t spend the money.spend the money.Lif ILif I l ff b i l l fl ff b i l l f

Life Insurance

Insurance can be a confusing area for Insurance can be a confusing area for individuals. Once you have ongoing individuals. Once you have ongoing responsibilities (dependents, homes), you begin responsibilities (dependents, homes), you begin to have a need for life insurance. to have a need for life insurance.

Annual renewable term life insurance is the best Annual renewable term life insurance is the best for most situations. for most situations. Blending life insurance with a Blending life insurance with a savings plan is not always the most cost efficientsavings plan is not always the most cost efficient..

Bank/Investment Accounts

Be sure that your funds are invested and working for you at Be sure that your funds are invested and working for you at all times all times Direct deposit may entitle you to a number of free banking Direct deposit may entitle you to a number of free banking servicesservicesArrange for overdraft protection (one way to achieve this is Arrange for overdraft protection (one way to achieve this is by linking your checking account to a savings account)by linking your checking account to a savings account)It is important to monitor/reconcile your accounts regularly; It is important to monitor/reconcile your accounts regularly; ask questions if you donask questions if you don’’t understand somethingt understand somethingIf you use a money manager, be sure to arrange for an If you use a money manager, be sure to arrange for an asset based fee rather than a per transaction feeasset based fee rather than a per transaction fee

Loans/Credit Cards

It is important to make your payments on timeIt is important to make your payments on timeMaking your payments twice a month can Making your payments twice a month can greatly reduce your interest payments over the greatly reduce your interest payments over the term of a home loanterm of a home loanBe cautious of interest only loans because you Be cautious of interest only loans because you will be paying interest only forever and never will be paying interest only forever and never reducing principalreducing principalFloating interest rates can also represent a risk Floating interest rates can also represent a risk depending on the condition of the market at the depending on the condition of the market at the timetimeDonDon’’t be surprised when a low introductory t be surprised when a low introductory credit card rate sky rockets several months latercredit card rate sky rockets several months later

Financial Advice Sources

Certified Financial PlannerCertified Financial Planner’’s (CFP) are trained to s (CFP) are trained to assist individuals with incomes at all levels to plan assist individuals with incomes at all levels to plan for their financial future. They are specifically for their financial future. They are specifically trained in the following areas:trained in the following areas:

-- General principles of financial planning General principles of financial planning -- Insurance planning Insurance planning -- Employee benefits planning Employee benefits planning -- Investment planning Investment planning -- Income tax planning Income tax planning -- Retirement planning Retirement planning -- Estate planning Estate planning

You can find names of You can find names of CFPCFP’’ss onon--line; then it is up line; then it is up to you to interview several to locate one that you to you to interview several to locate one that you “ ” i h O i l i h

financial planning 101 for early career psychologists · 20% 10% 0% –10% –20% –30% historical...

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