For the first TMWYK, Sneha covered an overview of personal finance basics, explained important terminology and concepts, and introduced topics within finance which will be discussed throughout the series. It’s a lot of information, but hopefully you can quickly scroll through and pick out the sections you’re interested in for a brief overview. This information is shared to introduce you to and help you understand the concepts of finance. Please consult your CPA or financial advisor for advice regarding your specific financial situation, and for the latest rules and information.

Led by:  Sneha

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Budget/Savings Planning:
1. Know your fixed expenses vs income: know where your paycheck is going
a. Have a system:
– spreadsheet
– mint.com
– use credit or debit card that will track and categorize your expenses
b. Checking:
– Don’t stick all your money into your checking account and lose track
– If you have autopayments, be sure to check your monthly statements regularly for errors, unauthorized purchases, price hikes, etc
c. Divide your expenses into percentage of income:
– less than/= 25% Mortgage
– 25% Recurring/fixed expenses (car, student loan, cable, phone), Variable (utilities), or Unexpected expenses (illness, car or home repairs)
– greater than/= 25% Savings/Investment/Retirement (if able after expenses)
– less than/= 25% Spending (if able after expenses & saving)

2. Determine the percentage of money you want to spend and how
a. Know where you want to spend your money, don’t spend money you don’t have or waste it on things you don’t care about
b. Set aside money for savings, short term goals, long term goals, etc
c. Set your goals
– Short term: 5 years, always changes based on life stages (new car, vacation, wedding, etc)
– Long term: retirement
– Revisit your goals regularly and adjust based on life/financial situation changes

Credit/Debt Planning:
Understanding when to borrow funds to make your purchases, analyzing the market interest rates.

1. Understanding compounding interest:
a. You pay interest on the interest, not just on the initial loan amount (principal)
b. Example: if you borrow $100 at 10% interest/year
– after 1 year, you owe $100 + 10% of $100 = $110
– after 2 years, you owe $110 + 10% of $110 = $121
c. APR = the actual rate you end up paying and is higher than the advertised interest rate (compounded monthly)
d. For more information on compounding interest, KhanAcademy.org has some great short videos to explain it:
https://www.khanacademy.org/economics-finance-domain/core-finance/interest-tutorial

2. Credit cards:
a. Use one that gets you the most bang for your buck
– On average, should be able to get approximately 2% back either through cash-back program or miles/points
b. Pay off higher interest rate cards first
c. Pay more than the minimum payment (ideally the full amount due) rather than just the minimum. You will end up paying a ton more money just on the interest otherwise.
d. Example of importance to pay off debt: $1000 purchase with minimum pay off of 1.5% each month with 15% interest leads to total payments $2,163.43 over 144 months. You’re paying more than double what it was actually worth!

3. Car financing:
a. Avoid financing a car if possible because you will be paying interest on something that immediately depreciates in value
b. Financing can be worthwhile if you get 0% interest or low rate such as 1% because that is essentially free money
– Using a free loan to finance your car payments can free up your savings money to pay off more expensive loans or invest and get a greater % return
c. Leasing your car can be a good option if you have a business and can expense the payments for greater savings

4. Home:
a. Tax benefits when paying mortgage
b. Fixed mortgage vs ARM:
– Fixed: same payment monthly, best rates are for 30 year fixed
– ARM: adjustable rate that depends on the market rate, good for shorter term. Usually is fixed for 5 or 7 years, then changes yearly afterwards (5/1 ARM or 7/1 ARM). Usually has a limit to how much rate can go up per year and overall rate limit (but still high, usually approx 12%)
c. Refinancing: if interest rates drop, could be worth the cost of refinancing to reduce your rate and payments
d. Rate renewals: less commonly available, but is cheaper than refinancing. Option to change your rate during fixed period if market interest rate drops

5. Education:
a. Tax benefits when paying student loans
b. Worth borrowing if low rates

6. Home Equity Loan vs Home Equity Line of Credit (HELOC)
a. Borrowing money against your house, essentially a second mortgage: If lower rate than your other loans, worth borrowing the money so you can free up your money to pay off higher rate loans
b. Home equity loan: borrow a lump sum, pay off fixed amount each month for a predetermined time period
c. HELOC: more like a credit card in that you draw what you need as you need it (up to predetermined limit) and pay back minimum amount (but can pay more at a time), eventually need to pay back full loan + interest owed. May be easier to obtain.

7. Resources:
a. nerdwallet.com – site that helps you to compare credit cards, bank accounts, mortgages, etc to find best deals
b. I Will Teach You to be Rich by Ramit Sethi and blog website of same name

Tax Planning:
1. If it’s just you and your job, easy to do taxes yourself.
a. TurboTax and other similar resources

2. Important to have good CPA or financial tax advisor once you have assets, investments, etc
a. Taxes are single largest expense in a household
b. It’s complex: Two ppl can make the same amount but pay two different amounts in taxes
– They are up to date on latest details and laws
– Can help you find how to reduce your tax liability in legal way
– Can be worth the few hundred they charge if they can save you more

Insurance Planning:
1. Assessing your risk to protect assets

2. Types include Life, disability and long-term health care insurance
a. Disability may be offered by your job, but depending on your occupation, may be worth getting supplemental because standard coverage may not pay well
b. Long-term health insurance is cheaper if you pay for it sooner rather than later

3. May not be FDIC insured like banks

Investment Planning:
1. Understanding where to invest your money depending on your situation

2. Types of investments: stocks, options, mutual funds, bonds, CDs, money market accounts, Treasury stocks and bonds

3. Understand risk vs return

4. Rule of 72: how long it takes to double income
a. Divide 72 by percent rate to get # years
– example: rate is 10%/year, investment of 50K will double in 7.2 years (72÷10)
– example: want to invest 50K and double it in 5 years, need to find an investment option that gives at least 14.5%/year (72/rate=5 years so 72÷5=rate = 14.4%)

5. Resources:
a. Investopedia.com
b. YahooFinance
c. Google Stock screener: find long-term fundamentals to calculate ROIC

College/Health Savings Plans:
1. Education savings plans: 529 plan
a. 529 Plan is an education savings plan operated by a state or educational institution designed to help families set aside funds for future college costs
b. Typically each state’s plans invest in mutual funds
– Only drawback is cannot pick how the money is invested
– Compare the type of investment each state has to offer before choosing
– Grows tax-free and no taxes paid when used for educational purposes
– Only 10% penalty to remove prematurely or for non-educational purpose
c. Rolls over from child to another if unused
– Contributions count as gifts limit of $14k annual per individual

2. Health Savings Plans:
a. FSA (flexible spending account)
– Pretax money (good for tax savings)
– Maximum contribution of $2,500 a year
– Funds don’t roll over if unused. They get absorbed back into your company’s fund if unused
– Very strict and need to submit all documentation
– Can use with any deductible plans
– Greater risk option for employer and for employee
b. HSA (health savings account)
– Pretax money (good for tax savings)
– High deductible of $1,250 as an individual or $2,500 for a family
– An individual can contribute up to $3,300 a year, while a family can give a maximum of $6,550
– Funds rollover
– If not offered through your job company can set up as an account with a bank
– Can be used for medical, dental, surgical, pharmacy
c. There’s a 20% penalty for using HSA or FSA funds for non-qualified expenses)
d. Savings accounts for dependent care: child or elderly parent
– Pretax (good for tax savings)
– Limit is approx $5000
– Can be used for aftercare, health, etc

Retirement Planning:
10% penalty to liquidate retirement accounts early

1. IRAs traditional
a. Contributions are often tax-deductible
b. Limit $5.5k
c. Taxed on back end

2. Roth IRA
a. Contributions are made with after-tax assets
b. Grows tax free and removed tax free if not prematurely
c. Can’t make more than $127,000 if you’re a single filer or $188,000 if you’re filing jointly

3. ROTH rollover:
a. Last couple of years, taxpayers at any income level can convert traditional IRA to roth IRA
– Pay the tax on the amount of any untaxed amounts in traditional IRA, but since Roth IRA income is tax-free, it might be worth paying tax now to save more later.
– Contribution limit $5500
b. Rollover IRA or 401K from previous companies
– Easier to manage
– More investment options

4. 401k/403b
a. Company sponsored
b. Contribute up to what the company will match, contribute the the rest into a roth account
– Fewer investment options in 401K than IRA and you don’t get to manage. IRA = more flexible investing
– Harder to access the money in 401K than IRA
c. 403b is a government sponsored, retirement account offered by public schools and certain tax-exempt organizations to their employees

5. SEP (Self-employed Plan)
a. Typically a small business or self-employed individual to provide or match contributions
b. Like IRA but under company name

6. Social Security
a. Approx 14% of income: 7% employer and 7% employee
b. Don’t bet on it to support your retirement. Low return and not reliable as a source of income with retirement.

7. Understand how you get paid, how company contributions are set up
a. Company contributions may be vested over several years instead of up front
– Example: only 20% of contribution available after first year, 40% after second year…100% after 5 years
– May be worth sticking around a job if amount vested is significantly increased after another year.
b. 1099 vs payroll employee
– As an employee, your company pays a certain % of payroll taxes on your behalf (not taken out of your salary) so you pay less overall
– With 1099, you’re getting paid as a consultant. You pay all payroll taxes
– No additional benefits with 1099: 401K, insurance, etc
– Payroll taxes include: FUTA (federal unemployment tax act), SUTA (state unemployment tax act), FICA (Social security, Medicare)

Estate Planning:
1. When you pass away, you don’t want the government to decide how your assets will be divided and sold

2. Beyond certain limits ($5 million), an estate tax (“death tax”) applies to your kids (40% tax).
a. It is double taxation, your post-tax assets are taxed again when left to your kids.
b. Your kids have a short time (1 year) to come up with the cash to pay the taxes on your assets (cash or otherwise) you gifted them. May leave your kids with only a very small portion of what you left them. Or they may even have to sell your home at low value to come up with the cash so they don’t even get the home!

3. Talk to your lawyer and accountant to find out how best to manage and plan. You want to ensure the proper beneficiary receives the assets and to limit the liability you pass on.
a. Gift 14k/yr, 5 mil total and estate tax 40%
b. Wills
c. Title set ups
d. Value is determined by current fair market value

4. Generation skipping tax: no longer available
a. For assets valuing > 2 million, kids were taxed 40% but grandkids were not taxed
b. If it ever comes back, would be a great way to manage your estate!

More Resources:
1. Some popular Finance websites: Yahoo Finance, Investopedia, CNN Money, MSN Money Central, Google Stock Screener.
2. https://www.khanacademy.org/economics-finance-domain/core-finance
3. I Will Teach You to be Rich by Ramit Sethi (book and website of same name)
4. www.nerdwallet.com