SMART Goals are well, smart!

In chapter 1 of the Personal Finance textbook we find the definition of a SMART goal.  The best goals are S-M-A-R-T in the sense that 

The more specific, measurable, action-oriented, realistic and time-sensitive your goals are, the more likely they will be realized during your lifetime.  For further explanation, please review the author's discussion about SMART goal setting in her text by clicking on this link.

Here is a flow chart for the process of setting a SMART goal:

For an example of how to apply a SMART plan to a real life example, please click on this link to access a spreadsheet that helps you calculate the cost of purchasing a big ticket item (such as a car).  

Net Worth and Net Income - 2 related but different guages of financial health

February 18, 2015

Hi Students,

Today our objective is to learn some of the differences between Net Worth and Net Income.  



One is more of a flow concept that should be monitored at least monthly, while the other is more of a big picture, frozen snapshot concept that should be reviewed at least once per year.   



BOTH are excellent ways to gauge your personal financial health.

To access today's presentation, please click on this link.

Personal Investing Reward to Risk Exercise

We continue our review of personal investing concepts.  Today, we will explore the reward-risk trade-off for various securities that can comprise an investment portfolio.

The trick is to find an optimal balance between risky investments and conservative investments to reach our long-term retirement goals.  You shouldn't have to stick out your neck too far to get 6-9% annual returns, as we shall see.  


To access the Excel spreadsheet with the scatter plot please click on this link.

To access the Word document with the scatter plot questions (12 in all) please click on this link. 

You can also access the Powerpoint presentation on investing by clicking on this link.

Mid-term Questions Study Guide

The WHAE Personal Finance Mid-term is comprised of 2 parts: 

Part 1 - 10 short-answer questions worth 7 points each

Part 2 - 1 Take-home essay question analyzing two hypothetical individuals' net income cash flows.   Parts 2A and 2B are worth 15 points each.  So the take-home part is worth 30 points out of 100.

Part 1 Short-answer questions deal with the following terms and topics (you should know the definitions of them all):

• the difference between wants and needs
• what is a budget?
• what are SMART goals
• what is the difference between  a short-term goal  and a long-term goal?
• what is the difference between net worth and net income?
• what is earned income?
•  what is inflation?
• what has been the average rate of inflation in America since 1926?
• be able to provide examples of good vs bad uses of credit (i.e. debt)
• what is the difference between fixed vs variable expenses?
• What is an emergency fund or rainy day fund? 

Understanding your pay-stub, W-4 and W-2 forms

In this lesson, our goal is to review W-4 and W-2 forms as well as the components of a typical pay-stub from an employer.

To access an instructional video, please click on this link.

Retirement Savings Planning & Investment Strategies

Saving for retirement requires the discipline to set aside at least 10% of your gross income on a monthly basis.  If this sounds challenging, now try to invest your money wisely.

How do you invest your money wisely??? 

This is not an easy question to answer.  If you talk to 50 investment advisors, they will offer different strategies - from the ultra-conservative to the ultra-aggressive.  Most fall somewhere in between.  But even the middle of the road advice I have found to be inaccurate, as far as maximizing reward to risk is concerned.  

The optimal investment strategy should try to maximize average annual investment returns while assuming the least amount of risk possible.  Period.  Amen.

In this Powerpoint presentation, I offer a solution for the average investor who doesn't want to have to bother with trading or tweaking the portfolio week in and out.  Equally important, I show you long-term investment results of the major investment asset classes: stocks, bonds, real estate and commodities.

I hope you apply these key concepts which will help you save for your retirement and meet your financial goals.  

What is Inflation? plus Tracking Cash Flows on a Monthly Basis

You've probably once heard your parents or grandparents say something to this effect: "When I was a kid, a gallon of gasoline costed us only 25 cents!  Look at prices now!"

And it's not just the price of gasoline, it's also food, movie tickets, concert tickets, home prices, land, etc.

Fact is, most countries in the world experience this price deterioration of their currency - otherwise called inflation.  How much the purchasing power of a currency deteriorates per year is the annual inflation rate.

Do you know what the average annual rate of inflation in America has been since 1926?

Why do we have inflation?  What steps can you take to combat inflation and thereby preserve your wealth?

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The next topic we will cover today is how to track personal income and expenses in order to ensure that we end up with positive cash flow.  

Let's have a look at a sample spreadsheet:

Let's enter in a hypothetical person's income and expenses (we'll have to estimate what they may be for the first 3 months of the year).  Try to be as realistic as possible.  Once we do this, we can then calculate estimated total monthly income and expenses, subtract expenses from income to get monthly net income.  Did we end up positive?  If so, we're generating a budget surplus; if not, we're in budget deficit.

We can also calculate what % of our total income we're spending on specific expense categories. This is important if we want to put constraints (i.e. to budget) our % allocations to each category.  Please refer to the Kiplinger's article that I distributed in class last week. 

Some key budget % allocation pointers to keep in mind:

•  No more than 25% of your total income should be allocated to housing (rent/mortgage)

• You should try to get rid of as much debt as you can as soon as possible (mortgage, student loans, auto loan, credit card debt)

• You should be saving at least 10% of your total income towards a retirement account like an IRA or a 401K plan. This is known as PYI - pay yourself first.

• Live frugally, not lavishly. There is really no need to impress others with your wealth.

• Track your spending habits closely from month to month.  There are many instructional books and videos that you can refer to on this subject. To do this, you should use a spreadsheet, a program like Mint.com, or even a basic envelope allocation system. 

 The percentage expense allocations should appear in the second column from the left on the cash flow spreadsheet provided above.

Also, remember to prioritize these expenses with a "W" for wants or "N" for needs in the third column from the left of the spreadsheet, and in the first column from the left put an "F" for fixed expenses, a "V" for variable expenses, or a "P" for period expenses.

You should submit this spreadsheet exercise by next week, October 29th.  Extra credit will be given if you can include an expense pie chart on the third tab of the spreadsheet.