"You have to acknowledge and accept the fact that you can't have or be everything all at the same time."
~ Teri Hatcher, as quoted in "Career Comeback: Repackage Yourself to Get the Job You Want," Lisa Johnson Mandell
Gentle Readers, you know how I am: If I find something that I think will help someone, I feel compelled to share it. Well, these past few days, I've been treated to -- no, blessed with -- some real words of wisdom that have not only lifted me, but freed me. Perhaps they'll do the same for you.
First are words of wisdom from my second-oldest sister (SOS). Before I begin, let me tell you the value of having older sisters around when your mother is deceased. Older sisters are like vaults of your late mom's wisdom, if for no other reason, because they knew your mom longer than you did and have more of her wisdom. When I'm feeling down or blue, I love talking to my sisters -- all of my sisters are older than me -- because they'll just say something that my mom would have said to me if she were here that snaps me out of my situation and gives me a better perspective. I'm so glad I was blessed in the birth order department, even if I didn't get the smokin' hot legs SOS got.
I was telling SOS how I felt tired and depleted after hosting a family meeting recently as part of my family's revolution. We've finished all the education modules, and now we're discussing a book recommended by one of my BFFs, "The On-Purpose Person: Making Your Life Make Sense," by Kevin W. McCarthy. SOS essentially gave my a spiritual b-slap with words to this effect: Stop trying to be everything to everybody. She counseled me that, as much as I have hopes and dreams for the younger folks in my family, people have to come into their own on their own and in their own time. SOS told me that holding family meetings and trying to create a sense of family and support that others clearly don't want as much as I want for them -- as evidenced by their absence -- is a waste of time. "They're not there yet, " SOS counseled, and they will get there, if they do, on their schedule, not mine.
BOOM! Talk about a revelation! Now I don't feel so bad about reclaiming my one Saturday a month for my book club and delegating the hosting and organizing of family meetings to others, to the extent that they want to keep the meetings going. They're not there yet.
I was also blessed with words of wisdom from one of my book club members, Joann, who turned 70 last week and doesn't look a day over 45. God has been good to Joann. That's not to say she hasn't had her struggles -- who hasn't?-- but she looks good and has a happy spirit. When I asked Joann for words of wisdom to reach the age of 70 looking and feeling like she does, she gave me these words of wisdom someone imparted upon her:
1) Find a church;
2) Keep a job;
3) Rest.
Of these three, she said the most important was getting enough rest.
Well, if you're looking for a church, or a house of worship of any faith, my soror Pamay Bassey has done the search work for you. Her book, "My 52 Weeks of Worship: Lessons from a Global, Spiritual, Interfaith Journey," chronicles her visits to a different house of worship each week for a year. I have to admit -- Black Man Not Blogging (BMNB) is happily ensconced in the Baptist church, and I've not followed. I used to think that, as a married couple, we should endeavor to share the same faith for the sake of our kids (yes, we're moving along with our adoption plans.) As I get older, I'm not so sure. My dad is a member of the Apostolic church, an offshoot of the Church of God in Christ, while my mother's family has been in the African Methodist Episcopal church for decades (although I have a distant cousin who attends the same church as my husband.). My parents seemed to have reached a religious detente during their marriage. To be frank, I haven't even begun the search for a church, happily not worshipping at St. Mattress of the Springs in my bedroom on Sunday mornings. I'm letting go of the idea that BMNB and I need to share the same faith. I need to find my own spiritual path, even if it's different than his. Pamay's book is a good place to start.
As for keeping a job, I've done that, but I want more than a job: I want a calling. That leads me to some words of wisdom imparted upon me by a former law teaching colleague who, like Joann, has been blessed with fabulous genes (she doesn't look a day over 40 and she's in her 60's), and an even more fabulous spirit. I told her how frustrated I am about continuing in the practice of law when I feel I have other skills and talents I want to use, but I just don't know how. First, she encouraged me to just keep writing. Then she said these words of wisdom: "Be patient. Keep searching for your calling. When you find it, you will know." Patience has never been my strong suit, but I'd rather be patient and get what I want than be impatient and settle for something less.
Finally, SOS gave me some words of wisdom specifically for married women: "Don't get lost in your marriage." She cops to having done so in her marriage, which ended in divorce. "If you get all lost in your marriage, make that man your entire world, and stop keeping in touch with your family and friends, what will you have if he leaves you? Who will you have to talk to?" I wouldn't say that I'm lost in my marriage (and perhaps I'm in denial on this one), but I am abysmal at keeping in touch with people who have been there for me. In fact, I owe more than a few family members and friends some phone calls right now.
Perhaps I need to heed my own words of wisdom.
I hope these words of wisdom bless you as much as they have blessed me, Gentle Readers. Thanks for continuing to read and support my little postage stamp of the blogosphere.
BWB
Showing posts with label My family's revolution. Show all posts
Showing posts with label My family's revolution. Show all posts
My Family's Revolution: Home Ownership
Well, my family's revolution has come to an end. And a beginning, of sorts. We've discussed family mission statements, credit, budgets, sou-sous, gentle nudges, financial literacy, estate planning and career planning, and entrepreneurship. The last two modules of our series of talks, titled, "Something to Think About," were to address home ownership and educating our children.
While we were cruising our way toward finishing up the modules on home ownership and educating our kids, real life got in the way. A revered elder was stricken with cancer but has not only survived, but thrived with chemo. Another family member faced a life-threatening illness but continues to fight back. God is good, all the time.
Needless to say, we all got a little distracted, and family meetings had to be postponed. We finally finished in August, and I'm going to devote separate blog entries to the home ownership module and the education module. This one is for home ownership.
First things first: Despite the housing market meltdown, I'm still a believer in home ownership. Why?
Because a home is usually the largest asset in the average American's portfolio, and most of us aren't savvy enough to make money off of stocks, bonds, and other investments alone.
Because of the mortgage interest deduction, for however long it lasts. For the life of me I can't understand paying rent for your entire life, getting a paltry renter's credit, if at all, and having nothing to show for all the rent you paid when you retire. I just don't get it.
Because home ownership, done properly, creates stability in your family. I've been on the poopy end of the rental stick, having been given 60 days' notice to move out of our rental solely because the landlord wanted to move back in. As long as I pay my mortgage, I have a place to stay that can't be taken away from me at someone else's whim. This is especially important when you have children.
Mind you, even if you pay off your home, you're not going to make a lot off of it in the long run unless there's another real estate bubble. That said, it is an asset that you can control and, to a certain extent, borrow against for large future expenses should you so choose, which I would not.
Because once you pay it off, you can hand it down to your children. A house is the biggest intergenerational wealth transfer for most average Americans. The ability to hand a house down to your children can, if done wisely, help them to maintain a middle-class lifestyle. Because we African Americans tend to have lower home ownership rates than whites, we tend to hand down less wealth to our children. However, home ownership rates for southern African Americans have usually been higher than for African Americans in other parts of the country.
I did not present the module on home ownership. Mary Assadi, an extraordinary realtor with Keller Williams and a friend of Black Man Not Blogging (BMNB), did. Mary outlined the basic home buying process and help us understand the different kinds of real estate loans you can get. More on that later.
What I did provide was a list of all the things BMNB and I did right and wrong in buying our home. They are:
Resources
Mary Assadi http://maryassadi.com/
Eric Tyson and Ray Brown, "Home Buying Kit for Dummies "
While we were cruising our way toward finishing up the modules on home ownership and educating our kids, real life got in the way. A revered elder was stricken with cancer but has not only survived, but thrived with chemo. Another family member faced a life-threatening illness but continues to fight back. God is good, all the time.
Needless to say, we all got a little distracted, and family meetings had to be postponed. We finally finished in August, and I'm going to devote separate blog entries to the home ownership module and the education module. This one is for home ownership.
First things first: Despite the housing market meltdown, I'm still a believer in home ownership. Why?
Because a home is usually the largest asset in the average American's portfolio, and most of us aren't savvy enough to make money off of stocks, bonds, and other investments alone.
Because of the mortgage interest deduction, for however long it lasts. For the life of me I can't understand paying rent for your entire life, getting a paltry renter's credit, if at all, and having nothing to show for all the rent you paid when you retire. I just don't get it.
Because home ownership, done properly, creates stability in your family. I've been on the poopy end of the rental stick, having been given 60 days' notice to move out of our rental solely because the landlord wanted to move back in. As long as I pay my mortgage, I have a place to stay that can't be taken away from me at someone else's whim. This is especially important when you have children.
Mind you, even if you pay off your home, you're not going to make a lot off of it in the long run unless there's another real estate bubble. That said, it is an asset that you can control and, to a certain extent, borrow against for large future expenses should you so choose, which I would not.
Because once you pay it off, you can hand it down to your children. A house is the biggest intergenerational wealth transfer for most average Americans. The ability to hand a house down to your children can, if done wisely, help them to maintain a middle-class lifestyle. Because we African Americans tend to have lower home ownership rates than whites, we tend to hand down less wealth to our children. However, home ownership rates for southern African Americans have usually been higher than for African Americans in other parts of the country.
I did not present the module on home ownership. Mary Assadi, an extraordinary realtor with Keller Williams and a friend of Black Man Not Blogging (BMNB), did. Mary outlined the basic home buying process and help us understand the different kinds of real estate loans you can get. More on that later.
What I did provide was a list of all the things BMNB and I did right and wrong in buying our home. They are:
1.
Not checking out our realtor. We used our realtor (who was not Mary -- we didn't know Mary was a realtor when we bought) because his mother had
name recognition and expertise in our real estate market. Although we did have access to her through
him, we should have found someone who was more experienced and who listened
more to what we wanted.
2.
Not seeking a mortgage through an independent
mortgage broker. We got our mortgage through Wells Fargo because
1) they did FHA loans; 2) they did CalPERS loans; and 3) BMNB banked with them
(my credit union did not do CalPERS loans). An independent mortgage broker has access to
a variety of loan products; a bank will only sell you what they have to offer,
and they probably won’t keep your loan in their portfolio. In our case, Wells Fargo eventually sold our
loan to Citibank, who later sold it to another bank.
3.
Not being clear on how much we wanted to spend. I wanted to spend more, BMNB wanted to spend
less. The realtor agreed with me, for
obvious reasons. BMNB had to set him
straight. It wasn't pretty.
4.
Buying a home in a new and incomplete neighborhood. We were lured to our relatively new
neighborhood by signs saying “School coming soon” and “Park coming soon.” Well, soon never came, and neither did the
school and the parks. Both the school
district and the city ran out of money.
Never buy in a new neighborhood that isn’t completely built out.
5.
Not checking out the finances of the school district
and the city. We should have never believed the parks and
schools signs and should have read the financial reports for both the city and
the school district to see if they really did have the money to finish the
parks and the schools. They didn't.
6.
Not double-checking the amount that needed to be impounded
for taxes. When you don't put down at least 20% for your house, your lender will require you to pay money in addition to your mortgage each month to cover the twice annual property tax bill, private mortgage insurance bill, and homeowner insurance bill. This additional money is held by the lender, or "impounded," until these bills become due, and the lender pays them. The bank got the amount of our monthly impound wrong, and we had to
play catch-up to pay back the amounts that weren’t impounded.
7.
Not checking on whether the neighbors next door were
renters. Not that all renters are bad – we were
renters, too. When you buy, however, you
don’t want to live next door to a rental house because you never know who your
neighbors are going to be for the long haul.
We specifically asked our realtor to check on this but he didn’t, and we
didn’t follow up. Our next-door
neighbors to the north are renters.
8.
Not checking on future development plans for nearby
neighborhoods. We didn’t know that a new neighborhood was
slated to be constructed near our neighborhood.
The school district doesn’t have the money to build additional schools,
and our neighborhood school is crowded as it is. When the new neighborhood comes on board, our
neighborhood school will be overcrowded and the streets may be gridlocked with
morning commuters.
9.
Not negotiating to have all or part of our
Mello-Roos bond paid. A Mello-Roos bond is a bond that all buyers
of new houses in California are responsible for paying to pay for the neighborhood
infrastructure such as sewers, lighting, etc.
They run from twenty to forty years.
You can negotiate to have the seller pay part or the entire Mello-Roos bond
or to lower the price of the home to compensate for the price of the Mello-Roos
bond. Buyers don’t like to buy houses
with huge Mello-Roos bonds, which will ultimately make our house harder to sell. Yep, we're pretty much sitting on rental property. Thanks, Henry Mello and Mike Roos.
10.
Not checking on where the local utilities are
located in relation to our house.
We knew that the railroad tracks were two blocks behind our home. What we didn’t know was that there’s a
petroleum gas line that runs right alongside the railroad tracks. Think San Bruno.
Here
are the successes BMNB and I had in buying our home:
1.
Using our own inspector. We wanted an inspector who didn’t have an
interest in the outcome, such as someone who was referred to us by our realtor.
2.
Checking out future freeway plans for the
neighborhood. We knew that a freeway bypass was slated to
come through our neighborhood, but we went to the CalTrans office to make sure
the bypass wasn’t going to be too close to our house.
3.
Buying a home that will suit us for the next ten
years. BMNB and I knew we planned to adopt, so we
wanted a home that would be big enough for the family we planned to have, not
the family we had.
4.
Getting a CalPERS loan. CalPERS no longer does home loans, but one of
the requirements of the loan program was to keep fees low.
5.
Buying in a neighborhood with a Home Owners
Association (HOA). A lot of people don’t like living in
neighborhoods with HOA’s because they don’t like all the rules. We like the rules because the rules keep your
neighbors from doing things to their property that brings down the value of
yours, e.g., painting their houses hot pink or parking their cars on the front
yard. It works for us, but it may not be
for everybody.
6.
Buying a foreclosure. Relatively speaking, we got a good deal. The down side? The house continued to lose value. That’s why we had to make sure it was
someplace we’d be happy to stay in for a while.
7.
Checking out the neighborhood at all times of the
day and night before buying. BMNB and I
made trips to our neighborhood during all hours of the day and night to get an idea of
what the neighborhood was really like – the sights and sounds during all hours
of the day – and to see how we would be received.
8.
Buying a house that suited our life style. BMNB and I are homebodies who like suburban
life. We like living someplace that is
quiet, safe, family-oriented, and away from congested cities. We chose our neighborhood because it was
affordable, safe, quiet and family-oriented.
Think about your own lifestyle – e.g., whether you are an urbanite who
likes to walk to the grocery store and ride your bike to work – before you buy
your house.
9. Getting a fixed rate loan. We got an FHA (Federal Housing Administration) 30 year fixed loan, which means that our monthly mortgage payments will be the same for the entire 30 years of the loan. No adjustable rates, no balloon payments, no interest-only loans.
9. Getting a fixed rate loan. We got an FHA (Federal Housing Administration) 30 year fixed loan, which means that our monthly mortgage payments will be the same for the entire 30 years of the loan. No adjustable rates, no balloon payments, no interest-only loans.
Here is A VERY BASIC GUIDE to home buying process as laid out by Mary Assadi with notes added by me. You should definitely consult a realtor and learn more about the process:
1. Initial consultation and market education: This is where you meet with your realtor to discuss what you're looking for and for your realtor to educate you about the real estate market you'll be dealing with. A good realtor tries to find out what you want and what your lifestyle is and then tries to find houses to fit you, not the other way around. And no good realtor should try to talk you into a house you cannot afford. (The old rule of thumb I'd always heard was that your home should not cost more than 2-3 times your gross annual income, but that may not always apply.)
2. Loan prequalification or preapproval: Prequalification is when your banker or mortgage broker reviews your credit, income and assets and determines how large a mortgage they think you would qualify for. Preapproval is when the banker or mortgage broker actually commits to you that you are approved for a certain amount of a mortgage. I would highly suggested getting preapproved instead of prequalified so you don't waste the realtor's time. With preapproval, you can lock in a mortgage rate for a certain number of days to allow you to find a home.
3. Viewing property.
4. Finding a home and submitting an offer. This is where you need to engage and trust your realtor. There can be some strategy to submitting an offer, especially if you are competing with other buyers. Your realtor's experience will be crucial to helping you put in an offer that stands out from all the others.
5. Negotiating terms. Your seller may reject your offer and provide a counteroffer. Negotiating the terms of the offer is an area of expertise for your realtor.
6. Accepted Offer! Yay! Now, the transaction enters three separate tracks that lead to closing, e.g., when you sign the loan documents.
a. Inspections, disclosures, and contingencies:
i. Schedule home inspection and review seller's disclosures of defects or things that need repair.
ii. Have home inspection and, if necessary, request that the seller make repairs before the transaction can go forward.
iii. Remove contingencies, e.g., conditions that need to be met in order for the buyer and/or seller to agree to the sale, such as requests for repair.
b. Escrow and Title
i. Open an escrow account and have earnest money deposited. An escrow account is an account controlled by a neutral third party, typically an escrow or title company, into which money for the sale of the house is deposited and held until all the contingencies are met. Earnest money is money you pay to show that you are serious about the transaction, and it is credited against the total price of the house.
ii. Get a preliminary title report and homeowners insurance information. A title report shows all the times the house has been sold and who bought it. It helps you know that the person who is selling you the house actually owns it. The title report will also reveal if there are any liens against the property. You will want all liens to be paid before closing.
c. Loan application
i. Submit a formal loan application and collect documentation for the loan. You will need bank statements, income tax returns, and all kinds of documents in order to qualify for a mortgage.
ii. Order appraisal; loan package submitted to underwriter. The bank will order an appraisal of the house to make sure it's worth what you're paying for it and worth the mortgage they're going to give you for it. Your loan application, once completed with all the proper documentation, will be sent by your banker or mortgage broker to their underwriting department, who will determine whether you qualify for the loan or if they have additional questions you need to answer in order to get the loan.
iii. Loan approval and responding to conditions: Your mortgage loan may be approved, but with conditions, e.g., explaining where you got your earnest money from, explaining things on your credit report. Once your respond to the underwriter's conditions in a way that satisfies the underwriter, you get your mortgage loan.
7. Sign loan documents at title company and provide a cashier's check for the required closing funds, also called "closing." Your closing costs may include fees related to the cost of escrow, the title search, the inspection, etc. You should get a Good Faith Estimate (GFE) in advance of signing the loan documents so you know how much of your own money you need to have in cashier's check at the time.
8. Lender funds the loan. Once you've signed all the loan documents and paid all the closing costs, the lender pays the amount of the mortgage loan to the buyer.
9. Title is recorded in your name and confirmation is received. Once the lender funds the loan, ownership, or "title," passes from the seller to the buyer by recording "title" with the county assessor. Once title is recorded, the house is officially yours.
10. GET THE KEYS TO YOUR NEW HOME!
Here are some examples of types of mortgage loan programs, courtesy of Mary Assadi:
Conventional Loans
- 20% down payment (no mortgage insurance)
- 3-5% down payment (mortgage insurance w/lower debt to income ratio)
- 3.875 interest rate (as of 5/4/12) for a 30-year fixed
- 3.00% interest rate (as of 5/4/12) for a 15-year fixed
- Impounds optional
- 3.5% down payment (up front and monthly mortgage insurance)
- 3.75% interest rate (as of 5/4/12) for a 30-year fixed.
- Impounds required
- 1 % down payment (upfront and monthly mortgage insurance)
- 3% down payment by CALHFA is a silent second mortgage on home (due upon sale with simple interest)
- Higher credit scores required
- Same interest rate on FHA loan for the first mortgage
- 3% down payment without mortgage insurance
- Only available on Fannie Mae foreclosure properties
- Interest rate usually 1 - 1.5% higher than available FHA rate
Resources
Mary Assadi http://maryassadi.com/
Eric Tyson and Ray Brown, "Home Buying Kit for Dummies "
My Family's Revolution: Financial Literacy and The Department of Gentle Nudges
"I'm just trying to be a light."
~ Tammy Faye Messner
DISCLAIMER: I am not an expert on investing, retirement planning or insurance and do not offer this information as professional advice. Please consult trained professionals for advice specific to your needs.
Dear Gentle Readers,
I've been so busy with family stuff and ranting about things that made me mad that I failed to keep you abreast of my family's revolution to become smarter than Wall Street. At our last family meeting, we just about finished our module on financial literacy, covering the basics of investing, retirement planning, and insurance. The funny thing is, although the meetings are informative (My niece, Single Parent Goddess, would say they're probably too informative, but since our last meeting got her reading the finance section of the newspaper, I beg to differ!), we eat very well (two types of lasagne, grilled portobello mushroom and red pepper sandwiches, sauteed zucchini, spaghetti, and lots of wine!), and we have our family sou-sou drawing (Black Man Not Blogging (BMNB) and I won the last payout -- woo hoo!), the part of our family meeting that is, in my opinion, the part most savored and awaited is what we call "The Department of Gentle Nudges," or an encouragement circle.
The Department of Gentle Nudges grew out of an experience BMNB had while living as a newly-minted attorney in Denver. He was active in his fraternity, and one of his older fraternity brothers kept encouraging him to buy a house, condo or townhome instead of renting. As BMNB put it, his fraternity brother didn't beat him over the head with this directive, but gave him "gentle nudges," occasionally reminding him that he was spending an equal or greater amount on rent than he would on a mortgage, with no tax deduction or equity to show for it. It was because of this fraternity brother that BMNB bought a townhome, which is now his own rental property. But it wasn't just the encouragement BMNB received; it was the manner in which he was encouraged -- gentle nudges.
When we decided to start holding these family meetings on financial literacy and other topics titled, "Something to Think About," BMNB and I decided that we would provide those same gentle nudges to the younger folks in our family to move in whatever direction they were already inclined to move. So at our first family meeting, we simply asked the younger members of our family, "What are you working on and how can we encourage you?" Well, after the young'uns told us the goals they were working on and what they needed encouragement with, they turned the table on US! They wanted to know what BMNB and I were working on and how they could encourage us! It made me realize this: Grown folks need encouragement, too. And not enough of us are getting it. So when we get to "The Department of Gentle Nudges" on our family meeting agenda, we go around the room and each of us proudly announces our goals and our struggles, we all brainstorm for ideas and solutions for each person, and we applaud each one of us for taking steps on the paths to our goals.
At this stage in my life, I, like the late Tammy Faye Messner, am just trying to be a light, to help someone see their own path that much more clearly. So many people encouraged me throughout my life that I feel I need to pay that encouragement forward. I see how just a few words of encouragement can give people that confidence and gentle nudge forward to do what they're afraid to do or don't think they can do.
Let me encourage you: If your family doesn't have a Department of Gentle Nudges, appoint yourself the chair of the department and get it started. Your words will mean the world to someone who is struggling or uncertain whether they can reach his or her goals.
Below are the materials about investing, retirement planning and insurance from our last "Something to Think About" family meeting that I promised I would share. Our next meeting will have a bonus module on estate planning and cover finding, getting and keeping the career you want. I hope you're following along with your family.
Here's to gentle nudges!
BWB
SOMETHING TO THINK ABOUT
A Series of Family Talks
AGENDA
January 7, 2012
5:00 pm to 7:00 pm
I. Prayer and Call to Order
II. Purpose of “Something to Think About”
· Knowledge: Share What We Know (mistakes and all), Learn What We Don’t
· Encouragement: Helping Each Other Reach Our Goals
· Action: Holding Each Other Accountable for Taking Positive Steps Toward Our Goals
III. Five Goals for The Family
· Financial Literacy
· Home Ownership
· Having a Career
· Educating Our Kids to Prepare Them for College or a Vocation
· Multiple Streams of Income
IV. Topics to be Covered Today – Financial Literacy
· Investing
· Retirement Planning
· Insurance
V. Family Sou-Sou Drawing
VI. The Department of Gentle Nudges: Encouragement from Each Other to Achieve Our Goals
VII. Adjourn; Next Meeting: Saturday, February 4, 2012. Topics: Finding, getting, and keeping the career you want.
A Series of Family Talks
AGENDA
January 7, 2012
5:00 pm to 7:00 pm
I. Prayer and Call to Order
II. Purpose of “Something to Think About”
· Knowledge: Share What We Know (mistakes and all), Learn What We Don’t
· Encouragement: Helping Each Other Reach Our Goals
· Action: Holding Each Other Accountable for Taking Positive Steps Toward Our Goals
III. Five Goals for The Family
· Financial Literacy
· Home Ownership
· Having a Career
· Educating Our Kids to Prepare Them for College or a Vocation
· Multiple Streams of Income
IV. Topics to be Covered Today – Financial Literacy
· Investing
· Retirement Planning
· Insurance
V. Family Sou-Sou Drawing
VI. The Department of Gentle Nudges: Encouragement from Each Other to Achieve Our Goals
VII. Adjourn; Next Meeting: Saturday, February 4, 2012. Topics: Finding, getting, and keeping the career you want.
Something to Think About
A series of family meetings
Financial Literacy
Module 3: Investing
Disclaimer: We are not experts or role models with respect to investing. We’re only sharing what we know. You will need to do more research on your own for additional answers or clarification. This is a VERY basic discussion of investing.
I. First Things First: What is investing and why do we need to do it?
o Investing is nothing more than spending money on things that will more than likely grow in value, called assets. Think of it as “money farming.”
o We need to invest because we need our money to increase in value faster than it would if we left it in a savings account to collect interest or stored it under a mattress. Typical goals to invest for include retirement, paying for your children’s college educations, or leaving an estate to your family or to a cause about which you’re passionate. With pensions slowly being eliminated in favor of 401(k) and 403(b) accounts and college tuition rising faster than the rate of inflation, most people will have to learn to invest in order to be able to retire comfortably or send their children to college.
o What it is not: Investing is NOT gambling. Investments should be made with investigation and appreciation of the risk of purchasing any asset. Few assets are risk-free, though some are virtually risk-free.
II. Types of Investments – What Kinds of Assets Can We Buy? Some Examples
· Stock. Stocks are ownership interests in companies that are owned by the public. They’re also called “equities.” Stock can be purchased from one company or from a variety of companies. They can also be purchased through a mutual fund or an exchange-traded fund (ETF), in which you buy shares of the fund and the fund takes your money and the money of other investors and buys stock in different companies.
· There are two types of stock: Common stock and preferred stock.
i. Common stock gives the owner the right to vote on how the company is run, but it gives the owner a lower priority in the payment of dividends (a portion of the company’s profits) and in liquidation of the company if it goes bankrupt. Common stock tends to have a price that is more volatile than preferred stock.
ii. Preferred stock gives the owner no voting rights, but it gives the owner higher priority in receiving dividends and high priority in payment of the company’s assets if the company goes bankrupt. It also has a less volatile price.
· Bonds. Bonds are basically an IOU. In exchange for purchasing a bond, the bond issuer owes you not only the amount that you paid for the bond but interest payments as well. There are two basic types of bonds:
· Government bonds. These are bonds issued by governments, including the federal government (e.g., U.S. Treasury bonds), state and local governments, and foreign governments. Government bonds issued by governments in the U.S., especially U.S. Treasury bonds and state and local government bonds, are usually one of the safest investments because governments rarely default on bond payments and governments rarely go bankrupt. Plus, many municipal bonds are tax-free. The safety of foreign bonds depends on the individual foreign government issuing them.
· Corporate bonds. These are bonds issued by corporations. In the event that a corporation dissolves or becomes bankrupt, bondholders are among the first to be paid.
· Bonds can be purchased in mutual funds or exchange-traded funds, too.
· Certificates of Deposit. These are issued by banks and entitle the purchaser to the amount of the certificate plus interest.
· Mutual Funds and Exchange-Traded Funds. These are pools of money from investors that are used to invest in stocks, bonds, commodities, or anything the fund manager wants to invest in. They can be very broad, such as an index fund, which invests in all of the stocks of a particular stock index, like the S & P 500, or very narrow, like a fund that invests only in stocks of businesses in a particular industry (energy stocks, health care stocks), stocks of businesses from particular countries or areas (China, Africa), or specific types of investments (bond funds). The difference between mutual funds and exchange-traded funds is that the value of shares in mutual funds are determined once daily, while the value of exchange-traded funds are determined all day long because they are bought and sold in real time in the stock market.
· Money market funds. These are types of mutual funds that are invested in short-term bonds and are designed to be worth $ 1 per share at all times so the investor never loses money. However, because they are less risky, they usually don’t pay more than $1 per share.
· Commodities. Commodities include tangible items like metals (e.g., gold, silver) or futures (e.g., agricultural products, oil) that you buy in order to sell later at a higher price.
· Annuities. An annuity is a contract for a larger payment or stream of payments at a later date. They are usually sold by insurance companies, and you pay the issue a lump sum of money up front. At a later date, the insurance company pays you a larger payment or a stream of payments for a period of time.
· Real estate. Many people like to diversify their investments by holding real estate, either by buying individual properties to rent out or renovate and sell at a higher price, or through real estate investment trusts (REITs), by which investors pool their money to buy many properties. Investors can invest in REITS through mutual funds or exchange-traded funds.
· Tax lien certificates. Tax lien certificates are certificates bought to pay off a property tax lien on someone else’s property in exchange for interest or ownership of the property. If the property owner pays off the property tax lien and interest, the purchaser of the tax lien certificate for that property receives the payment plus interest. If the property owner fails to pay off the tax lien within a certain amount of time, the purchaser of the tax lien certificate gets the property if he pays off any remaining unpaid property taxes.
· Businesses. Some consider outright ownership of a business an investment. A business can pay you profits, and assuming it increases in value, it can be sold for a profit.
III. Basics To Know About Investing
· What You Invest in Will Depend on Your Age and Tolerance for Risk
o We invest differently depending on our age. Younger people typically invest in riskier investments with a higher payoff (e.g., stocks), because they have time to recover any losses and to allow their investments to increase in value over time. As you age, your investment goal should be to conserve any gains you’ve made by decreasing the amount of riskier investments you have and increasing the amount of less risky investments you have, such as bonds.
o We invest differently depending on our tolerance for risk. Risk-averse investors are going to invest in things that are safer but less profitable, e.g., bonds. Investors who can tolerate a greater degree of risk might have more of their money invested in riskier investments like stocks.
· Investors Reduce Risk by Diversifying
o This gets back to the age-old saying of our grandparents, “Don’t put all your eggs in one basket.” Similarly, to reduce risk, don’t put all your investment money in one type of investment. Investors typically put their money into many investments in order to counteract the volatility in any one kind of investment. This is called “diversification.”
· Note: Noted investor Warren Buffett says, “Diversification is for those who don’t know what they’re doing.” The average investor doesn’t have the expertise Warren Buffett has.
· Investors Have a Goal and a Time Horizon for That Goal. Investors are usually investing for a short-term goal that they need to reach within a year or a few years (down payment for a house), or a long-term goal that they need to reach in many years (retirement, children’s education). How long your time horizon is will determine what kind investments you buy. If your time horizon is short and your goal is closer in time, you will probably seek investments that are less risky investments because you don’t have time to make up any losses (money market funds, certificates of deposit, bonds). If your time horizon is longer, you’ll probably seek riskier investments with the potential for a higher payoff in the long run (stocks, stock mutual funds).
· Investors Invest with the Goal of Reducing Taxes on Their Profits (Capital Gains Taxes). Investors try to reduce the amount of taxes they pay on their investments by cashing them out when they are in a lower tax bracket (retirement), buying investments that aren’t taxed (municipal bonds), or buying investments through accounts that defer taxes on profits until the profits are withdrawn (e.g., 401(k) accounts, Individual Retirement Accounts)
· Investors Reduce the Risks of Buying Stocks or Riskier Investments by Investing Regularly Over Time (Dollar Cost Averaging). Few of us are so knowledgeable about when the stock market is going to go up or down. Instead of trying to “time the market,” investors typically invest a fixed amount regularly in the stock market so that the costs of the stocks will average out over time. This is called “Dollar Cost Averaging.”
IV. How To Start Investing
· Should You Pay Off Debts First? Some financial advice websites, like The Motley Fool (fool.com), advise that you pay off your high interest debts before you begin investing, since the interest you’re paying on the debt is probably higher than the interest you will receive on any investment. I disagree. I think you should begin investing through tax-deferred retirement accounts (401(k), 403(b), IRA, etc.), while you are paying off your debts. It takes a long time horizon for the value of your retirement accounts to grow, and through the compounding of interest, increase in value over time, employer contribution of matching funds to your 401(k) or 403(b), and withdrawing the funds when you’ve retired and are probably in a lower tax bracket, the benefit of investing through tax-deferred retirement accounts later on may outweigh paying off all your high-interest debt first.
· How to Buy Stocks, Bonds, Mutual Funds and Exchange-Traded Funds
o Set up a brokerage account for your 401(k) or 403(b) retirement account. (Remember, you want to invest through tax-free or tax-deferred accounts first.) Some employers allow you to set up a brokerage account through a stock brokerage account to invest your 401(k) or 403(b) holdings. For example, the State of California allows its employees to set up a brokerage account with Charles Schwab (schwab.com) to invest the holdings in their 401(k) accounts above a $2,500 minimum that must be maintained in the State’s Savings Plus Plan (sppforu.com).
o Set up an Individual Retirement Account (IRA) with an online brokerage house. Most online brokerage houses (eTrade, ScottTrade, Charles Schwab) will allow you to set up an individual retirement account and buy and trade stocks, bonds and mutual funds with the money you deposit in your IRA. Like a 401(k) or 403(b) account, the money that grows in your IRA is not taxed until you withdraw it, either upon retirement, when you should be in a lower tax bracket, or if you withdraw it in an emergency (and it will be heavily taxed.
A series of family meetings
Financial Literacy
Module 3: Investing
Disclaimer: We are not experts or role models with respect to investing. We’re only sharing what we know. You will need to do more research on your own for additional answers or clarification. This is a VERY basic discussion of investing.
I. First Things First: What is investing and why do we need to do it?
o Investing is nothing more than spending money on things that will more than likely grow in value, called assets. Think of it as “money farming.”
o We need to invest because we need our money to increase in value faster than it would if we left it in a savings account to collect interest or stored it under a mattress. Typical goals to invest for include retirement, paying for your children’s college educations, or leaving an estate to your family or to a cause about which you’re passionate. With pensions slowly being eliminated in favor of 401(k) and 403(b) accounts and college tuition rising faster than the rate of inflation, most people will have to learn to invest in order to be able to retire comfortably or send their children to college.
o What it is not: Investing is NOT gambling. Investments should be made with investigation and appreciation of the risk of purchasing any asset. Few assets are risk-free, though some are virtually risk-free.
II. Types of Investments – What Kinds of Assets Can We Buy? Some Examples
· Stock. Stocks are ownership interests in companies that are owned by the public. They’re also called “equities.” Stock can be purchased from one company or from a variety of companies. They can also be purchased through a mutual fund or an exchange-traded fund (ETF), in which you buy shares of the fund and the fund takes your money and the money of other investors and buys stock in different companies.
· There are two types of stock: Common stock and preferred stock.
i. Common stock gives the owner the right to vote on how the company is run, but it gives the owner a lower priority in the payment of dividends (a portion of the company’s profits) and in liquidation of the company if it goes bankrupt. Common stock tends to have a price that is more volatile than preferred stock.
ii. Preferred stock gives the owner no voting rights, but it gives the owner higher priority in receiving dividends and high priority in payment of the company’s assets if the company goes bankrupt. It also has a less volatile price.
· Bonds. Bonds are basically an IOU. In exchange for purchasing a bond, the bond issuer owes you not only the amount that you paid for the bond but interest payments as well. There are two basic types of bonds:
· Government bonds. These are bonds issued by governments, including the federal government (e.g., U.S. Treasury bonds), state and local governments, and foreign governments. Government bonds issued by governments in the U.S., especially U.S. Treasury bonds and state and local government bonds, are usually one of the safest investments because governments rarely default on bond payments and governments rarely go bankrupt. Plus, many municipal bonds are tax-free. The safety of foreign bonds depends on the individual foreign government issuing them.
· Corporate bonds. These are bonds issued by corporations. In the event that a corporation dissolves or becomes bankrupt, bondholders are among the first to be paid.
· Bonds can be purchased in mutual funds or exchange-traded funds, too.
· Certificates of Deposit. These are issued by banks and entitle the purchaser to the amount of the certificate plus interest.
· Mutual Funds and Exchange-Traded Funds. These are pools of money from investors that are used to invest in stocks, bonds, commodities, or anything the fund manager wants to invest in. They can be very broad, such as an index fund, which invests in all of the stocks of a particular stock index, like the S & P 500, or very narrow, like a fund that invests only in stocks of businesses in a particular industry (energy stocks, health care stocks), stocks of businesses from particular countries or areas (China, Africa), or specific types of investments (bond funds). The difference between mutual funds and exchange-traded funds is that the value of shares in mutual funds are determined once daily, while the value of exchange-traded funds are determined all day long because they are bought and sold in real time in the stock market.
· Money market funds. These are types of mutual funds that are invested in short-term bonds and are designed to be worth $ 1 per share at all times so the investor never loses money. However, because they are less risky, they usually don’t pay more than $1 per share.
· Commodities. Commodities include tangible items like metals (e.g., gold, silver) or futures (e.g., agricultural products, oil) that you buy in order to sell later at a higher price.
· Annuities. An annuity is a contract for a larger payment or stream of payments at a later date. They are usually sold by insurance companies, and you pay the issue a lump sum of money up front. At a later date, the insurance company pays you a larger payment or a stream of payments for a period of time.
· Real estate. Many people like to diversify their investments by holding real estate, either by buying individual properties to rent out or renovate and sell at a higher price, or through real estate investment trusts (REITs), by which investors pool their money to buy many properties. Investors can invest in REITS through mutual funds or exchange-traded funds.
· Tax lien certificates. Tax lien certificates are certificates bought to pay off a property tax lien on someone else’s property in exchange for interest or ownership of the property. If the property owner pays off the property tax lien and interest, the purchaser of the tax lien certificate for that property receives the payment plus interest. If the property owner fails to pay off the tax lien within a certain amount of time, the purchaser of the tax lien certificate gets the property if he pays off any remaining unpaid property taxes.
· Businesses. Some consider outright ownership of a business an investment. A business can pay you profits, and assuming it increases in value, it can be sold for a profit.
III. Basics To Know About Investing
· What You Invest in Will Depend on Your Age and Tolerance for Risk
o We invest differently depending on our age. Younger people typically invest in riskier investments with a higher payoff (e.g., stocks), because they have time to recover any losses and to allow their investments to increase in value over time. As you age, your investment goal should be to conserve any gains you’ve made by decreasing the amount of riskier investments you have and increasing the amount of less risky investments you have, such as bonds.
o We invest differently depending on our tolerance for risk. Risk-averse investors are going to invest in things that are safer but less profitable, e.g., bonds. Investors who can tolerate a greater degree of risk might have more of their money invested in riskier investments like stocks.
· Investors Reduce Risk by Diversifying
o This gets back to the age-old saying of our grandparents, “Don’t put all your eggs in one basket.” Similarly, to reduce risk, don’t put all your investment money in one type of investment. Investors typically put their money into many investments in order to counteract the volatility in any one kind of investment. This is called “diversification.”
· Note: Noted investor Warren Buffett says, “Diversification is for those who don’t know what they’re doing.” The average investor doesn’t have the expertise Warren Buffett has.
· Investors Have a Goal and a Time Horizon for That Goal. Investors are usually investing for a short-term goal that they need to reach within a year or a few years (down payment for a house), or a long-term goal that they need to reach in many years (retirement, children’s education). How long your time horizon is will determine what kind investments you buy. If your time horizon is short and your goal is closer in time, you will probably seek investments that are less risky investments because you don’t have time to make up any losses (money market funds, certificates of deposit, bonds). If your time horizon is longer, you’ll probably seek riskier investments with the potential for a higher payoff in the long run (stocks, stock mutual funds).
· Investors Invest with the Goal of Reducing Taxes on Their Profits (Capital Gains Taxes). Investors try to reduce the amount of taxes they pay on their investments by cashing them out when they are in a lower tax bracket (retirement), buying investments that aren’t taxed (municipal bonds), or buying investments through accounts that defer taxes on profits until the profits are withdrawn (e.g., 401(k) accounts, Individual Retirement Accounts)
· Investors Reduce the Risks of Buying Stocks or Riskier Investments by Investing Regularly Over Time (Dollar Cost Averaging). Few of us are so knowledgeable about when the stock market is going to go up or down. Instead of trying to “time the market,” investors typically invest a fixed amount regularly in the stock market so that the costs of the stocks will average out over time. This is called “Dollar Cost Averaging.”
IV. How To Start Investing
· Should You Pay Off Debts First? Some financial advice websites, like The Motley Fool (fool.com), advise that you pay off your high interest debts before you begin investing, since the interest you’re paying on the debt is probably higher than the interest you will receive on any investment. I disagree. I think you should begin investing through tax-deferred retirement accounts (401(k), 403(b), IRA, etc.), while you are paying off your debts. It takes a long time horizon for the value of your retirement accounts to grow, and through the compounding of interest, increase in value over time, employer contribution of matching funds to your 401(k) or 403(b), and withdrawing the funds when you’ve retired and are probably in a lower tax bracket, the benefit of investing through tax-deferred retirement accounts later on may outweigh paying off all your high-interest debt first.
· How to Buy Stocks, Bonds, Mutual Funds and Exchange-Traded Funds
o Set up a brokerage account for your 401(k) or 403(b) retirement account. (Remember, you want to invest through tax-free or tax-deferred accounts first.) Some employers allow you to set up a brokerage account through a stock brokerage account to invest your 401(k) or 403(b) holdings. For example, the State of California allows its employees to set up a brokerage account with Charles Schwab (schwab.com) to invest the holdings in their 401(k) accounts above a $2,500 minimum that must be maintained in the State’s Savings Plus Plan (sppforu.com).
o Set up an Individual Retirement Account (IRA) with an online brokerage house. Most online brokerage houses (eTrade, ScottTrade, Charles Schwab) will allow you to set up an individual retirement account and buy and trade stocks, bonds and mutual funds with the money you deposit in your IRA. Like a 401(k) or 403(b) account, the money that grows in your IRA is not taxed until you withdraw it, either upon retirement, when you should be in a lower tax bracket, or if you withdraw it in an emergency (and it will be heavily taxed.
§ I have a Roth IRA account with eTrade, but there’s not much in it.
§ I have a regular IRA with Sharebuilder/ING, and it also doesn’t have much in it.
o Buy stock through a dividend reinvestment program (DRIP). Dividend Reinvestment Programs, or DRIPs, allow investors to buy shares of stock directly from a company and have the dividends directly reinvested into buying more shares of the same stocks. Some brokerage accounts also allow for the reinvestment of dividends into more shares of stock. My Charles Schwab account allows me to reinvest all my dividends from General Electric back into buying more shares of General Electric. DRIPs are also a low-cost way to get started investing. However, they should be an option you use after you have exhausted investing through your tax-deferred options (401(k), 403(b), or IRA accounts for example). For more information on DRIPs, visit DRIP Central, dripcentral.com
o Set up an individual brokerage account with an online brokerage house or a DRIP program. This should be your last resort after you have exhausted investing through your tax-deferred options (401(k), 403(b), or IRA accounts), because you will be taxed on your profits on a regular basis.
o Buy one share of stock and give it to your children. To get your children interested in investing, buy them one share of stock in a company that sells something of interest to them (e.g., Disney, Nike, Electronic Arts, Nintendo). At One Share, you can buy one share of stock, receive a framed stock certificate, and give it to your child. For more information, visit oneshare.com.
V. Consider getting a financial planner
If you don’t have the time or the inclination to learn about investing, consider hiring a financial planner. A financial planner can provide you advice on how to invest given your age, your goals, and your tolerance for risk. Financial planners are paid in many ways: 1) A percentage of your entire investment portfolio; 2) a flat rate; or 3) by commissions on investment products they sell you. Never hire a financial planner who is paid by commissions because they have an inherent conflict of interest – trying to get you to buy stuff that may or may not be in your best financial interest.
VI. Consider starting a family investment club
During the early ‘90s, my family had an investment club, and we learned a lot about buying stock. It was almost like a sou-sou – we put in a set amount each month for investment, we took turns researching stocks for investment, and we bought and sold stocks through the Morgan Stanley brokerage firm (this was before brokerage firms were mainly online). Most of what I know about researching stocks I learned from my family investment club. A family investment club is also a good way to get kids excited about investing.
VII. Resources (A Partial List)
· Online
o The Motley Fool (fool.com
o DRIP Central (dripcentral.com)
o Charles Schwab (schwab.com)
o eTrade (eTrade.com)
o Investopedia (investopedia.com)
o MSN Money (money.msn.com/investing/)
o Yahoo! Finance (finance.yahoo.com
o Suze Orman (suzeorman.com)
o Michelle Singletary (michellesingletary.com)
o Kiplinger (Kiplinger.com)
o Black Enterprise (Blackenterprise.com)
o Robert Kiyosaki (Richdad.com)
o David Bach (finishrich.com)
o Forbes (forbes.com)
· Books and Magazines (There are way too many to name, so I’ll keep it short. Browse the personal finance section at your local library or book store.
o Eric Tyson, “Personal Finance for Dummies”
o Kiplinger
o Forbes
o Black Enterprise
o Set up an individual brokerage account with an online brokerage house or a DRIP program. This should be your last resort after you have exhausted investing through your tax-deferred options (401(k), 403(b), or IRA accounts), because you will be taxed on your profits on a regular basis.
o Buy one share of stock and give it to your children. To get your children interested in investing, buy them one share of stock in a company that sells something of interest to them (e.g., Disney, Nike, Electronic Arts, Nintendo). At One Share, you can buy one share of stock, receive a framed stock certificate, and give it to your child. For more information, visit oneshare.com.
V. Consider getting a financial planner
If you don’t have the time or the inclination to learn about investing, consider hiring a financial planner. A financial planner can provide you advice on how to invest given your age, your goals, and your tolerance for risk. Financial planners are paid in many ways: 1) A percentage of your entire investment portfolio; 2) a flat rate; or 3) by commissions on investment products they sell you. Never hire a financial planner who is paid by commissions because they have an inherent conflict of interest – trying to get you to buy stuff that may or may not be in your best financial interest.
VI. Consider starting a family investment club
During the early ‘90s, my family had an investment club, and we learned a lot about buying stock. It was almost like a sou-sou – we put in a set amount each month for investment, we took turns researching stocks for investment, and we bought and sold stocks through the Morgan Stanley brokerage firm (this was before brokerage firms were mainly online). Most of what I know about researching stocks I learned from my family investment club. A family investment club is also a good way to get kids excited about investing.
VII. Resources (A Partial List)
· Online
o The Motley Fool (fool.com
o DRIP Central (dripcentral.com)
o Charles Schwab (schwab.com)
o eTrade (eTrade.com)
o Investopedia (investopedia.com)
o MSN Money (money.msn.com/investing/)
o Yahoo! Finance (finance.yahoo.com
o Suze Orman (suzeorman.com)
o Michelle Singletary (michellesingletary.com)
o Kiplinger (Kiplinger.com)
o Black Enterprise (Blackenterprise.com)
o Robert Kiyosaki (Richdad.com)
o David Bach (finishrich.com)
o Forbes (forbes.com)
· Books and Magazines (There are way too many to name, so I’ll keep it short. Browse the personal finance section at your local library or book store.
o Eric Tyson, “Personal Finance for Dummies”
o Kiplinger
o Forbes
o Black Enterprise
Something to Think About
A series of family meetings
Financial Literacy
Module 4: Retirement Planning
Disclaimer: We are not experts or role models with respect to retirement planning. We’re only sharing what we know. You will need to do more research on your own for additional answers or clarification.
I. First Things First: Why plan for retirement?
· At some point in your life, you will either not want to work or will be unable to work. Retirement planning ensures that you have a stream or streams of income to support yourself when you no longer want to work or can’t work.
· The goal of retirement planning is simple: Plan to not run out of money before you die.
II. What Does a Good Retirement Plan Consist Of? A Three-Legged (or Four-Legged) Stool
The old saying about retirement is that it is a “three-legged stool.” That means it rests on three (or these days, four) legs, which are:
· Social Security income
· Pension or 401(k)/403(b) income (or both if your employer provides them)
· Tax-deferred investment income (from an Individual Retirement Account (IRA) or some form thereof; and
· In some cases, non-taxed deferred investments, such as your savings and/or investments you hold outside of an IRA or 401(k) or 403(b) account
· A good retirement plan uses all three (or four) sources (or legs) of income to maintain a standard of living you’ve already decided upon in advance based on what you want or think you’ll need in order to retire.
· Don’t assume that any one “leg” of the stool – Social Security, pension, etc. – will provide you with enough to retire on.
III. Try to Figure Out How Much You’ll Need to Retire. Figuring out how much you’ll need to retire is difficult, but there are many online retirement calculators that can help you get a broad estimate. However, to get a best estimate, you should probably consult a financial planner. Here are some beginning steps to help you figure it out.
· The first thing you need to consider is the amount of income you’re going to want.
· The second thing to consider is how much income you’re going to expect from Social Security, your pension, your 401(k)/403(b), and your IRA.
· With those numbers, you can determine how much you’re going to have to save to generate the amount of income you want in retirement.
· How much income are you going to want in retirement?
o Look at how much you spend now and what you spend it on. When you retire, many work-related expenses such as gas, bus fare, dry cleaning and union dues will disappear. Even subtracting for those expenses, are you going to want to maintain the lifestyle you currently have, or are you willing to downshift, i.e., reduce your expenses? If you eat out four times a month now, are you going to want to do that when you retire? If you travel now, are you going to want to travel in retirement? What is the annual amount of income you would need to pay the expenses you will take or maintain into retirement?
o Take into consideration other expenses that will come with retirement. Although work-related expenses will disappear, health care-related expenses will increase, such as prescription drug co-pays, health insurance deductibles, and long-term care costs. If you already have prescription drug co-pays or health insurance deductibles, use those as a basis for estimating what you have to pay in the future.
o Consider whether you will be taking debt into retirement. The typical retirement goal is to enter into retirement debt-free. By entering into retirement debt-free (for example, paying off your mortgage, your cars, your credit cards, and any other debts), you reduce the amount you’ll need to live on in retirement. If you can’t, you need to know how much monthly debt you’ll be carrying into retirement and for how long (e.g., how long it will take you to pay off your house, car, etc.)
o Consider inflation. With inflation, the value of money goes down over time. What $60,000 a year buys in 2012 will be more than what $60,000 a year buys in 2022. According to inflationdata.com, the average inflation rate in the United States since 1913 is 3.24% per year. In other words, your money will have to increase in value by an average of 3.24% per year just to maintain its value. Many of the online retirement calculators can estimate this.
o Consider interest. Again, the online calculators can generate an estimate of the interest that might be paid on your investments.
· How much income can you expect to receive from Social Security, your pension, your 401(k)/403(b), and your IRA?
o Social Security sends out regular statement telling you how much you can expect to collect depending on when you retire if you already have even quarters of contributions (40) to qualify. That might change if you are married. Contact the Social Security Administration to get an estimate of what your Social Security payments will be.
o Find out what your pension formula is. For example, the pension formula for many CalPERS members is 2% at 55, which means you can expect to receive at least 2% of your salary for every year of service if you retire after the age of 55. For example, if you’re sixty, earning $75,000 a year, and you have 20 years of service, you would receive at least $30,000 a year in pension under this formula ($75,000 x .02 x 20 = $30,000).
o Estimate how much income your 401(k)/403(b) will generate given your current contributions and rate of growth and the maximum you can withdraw during retirement. This is something an online retirement calculator can do.
o Estimate how much income your IRA will generate.
o How much do you have currently saved?
With these numbers, you can use a number of online retirement calculators to get a broad estimate of the gap between the income you want to receive and the income you’re scheduled to receive through Social Security, your pension, your 401(k)/403(b), your IRA, and other assets. Again, you would be well-advised to consult a financial planner. Here are some online retirement calculator websites:
· Mass Mutual Retirement Calculators http://www.massmutual.com/planningtools/retirement-calculators
· CNN Money http://cgi.money.cnn.com/tools/retirementneed/retirementneed_plain.html
· MSN Money http://money.msn.com/retirement/retirement-calculator.aspx
· Kiplinger http://www.kiplinger.com/tools/retirement-savings-calculator.html
· Prudential http://www.prudential.com/bringyourchallenges/retirementincome/
IV. Take Action. The problem with retirement planning is that when people figure out how far behind they are on retirement planning, they do nothing to close the gap or decrease their standard of living. Anything you do to increase your retirement income now will be less you’ll have to do later. The first step is taking steps to create the retirement income you’ll want.
· It’s never too early to start saving for retirement. You can open an IRA for your kids! The earlier you start saving and investing for retirement, the easier it will be. The more time you have ahead of you, the easier it is.
V. Resources
Some sample resources include:
· Online
o Kiplinger.com
o MassMutual.com http://www.massmutual.com/planningtools
o Prudential.com http://www.prudential.com/bringyourchallenges/retirementincome/
o MSN.com http://money.msn.com/retirement/
o AARP.com http://www.aarp.org/work/retirement-planning/
o David Bach http://www.finishrich.com/
· Books
o David Bach, “Start Late, Finish Rich”
o Eric Tyson, “Personal Finance for Dummies”
o Michael K. Farr, “A Million Is Not Enough: How to Retire with the Money You’ll Need”
o Terry Savage, “The Savage Number: How Much Money Do You Need to Retire”
A series of family meetings
Financial Literacy
Module 4: Retirement Planning
Disclaimer: We are not experts or role models with respect to retirement planning. We’re only sharing what we know. You will need to do more research on your own for additional answers or clarification.
I. First Things First: Why plan for retirement?
· At some point in your life, you will either not want to work or will be unable to work. Retirement planning ensures that you have a stream or streams of income to support yourself when you no longer want to work or can’t work.
· The goal of retirement planning is simple: Plan to not run out of money before you die.
II. What Does a Good Retirement Plan Consist Of? A Three-Legged (or Four-Legged) Stool
The old saying about retirement is that it is a “three-legged stool.” That means it rests on three (or these days, four) legs, which are:
· Social Security income
· Pension or 401(k)/403(b) income (or both if your employer provides them)
· Tax-deferred investment income (from an Individual Retirement Account (IRA) or some form thereof; and
· In some cases, non-taxed deferred investments, such as your savings and/or investments you hold outside of an IRA or 401(k) or 403(b) account
· A good retirement plan uses all three (or four) sources (or legs) of income to maintain a standard of living you’ve already decided upon in advance based on what you want or think you’ll need in order to retire.
· Don’t assume that any one “leg” of the stool – Social Security, pension, etc. – will provide you with enough to retire on.
III. Try to Figure Out How Much You’ll Need to Retire. Figuring out how much you’ll need to retire is difficult, but there are many online retirement calculators that can help you get a broad estimate. However, to get a best estimate, you should probably consult a financial planner. Here are some beginning steps to help you figure it out.
· The first thing you need to consider is the amount of income you’re going to want.
· The second thing to consider is how much income you’re going to expect from Social Security, your pension, your 401(k)/403(b), and your IRA.
· With those numbers, you can determine how much you’re going to have to save to generate the amount of income you want in retirement.
· How much income are you going to want in retirement?
o Look at how much you spend now and what you spend it on. When you retire, many work-related expenses such as gas, bus fare, dry cleaning and union dues will disappear. Even subtracting for those expenses, are you going to want to maintain the lifestyle you currently have, or are you willing to downshift, i.e., reduce your expenses? If you eat out four times a month now, are you going to want to do that when you retire? If you travel now, are you going to want to travel in retirement? What is the annual amount of income you would need to pay the expenses you will take or maintain into retirement?
o Take into consideration other expenses that will come with retirement. Although work-related expenses will disappear, health care-related expenses will increase, such as prescription drug co-pays, health insurance deductibles, and long-term care costs. If you already have prescription drug co-pays or health insurance deductibles, use those as a basis for estimating what you have to pay in the future.
o Consider whether you will be taking debt into retirement. The typical retirement goal is to enter into retirement debt-free. By entering into retirement debt-free (for example, paying off your mortgage, your cars, your credit cards, and any other debts), you reduce the amount you’ll need to live on in retirement. If you can’t, you need to know how much monthly debt you’ll be carrying into retirement and for how long (e.g., how long it will take you to pay off your house, car, etc.)
o Consider inflation. With inflation, the value of money goes down over time. What $60,000 a year buys in 2012 will be more than what $60,000 a year buys in 2022. According to inflationdata.com, the average inflation rate in the United States since 1913 is 3.24% per year. In other words, your money will have to increase in value by an average of 3.24% per year just to maintain its value. Many of the online retirement calculators can estimate this.
o Consider interest. Again, the online calculators can generate an estimate of the interest that might be paid on your investments.
· How much income can you expect to receive from Social Security, your pension, your 401(k)/403(b), and your IRA?
o Social Security sends out regular statement telling you how much you can expect to collect depending on when you retire if you already have even quarters of contributions (40) to qualify. That might change if you are married. Contact the Social Security Administration to get an estimate of what your Social Security payments will be.
o Find out what your pension formula is. For example, the pension formula for many CalPERS members is 2% at 55, which means you can expect to receive at least 2% of your salary for every year of service if you retire after the age of 55. For example, if you’re sixty, earning $75,000 a year, and you have 20 years of service, you would receive at least $30,000 a year in pension under this formula ($75,000 x .02 x 20 = $30,000).
o Estimate how much income your 401(k)/403(b) will generate given your current contributions and rate of growth and the maximum you can withdraw during retirement. This is something an online retirement calculator can do.
o Estimate how much income your IRA will generate.
o How much do you have currently saved?
With these numbers, you can use a number of online retirement calculators to get a broad estimate of the gap between the income you want to receive and the income you’re scheduled to receive through Social Security, your pension, your 401(k)/403(b), your IRA, and other assets. Again, you would be well-advised to consult a financial planner. Here are some online retirement calculator websites:
· Mass Mutual Retirement Calculators http://www.massmutual.com/planningtools/retirement-calculators
· CNN Money http://cgi.money.cnn.com/tools/retirementneed/retirementneed_plain.html
· MSN Money http://money.msn.com/retirement/retirement-calculator.aspx
· Kiplinger http://www.kiplinger.com/tools/retirement-savings-calculator.html
· Prudential http://www.prudential.com/bringyourchallenges/retirementincome/
IV. Take Action. The problem with retirement planning is that when people figure out how far behind they are on retirement planning, they do nothing to close the gap or decrease their standard of living. Anything you do to increase your retirement income now will be less you’ll have to do later. The first step is taking steps to create the retirement income you’ll want.
· It’s never too early to start saving for retirement. You can open an IRA for your kids! The earlier you start saving and investing for retirement, the easier it will be. The more time you have ahead of you, the easier it is.
V. Resources
Some sample resources include:
· Online
o Kiplinger.com
o MassMutual.com http://www.massmutual.com/planningtools
o Prudential.com http://www.prudential.com/bringyourchallenges/retirementincome/
o MSN.com http://money.msn.com/retirement/
o AARP.com http://www.aarp.org/work/retirement-planning/
o David Bach http://www.finishrich.com/
· Books
o David Bach, “Start Late, Finish Rich”
o Eric Tyson, “Personal Finance for Dummies”
o Michael K. Farr, “A Million Is Not Enough: How to Retire with the Money You’ll Need”
o Terry Savage, “The Savage Number: How Much Money Do You Need to Retire”
Something to Think About
A series of family meetings
Financial Literacy
Module 5: Insurance
Disclaimer: We are not experts or role models with respect to insurance. We’re only sharing what we know. You will need to do more research on your own for additional answers or clarification. This is a VERY basic discussion.
I. First Things First: Why buy insurance?
· Insurance protects hard-to-replace assets against loss and damage, including people.
II. What Kind of Insurance Should You Have? Consider the Following:
· Health Insurance – to pay for health care costs.
o PPO (Preferred Provider Organization)
o POS (Point of Service) Plan
o HMO (Health Maintenance Organization)
o Medicare/Medicaid, and Medigap
· Life Insurance - To replace your income for your family if you die
o Term
o Cash Value (Whole Life, Universal Life, Variable Life)
· Car Insurance – To pay for damage to your car, damage your car causes, and damage to passengers in your car
· Homeowner’s Insurance or Renter’s Insurance – To pay for damage to the contents of your home or rental and to pay for damage to your home
· Long-Term Disability Insurance -- In case you become disabled and can no longer work
· Long-Term Care Insurance – To pay for the costs to be in a long-term care facility when you’re old
· Mortgage Protection Insurance – To pay for your mortgage in the event you can’t (not to be confused with Private Mortgage Insurance (PMI), which pays off your loan in case you default)
· Flood Insurance – To pay for damage to your home caused by flood, which is usually not covered by homeowner’s insurance
· Earthquake Insurance – To pay for damage to your home caused by earthquakes, which is usually not covered by homeowner’s insurance.
III. What You Need to Know When Buying Insurance
· Compare! Compare policies from different companies for the same amounts and types of coverage, the amount of the deductible, and the premiums charged for each.
· Read the policy carefully and ask the insurance agent or broker to explain any terms you don’t understand
· Review your policies annually and shop around for better rates.
· Make your insurance agent or broker explain exactly what your policy covers and doesn’t cover.
IV. Details on Health, Life, and Car Insurance
· Health Insurance
o HMO – Health Maintenance Organization health insurance requires you to use the doctors in the organization and receive referrals to specialists. You have fewer choices but usually lower costs. An example of an HMO is KaiserPermanente
o PPO – Preferred Provider Organization health insurance allows you to see doctors within the organization’s network or pay more to see doctors outside of the network. It is less restrictive than an HMO plan but may cost more.
o POS – Point of Service health insurance works much the same as PPO plans, but they typically require you to get a referral to see specialists, much like an HMO.
o Medicare – Medicare covers the following groups (from the Medicare website, medicare.gov)
· People over the age of 65
· People under the age of 65 with certain disabilities
· People of any age with end-stage renal disease (kidney disease requiring dialysis or kidney transplant)
· Medicare provides different types of coverage depending on the type of Medicare plan. Consult medicare.gov for more information.
o Medicaid – Medicaid is a federal and state program that provides health insurance to the poor.
o Medigap – private health insurance to cover what Medicare doesn’t cover
· Life Insurance
o Term Insurance – Term life insurance provides coverage for a certain length of time and ends. It is usually cheaper than whole life.
o Cash Value Insurance – A continuous policy that has a cash value that increases over time that can be cashed out prior to death or borrowed against. The premiums are higher than for term insurance.
· Car Insurance – Car insurance coverages include (from insure.com):
o Bodily injury coverage (in case you injure someone)
o Property damage coverage (in case you damage someone’s property)
o Medical payments or personal injury protection (in case you injure yourself or a passenger in your car)
o Collision (pays for damage to your car in case of collision)
o Comprehensive (pays for damage to your car caused by things other than collision, like falling trees)
o Uninsured/underinsured motorist coverage (pays for damage to you or your car if you’re hit by an uninsured or underinsured driver)
o Extras, like roadside assistance
V. Where to Buy Insurance
· Agents who work for a particular company
· Brokers who sell insurance from a variety of insurance companies
· Online directly from insurance companies
VI. Resources
· Insure.com
· Medicare.gov
A series of family meetings
Financial Literacy
Module 5: Insurance
Disclaimer: We are not experts or role models with respect to insurance. We’re only sharing what we know. You will need to do more research on your own for additional answers or clarification. This is a VERY basic discussion.
I. First Things First: Why buy insurance?
· Insurance protects hard-to-replace assets against loss and damage, including people.
II. What Kind of Insurance Should You Have? Consider the Following:
· Health Insurance – to pay for health care costs.
o PPO (Preferred Provider Organization)
o POS (Point of Service) Plan
o HMO (Health Maintenance Organization)
o Medicare/Medicaid, and Medigap
· Life Insurance - To replace your income for your family if you die
o Term
o Cash Value (Whole Life, Universal Life, Variable Life)
· Car Insurance – To pay for damage to your car, damage your car causes, and damage to passengers in your car
· Homeowner’s Insurance or Renter’s Insurance – To pay for damage to the contents of your home or rental and to pay for damage to your home
· Long-Term Disability Insurance -- In case you become disabled and can no longer work
· Long-Term Care Insurance – To pay for the costs to be in a long-term care facility when you’re old
· Mortgage Protection Insurance – To pay for your mortgage in the event you can’t (not to be confused with Private Mortgage Insurance (PMI), which pays off your loan in case you default)
· Flood Insurance – To pay for damage to your home caused by flood, which is usually not covered by homeowner’s insurance
· Earthquake Insurance – To pay for damage to your home caused by earthquakes, which is usually not covered by homeowner’s insurance.
III. What You Need to Know When Buying Insurance
· Compare! Compare policies from different companies for the same amounts and types of coverage, the amount of the deductible, and the premiums charged for each.
· Read the policy carefully and ask the insurance agent or broker to explain any terms you don’t understand
· Review your policies annually and shop around for better rates.
· Make your insurance agent or broker explain exactly what your policy covers and doesn’t cover.
IV. Details on Health, Life, and Car Insurance
· Health Insurance
o HMO – Health Maintenance Organization health insurance requires you to use the doctors in the organization and receive referrals to specialists. You have fewer choices but usually lower costs. An example of an HMO is KaiserPermanente
o PPO – Preferred Provider Organization health insurance allows you to see doctors within the organization’s network or pay more to see doctors outside of the network. It is less restrictive than an HMO plan but may cost more.
o POS – Point of Service health insurance works much the same as PPO plans, but they typically require you to get a referral to see specialists, much like an HMO.
o Medicare – Medicare covers the following groups (from the Medicare website, medicare.gov)
· People over the age of 65
· People under the age of 65 with certain disabilities
· People of any age with end-stage renal disease (kidney disease requiring dialysis or kidney transplant)
· Medicare provides different types of coverage depending on the type of Medicare plan. Consult medicare.gov for more information.
o Medicaid – Medicaid is a federal and state program that provides health insurance to the poor.
o Medigap – private health insurance to cover what Medicare doesn’t cover
· Life Insurance
o Term Insurance – Term life insurance provides coverage for a certain length of time and ends. It is usually cheaper than whole life.
o Cash Value Insurance – A continuous policy that has a cash value that increases over time that can be cashed out prior to death or borrowed against. The premiums are higher than for term insurance.
· Car Insurance – Car insurance coverages include (from insure.com):
o Bodily injury coverage (in case you injure someone)
o Property damage coverage (in case you damage someone’s property)
o Medical payments or personal injury protection (in case you injure yourself or a passenger in your car)
o Collision (pays for damage to your car in case of collision)
o Comprehensive (pays for damage to your car caused by things other than collision, like falling trees)
o Uninsured/underinsured motorist coverage (pays for damage to you or your car if you’re hit by an uninsured or underinsured driver)
o Extras, like roadside assistance
V. Where to Buy Insurance
· Agents who work for a particular company
· Brokers who sell insurance from a variety of insurance companies
· Online directly from insurance companies
VI. Resources
· Insure.com
· Medicare.gov
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