Finance 101

ASSIGNMENT #7 FINAL PART A (WRITING)

LAURI PETERSEN

Financial Principles
Give a man a fish and you feed him for a day; teach a man to fish and you feed
him for a lifetime.
Maimonides

We live in a time where instant gratification has reached alarming levels. Every day
we are bombarded by media developed to tickle our minds and thoughts to believe
that we can have it all we deserve to have the best, we dont need to save for
those items we want, but we can have them all and now, and with no consequences
to our future. As a result, personal bankruptcy in the United States is a more
frequent occurrence than many people realize. Bankruptcies reached an all-time
high in 2005 as one of every 55 U.S. households went bankrupt. In particular, it is
important to realize that the definition and processes for personal bankruptcy filings
are not the same in every state.
The typical American who files for bankruptcy is a high school graduate heading a
Lower-Middle Class household. Many of these bankruptcy filers have landed
themselves in poor financial situations due to money mismanagement and heavy
credit use. The average age of people filing for bankruptcy in the U.S. is 38. 44% of
bankruptcy cases are filed by couples, 30% by women filing alone, and 26% by men
filing alone. While heavy consumer debt is a common cause of bankruptcy, other
significant factors commonly leading to filings are major life changing events such
as getting divorced, being fired from a job, the death of a family member, or
incurring a medical expense not covered by insurance plans, as these all
significantly reduce personal financial security and leverage. Another important
fact, fewer than 9% of individuals filing for bankruptcy have not experienced a
medical problem, a divorce, or loss of employment. In reviewing personal
bankruptcy filings by state, Utah ranks number 5 in the nation with 468 filings per
100,000 population and is only preceded by Tennessee (Number 1), Georgia
(Number 2), Alabama (Number 3), and Illinois (Number 4). (World Atlas, Highest
Personal Bankruptcy Rates in the U.S. by State,
http://www.worldatlas.com/articles/highest-personal-bankruptcy-rates-in-the-us-bystate.html, June 14, 2016)

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Highest Personal Bankruptcy Rates in the U.S. By State

Although bankruptcy is a common by-product of economic and financial
environments and/or personal mismanagement of money, one does not need to be
in total financial despair to benefit from learning and understanding sound personal
financial principles. In fact, it is imperative that couples and individuals become
wise stewards to the money they make. It is not so important how much money you
make but how you manage the money that is in your stewardship so that your
money works for you. It has been noted that most couples and individuals spend
far more time researching where to go on an annual vacation than is spent in
learning, understanding, and applying sound financial principles.
In the following pages I will outline principles which will be taught and addressed in
the program you are requesting. Though what will be presented below are the key
principles, adequate time will be focused on whittling down into more detail.
Assignments will be given. Those being tutored will also learn how to use formulas
and spreadsheets using Excel so that what they end up with is a working financial
library of tools intended to be used for life. Skills will be developed so that financial
questions can be solved through hands-on use of formulas and tables so that the
individual or couple can come to sound financial answers/conclusions to questions
that will arise throughout their lives.
One note in particular that I will make which is key to the success in this program is
that the individuals or couples must accept full accountability for their situations
and must have a deep hunger and desire to rectify their current situation and make
goals to apply what will be taught to life situations which will arise throughout the
rest of their lives. In the situation where a couple will be mentored, both husband
and wife need to be totally on board and be willing to make the necessary changes
to turn around or improve their current financial situation. If both are not, the
desirable outcome usually is not met as one will sabotage what the other is trying to
do. In the situation where there are children in the home, the children need to be
involved in understanding the goals of the family in getting out of debt and
becoming independently wealthy and will need to understand that changes in the
family lifestyle will need to take place in order to meet the financial goals made.

Chapter 1 Financial Independence

Principle 1 Why Study Personal Financial Management
In the October 1980 October General Conference of the Church, President Ezra Taft
Benson quoted the following:
For over forty years, in a spirit of love, members of the Church have been
counseled to be thrifty and self-reliant; to avoid debt; pay tithes and a generous fast
offering; be industrious; and have sufficient food, clothing, and fuel on hand to last
at least one year. Today there are compelling reasons to reemphasize this counsel.
More than ever before, we need to learn and apply the principles of economic selfreliance. We do not know when the crisis involving sickness or unemployment may
affect our own circumstances. We do know that the Lord has decreed global

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calamities for the future and has warned and forewarned us to be prepared. For this
reason the Brethren have repeatedly stressed a back to basics program for
temporal and spiritual welfare. (Ensign, Nov 1980, Prepare for the Days of
Tribulation)
As was mentioned above in my introduction, most individuals facing bankruptcy did
so due to life-changing events. We cannot predict the future and what will affect us
individually or as families, but becoming prepared financially to meet the waves of
uncertainty and calamities/situations that may be beyond our control will be
paramount.

Principle 2 Lifelong Personal Financial Planning

Studies have shown that ones ability to delay gratification is one of the best
predictors of success in life. The key goal of this course is to understand that we
have within our means the ability to become independently wealthy, to develop the
financial means to live comfortably without having to worry about not being able to
meet our financial obligations. Each individual will learn not only how to preserve
the monies which they earn but how to make that money work for them in bringing
them to the point where they have enough money through investing wisely to be
able to retire and let their money work for them through the rest of their lifetime.
How one manages their income will largely determine their happiness and success
in life. Those who do not learn these principles end up in financial bondage where
stress, anxiety, conflict, sorrow, remorse, are forefront to anything and everything
they do.
This course will cover saving, budgeting, accounting, using credit and financial
services, making major purchases, assessing and minimizing risk, and developing a
plan to safely bring one into retirement with the financial means to live a fulfilling
and rich retirement. All of this requires planning and forecasting.
The six Ps of Planning will be instilled: Proper Prior Planning Prevents Poor
Performance.

Principle 3 5 Keys to Financial Success

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1. Pay the Lord first, and then

yourself
2. Collect interest

3. You cannot retire until your

money goes to work!
4. Do not pay interest
5. Prepare Financial Goals and
Make Wise Financial Decisions

The Five Keys to Personal Financial Success will be taught.

1. Pay the Lord first, and then yourself
After paying tithing, set aside a certain amount of money to pay yourself (to save
and invest). Vehicles that can be used for this purpose so that the amount is
deducted from take home pay before you receive it are as follows:

Payroll Deduction
Automatic Withdrawal

By making these arrangements up front you either do not get the money up front in
your paycheck or it is automatically paid out of your checking in the same manner
as you would pay a monthly bill. The result is that you learn to live within your
means on the amount of money you have established for this purpose. You do not
have to worry about being tempted to use the money for a different purpose. You
learn to pay your bills and live on what is left.

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Key Point

It is recommended that
you save or invest 10%
of your income!

Not everyone will have the means to start out paying themselves 10% of their
income. Start where you can and build up to saving 10%. This will lead to financial
independence and ultimately, financial wealth.
2. Collect Interest
Probably one of the most important principles, you want to SAVE your money and
put it to work working for you by earning interest in the financial vehicles you
choose. Interest is paid to you on the savings that you deposit in a financial
institution or loan to a government or corporation. When you loan your money, the
borrower pays you rent for the use of your money. This rent is interest.
We will go into depth in Chapter 9 on ways you can make your money work for you
be it investing in stocks, bonds, mutual funds, etc. Depending on the vehicle, you
can earn interest any increase in the value of the money you have working for you
and possibly dividends.
3. You cannot retire until your money goes to work!
The goal when it comes to financial planning is to put your money to work earning
interest, dividends and appreciation so that you are not solely dependent on the
income you earn through employment. The interest, dividends and appreciation
you earn will help build your financial security now and help bring you to the state
of being able to retire and live out the rest of your life financially secure and
independently wealthy.
The amount of interest that you will earn is dependent on the following factors:

The rate of interest or the percentage you earn on your savings

The length of time your money is one deposit or invested
How often and how much money you deposit to your savings or investment
accounts.

Your money does not sleep or stop to take a vacation. It is continually working for
you 24/7!
4. Do Not Pay Interest
The road to financial independence is dependent on your saving money and for that
money to be earning interest. However, if you borrow money so that you are paying
interest on rented funds you will be headed for financial bondage. We will discuss
what situations warrant paying interest (taking out a loan) and which do not. The
wise use of credit will be discussed in Chapter 5.

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We will discuss the beauty of Compound Interest. Compounding means that you
earn interest on the original amount plus the interest you have previously earned.
5. Prepare Financial Goals and Make Wise Financial Decisions
Understanding the value of compound interest each student will be able to establish
financial goals to further grow their money using wise financial principles. Sound
goals may be established by following the essential characteristics:

Specific well defined

Measurable in terms of time and results
Important focused on your personal values
Challenging outside of your comfort zone
Realistic largely within your control
Participatory made and agreed upon by those responsible for their
accomplishment (e.g. husband and wife)

Chapter 2 Show Me the Money Keeping Score

Principle 4 Financial Records How to Organize
In order to make financial goals you need to know where you stand financially. You
wouldnt run out and purchase a vacation home without calculating if you have the
money to do so. One way to come to an understanding of where you are financially,
which will be your start-off point, is to gather information so you can create
documents which will give the big picture of where you are financially to help you in
setting and following your financial goals. The documents should be organized and
utilized to keep your overall personal financial score.
Financial Records
The following records should be kept in an organized filing system:
1. Financial Management records
Budget and Goals
Financial Statements
2. Tax records
Payroll records
Deductible receipts
Taxable income records
Tax returns and documentation
3. Transaction records
Payroll records
Checking, savings and all bank statements
Unpaid bills
Payment books
4. Investment records
Purchase and sales records
Brokerage statements
IRA statements

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5. Property records
Mortgage papers, title deed
Lease (if renting)
Home maintenance records
Auto titles
Auto maintenance records
Auto registrations (in car0
Warranties
Operating manuals for appliances
6. Personal records
Birth certificates
Passports
Social Security data
Employee benefit information
Wills
Trust Agreements
7. Credit records
Purchase contracts
Credit account list and phone numbers
8. Insurance records
Policies (home, life, auto, medical, other)
Policy statements
Medical records
Claims records
Legal documents such as contracts, titles, deeds, certificates, policies, wills and
trusts should be kept in a safe deposit box or fireproof safe to protect against loss
by fire or theft. A personal computer financial management system could also be
used to record, file, and prepare financial transactions. A back-up should also be
kept on the cloud or personal drive so that another copy of the financial
transactions are available should you need them. This is also another item that
would be very important to have in an emergency where you may need to evacuate
which will give you all of the information you would need to claim financial
accounts.

Principle 5 - Personal Financial Statements

To get an accurate portrait of your financial health, personal financial statements
will be developed and prepared: (1) a balance sheet and (2) a cash flow statement.
A balance sheet is a portrait of your assets plus the debts that you may owe. These
statements are used to determine your net worth.

Assets

Liabilities

What you
own

Debts you
owe

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Net
Worth
Your wealth

Assets fall under the following categories:

Liquid Assets
Investments
Personal Property
Real Estate

Liabilities fall into two categories:

Current Liabilities
Long-term Liabilities

Each asset and liability category will be discussed in detail in preparation of

developing personal balance sheets. The information from the balance sheets will
determine net worth. It will also illustrate liabilities. The key is to grow net worth by
decreasing liabilities by paying off debt which will then free the student to save
more money, buy appreciating assets and avoid additional debt.
Cash Flow Statements will also be discussed and the student will prepare a
statement.

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Principle 6 - Preparing a Budget

Preparing and using budget is paramount in understanding your current financial
situation and to establish financial goals. Budgeting will help to:

Spend less than you earn.

Spend for needs rather than wants.
Save for emergencies, major expenditures, and investments.

A budget is a forecast of your cash flow for a determined period of time, generally a
month. Most expenditures and incoming revenue occur on a monthly basis,
however, there are others that will not. For that reason it is important to establish a
monthly budget for a full year to be able to capture all variable income and
expenses.
There are numerous Budgeting Methods which will be covered. We will use a
computer software program to capture and maintain budgets developed by the
students. A computerized budgeting system allows you to keep extensive records
and allows an avenue to quickly and accurately see what changes to a budget
category can affect the bottom line. It also provides a written record which is the
most powerful score keeping method.

Chapter 3/9 Putting Your Money to Work Building a

Portfolio
Principle 7 - Investment Alternatives Stock or Equity Investments
In chapter 3/9 we will explore investment alternatives i.e. stocks, bonds, mutual
funds, etc. The students will gain a greater understanding of where and how stocks
are traded. We will learn about the entities which handle the trading of public
companies and how private stocks are purchased and sold. Sample problems will
be given to help understand how commissions add to the cost of shares as well as
reduce total returns at the sale of a stock. How to determine current yields and
percent gains will also be covered.
The basic categories of stocks will be covered and explained as well as an in-depth
discussion on types of stock measurements such as earnings per share and book
value per share and price earnings ratios and how to calculate these
measurements.

Principle 8 - Stock Investment Strategies

Stock values are ever fluctuating. One minute your net worth has increased and the
next minute due to market trends and the economy your net worth has diminished.
There are risks involved in investing money. Two concepts are important when
deciding to invest:
1. What is your risk tolerance?
2. How can you minimize your risk?

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There are strategies which can be followed to minimize risk:

Dollar Cost Average.

Buy and Hold
Diversify
Beat Inflation
Ignore World Events

Principle 9 - Mutual Funds, Bonds or Debt Investments, Other

Investment Alternatives
In order to maintain a robust investment portfolio a broad diversity of investments
needs to be maintained. Stocks or equity investments, bonds or debt investments
and other investment alternatives such as real estate, gold, silver, and other
precious materials, and collectibles are common. Again, diversity is the key. Each
type of investment will be discussed in depth.

Chapter 5 Save Now Buy Later (Understanding Credit)

Principle 10 - The Cost of Making Minimum Payments
Paying cash for consumer purchases is always the best financial strategy. Credit
cards have become too easy to use and often individuals do not think of the
potential consequences of overspending. One major problem with open ended
credit is that a minimum monthly payment may be made in place of paying the total
cost of the purchased item. This can result in paying up to three times the amount
of the purchased item which can literally take years to pay off.

Principle 11 - Impact of Debt on FICO Scores

Excessive debt can impact FICO scores which in turn can affect the interest rates
offered when needing to request a loan. For example, a person with a FICO score of
760 or better will pay $212 less per month for a $216,000 30-year, fixed-rate
mortgage than a person with a FICO score of 620 - thats a savings of $2,544 per
year.

Principle 12 - Use Credit Wisely

The five Cs of credit are used by most lenders in evaluating and qualifying
consumers on credit applications.
1. Charact
er

2. Capacit
y
3. Capital

Will you repay the loan? This is determined by your past

history of payments and the stability of your lifestyle.
Time at present address, home ownership, time of
present employment, and living within your means are
important factors.
Can you repay the loan? What is your income and will it likely
continue? How much debt do you already have?
What are your assets and net worth? What do you own, what do
you owe, and how much wealth is available to repay the loan if
income is not sufficient?

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4. Collater
al
5. Conditi
ons

What if you dont repay the loan? What assets can you pledge
as security that the lender can sell to pay the debt?
What economic conditions may affect your repayment of the
loan? The security of your job and the company you work for are
considerations.

Chapter 6 You Are Not Your Car

Principle 13 - Cost of Car Ownership
Next to the purchase of a home, a car purchase is perhaps the most costly physical
asset one will make. Many individuals can get caught up in the image that a
particular car can convey and either purchase a vehicle that they cannot afford or
spend far more on a vehicle than is prudent thus decreasing their net worth. Even
in the purchase of a vehicle the goal is still to increase your net worth. Researching
and finding a dependable car, not the most expensive car, will be far more
important to ones bottom line.
Many purchase new vehicles not realizing that most new vehicles will depreciate as
much as 50% during the first two years of ownership. Purchasing a vehicle that is
one or two years old minimizes the loss in value caused by depreciation. One
benefit of purchasing a brand new car is the full warranty which is provided that a
used car will not have. Many dealerships, however, offer certified used vehicles
which have gone through rigorous tests and which come with a limited warranty.
You will usually benefit from purchasing a slightly used vehicle (one or two years
old) than purchasing a new one.
The total cost of owning and operating a car falls into two category types as shown
below.

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Fixed Costs

Depreciation
Loan interest
Insurance
Registration
Taxes

Variable Costs

Gasoline
Oil changes
Tires
Repairs
Tolls
Parking

The fixed and variable costs of owning a vehicle need to be considered when
purchasing a car as these items will affect your budget. For example, a larger car
usually will not get as good of gas mileage as a smaller car. Tires on a larger car are
more costly than those of a smaller car. Insurance costs, maintenance schedules
and fees, insurance and registration costs will vary depending on the vehicle
purchased. All of these variables need to be studied prior to your going shopping
for a vehicle so you know from your budget what you can afford.

Principle 14 - What Can You Afford?

Identifying other debt you may have is imperative as it will affect the amount of
money you can afford to spend on a vehicle. Financial experts advise that you can
afford to spend 15-20 percent of your net monthly income (after tax take home pay)
on credit payments. An example of how to determine what you can spend for a car
payment follows:
Take home pay:
Affordable debt:
Already owe:
Affordable car payment:

=$3,500
=$525 (25% * $3,500)
=$250
=$275 ($525-$250)

Once an affordable car payment is determined, we can further substantiate our

example by determining the car purchase price. Given an affordable car payment
of $275, if you were able to finance the vehicle at your bank at 2.9% compounded
monthly for four years, you can make a 10% down payment.

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Based on the above example, and making a monthly payment of $275, you can
afford to purchase a vehicle at a selling price of $12,448.98. Putting money down
on the car can reduce the overall cost of the loan.

Principle 15 - Buy vs. Lease a Vehicle

Car dealerships offer an alternative to purchasing a vehicle. Instead you can lease a
vehicle. A monthly payment is made on a lease for a set period of time usually
three to five years. Benefits of leasing include:
Low initial cash outlay required to a security deposit rather than a down
payment
Lower monthly payments than with traditional financing
Driving a new vehicle, which is returned at the end of the lease term.
There are drawbacks to leasing. Penalties can be incurred for excess mileage and
excess wear and tear on the vehicle.
A lease is attractive if you expect to get a new vehicle every few years and if you
drive less than the mileage limitation per year. If you plan to purchase the vehicle
at the end of the lease it will be beneficial to purchase the vehicle instead of leasing
the vehicle.
A general rule to following when determining if you should lease a vehicle vs. buy a
vehicle are as follows:
1. In the Short Term: leasing will always be less expensive

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2. In the Medium Term (always trade in your car at the end of the lease): costs
are about equal
3. In the Long Term: buying is always less expensive

Chapter 7 Location, Location, Location

Principle 16 - Evaluate Housing Alternatives
Housing alternatives will vary depending on your stage of life, income, and other
circumstances. A student may choose from living at home to renting an apartment.
Most individuals starting out on their own will choose to live in an apartment which
is normally considered a temporary step while saving enough money to use for a
down payment on a home and/or becoming established in a particular area. Other
options are renting a home or owning a condominium. While there are advantages
and disadvantages to both home ownership and renting, it is generally true that
purchasing a home and paying it off as quickly as possible is one of the best
methods for increasing individual wealth.

Principle 17 - Compare the Cost of Renting Versus Owning a Home

There are advantages to both renting and home ownership. Renting offers more
flexibility, lower maintenance costs and less up-front cash. Home ownership
provides tax benefits and increasing equity through appreciating in value and
decreasing the loan principal.

Principle 18 - What Can You Afford Compare the Cost of Renting

Versus Owning a Home

Key Point

Do not spend more than 25

to 30 percent of your takehome pay on housing

An analysis can easily be made to determine based on the years you will be in your
home if it is better to purchase a home or to rent a home. The spreadsheet below
analyzes the cost of purchasing a home that will only be lived in for a year and then
sold to renting a home instead. An amortization schedule is calculated to determine
the equity.

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Renting Versus Buying a Residence

BUYING
Mortgage Cost
Purchase Price
Less Down Payment
Amount of Mortgage before fees and closing costs
Loan Fee
Closing Costs
Total amount to be borrowed
Monthly Mortgage Payments (PMT formula)
Annual Mortgage Payments (monthly times 12)
Annual Costs
Fire and Home Owners Insurance
Repairs
Property Taxes
Total
Annual Cost to Buy
Add Annual Mortgage Payments and Total Annual Costs,
Multiply by Number of Years
Total Cost to Buy
Less: financial benefits of home ownership
Increased equity

$160,000.0
0
$8,000.00
$152,000.0
0
$1,520.00
$1,000.00
$154,520.0
0
($926.43)
$11,117.11

$450.00
$1,000.00
$1,000.00
$2,450.00

$13,567.11
1
$13,567.11

$1,897.58

Mortgage Interest
Times Income Tax Rate
Total

$9,219.58
20%
$1,843.92

Property Taxes
Times Income Tax Rate
Total

$1,000.00
20%
$200.00

Appreciation/(Depreciation)
$167,000.0
0

Sold House for

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Mortgage Cost
Purchase Price
Less Down Payment
Total

$200,000.00
$10,000.00
$190,000.00

Additional Mortgage Amounts

Loan Fee
Escrow Fees
Title Insurance
Appraisal Fee
Property Taxes
Utility Hook-up Fees
Total

$1,900.00
$1,500.00

$3,400.00

Monthly Mortgage Payments (PMT formula)

Annual Mortgage Payments (monthly times 12)

$193,400.00
($13,914.37)

Monthly Costs
Telephone
Lights and Heat
Water and Garbage Collection
Total multiplied by 12

$85.00
$150.00
$45.00
$3,360.00

Annual Costs
Property Taxes
Fire, Personal Property, and Liability Insurance
Repairs
Yard Care
Total

$1,800.00
$420.00
$1,000.00
$500.00
$3,720.00

Annual Cost of Operating the Household

Add Annual Mortgage Payments, Total Annual Monthly Costs, and Total Annual Costs

$20,994.37

Principle 18 - Determine the Price of a Home You Can Afford

Ideally speaking a home buyer should put a 20% or higher down payment on the
home to be purchased, however, few first time homebuyers have the funds to do so.
Therefore, private mortgage insurance (PMI) is added to the cost of the loan. This
insurance ensures that the lender is protected in the event of a default on the loan.
PMI is paid by the home buyer as part of the monthly payment until the loan to
value of the home reaches 80%. With a down payment of at least 10% lenders use
a formula of 28% of your monthly gross income as a guideline to determine the
amount of principal, interest, taxes and insurance (known as PITI) that a home
buyer can afford. Another guideline used by lenders is 36% of your monthly gross
income for the total of PIPT plus all other debts.
There are many types of loans that can be acquired from Conventional, Government
Guaranteed (FHA or VA), Adjustable rate (ARM), and Balloon. Adjustable and

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Balloon loans start with a lower interest rate and either adjust with the movement of
the economy or require that the loan be paid in full in a much shorter time period.
Many individuals get caught up in thinking they can afford a larger home with the
lower interest rates, but can find themselves in harms way when they either cannot
pay off the loan in the shortened time frame or interest rates climb due to the
economy and they find that they cannot afford the payments.
An avenue that is often offered when determining loan percentages is the use of
points, a financial term meaning percentage. This is a way to buy down the
interest rate. Points essentially refer to a percent of the loan amount. Points should
be carefully considered and only purchased if you can recover the costs within the
first one to two years of the loan.
Other essential elements in selecting a home should be the location of the home
which can greatly affect the value of the home when ready to sell. The home
should be found in a well maintained neighborhood with easy access to shopping.
Schools are another important factor to consider. The condition of the home is a
key factor. The home should be inspected by a professional and an appraisal be
conducted by a certified appraiser which will help in determining the homes
condition and current market value. A reputable real estate agent can assist in
finding a home. Their expertise is worth the cost as they can steer you away of
homes that are not in great condition, etc.
When purchasing a home, especially for a first-time home buyer, the realization of
how much money is paid into interest gets overlooked. Not until you have either
carefully studied an Amortization Schedule or the home buyer goes through the
exercise of drawing up an amortization schedule does he/she realize how much
money is paid to interest through the course of the loan. It is highly recommended
that one try to pay off the home as quickly as possible to reduce the interest paid in
the amount of the loan.

Chapter 8 Risk Wise Use of Insurance

Principle 19 - Assess Risk Transfer Options

There are very few certainties in life. Purchasing different types of insurance may
transfer some of the risks one may incur during ones lifetime. It is fairly common
to find individuals who are facing a major illness and who do not have health
insurance to lose all of their hard earned savings and eventually file bankruptcy.
Purchasing different types of insurance allows one to transfer risks to an insurance
company. Types of insurance that may be purchased are Home and Property
Insurance, Automobile Insurance, Health Insurance, Disability Insurance, Life
Insurance, and Long-Term Care Insurance.

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Principle 20 - Determine the Insurance Required for Your Home

A home purchase is considered one of the most expensive purchases one will make
and will be considered one of your major assets. Therefore the home and its
contents need to be insured. Homeowners insurance includes coverage against the
loss of damage to the structure. It also can cover living expenses incurred living
elsewhere while the home is being repaired. Personal property is covered for loss of
belongings such as appliances, furnishings and clothing. Personal liability insurance
should also be purchased which will cover the event of someone injured on your
property. A floater can be purchased on a particular item that has a specified value
such as a diamond ring. Actual cash value (ACV) homeowners insurance can be
purchased or replacement value (RV) may be purchased.

Principle 21 - Determine the Insurance Required for Your Automobile

Liability insurance is mandatory in most states. Automotive insurance is broken
down into two categories:
Bodily Injury. Covers legal expenses, medical expenses, lost wages, etc. for
injuries in an accident that you have caused. Medical payment coverage pays for
the injuries you have caused to others, not yourself. Your medical expenses are
covered through PIP and then referred to your personal medical insurance.
Personal Property. Coverage includes property damage liability, collision, and
comprehensive physical damage. Property damage coverage protects against loss
when you are at fault which covers damage to the other persons property and/or
vehicle. Collision covers your vehicle no matter who is at fault. Comprehensive
coverage covers vandalism, theft, damage to the vehicle caused by wind, hail,
tornado, flood, etc.
Coverage is quoted as follows:
100 / 325 / 50
The first number represents a $100,000 limit for payments to one individual who
receives bodily injury in an accident. The second number, $325,000, limits the total
dollar amounts the insurance company will pay toward all persons injured in the
accident. The final number, $50,000, refers to the total amount the insurance
company will pay toward property damage to the others property.
It is imperative that one is properly insured to decrease the risks incurred when
involved in an accident. This is another area where familys savings can quickly
disintegrate if not properly insured.

Principle 22 - Determine the Health Insurance Needs and Options

Healthcare costs in America continue to increase. The cost of healthcare and the
risk of major medical expenses are too great to be ignored and must be carefully
considered to avoid financial devastation. Financial independence requires
adequate healthcare coverage.
Health insurance plans include the following:

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Deductible
amount

Coinsurance

Co-payment

Stop-loss
provision

An insurance policy normally includes a deductible

which must be paid in full before the insurance covers
a predetermined percentage of healthcare costs. An
example may be requiring that the first $3,000 of
healthcare expenses be paid by the individual prior to
the coinsurance percentage coming into play.
This refers to the percentage of medical bills you are
required to pay beyond the deductible. An example may be
that you are required to pay 20% of medical costs after the
deductible is met with the insurance company paying the
other 80%
A co-payment may be required for doctors visits and
prescription drugs. An example may be that you pay $20
per doctors visit and $15 per prescription.
A stop-loss provision requires that the insurance company
pay 100% of all medical bills once you have paid a specified
amount, such as $5,000 in any calendar year.

Principle 23 - Determine Your Life Insurance Needs and Options

The need for life insurance is primarily based on your responsibilities to a spouse,
children, parents, business partners or others who would be financially affected in
your absence. Purchasing life insurance provides for those who depend on you and
who would suffer a financial loss in your death. Dependents are designated as
beneficiaries, or those who will receive proceeds of the insurance in the event of
your death.
The amount of coverage one should hold can be determined in a variety of ways as
follows:
Guideline

Easy method

DINK (dual
income no kids)
method

A general rule observed in the insurance industry is

to suggest $10,000 of coverage for every $1,000 of
annual income.
Example: If you have an annual income of $50,000
you should have $500,000 in insurance (50*$1,000).
The Easy Method is based on the assumption that a family
will need 70 percent of your salary for seven years to make
the financial adjustment brought on by your death. A
simple way to determine this number is to multiply your
gross income by 5.
Example:
70% * 7 years = 4.9, which is rounded to 5
This method is determined where there are no children in
the household and both spouses work. Calculations are
determined by calculating the % of each spouses income of
the total household income. Multiply this % times the total

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debt of the couple and then add the funeral expenses. This
provides the insurance needed for each spouse. This
illustration assumes that one spouse earns 60% of the total
income as illustrated in the following example:

Non-working
spouse method

Category
Spouse #1 (60%)
Spouse #2 (40%)
Funeral Expenses
$10,000
$10,000
Mortgage of $150,000
$90,000
$60,000
Other debt of $20,000
$12,000
$ 8,000
Total Insurance Needed
$112,000
$78,000
This method estimates that $10,000 per year would be
needed to provide a homemaker services while children are
young. An estimate of what a stay-at-home mother or
father would require is determined by multiplying $10,000
by the number of years until the youngest child reaches age
18.
Example: $100,000 of coverage would be needed if the
youngest child was eight years old, calculated as follows:
10 years (18 8) x $10,000 = $100,000

Chapter 10 Independent Wealth Retirement Planning

Principle 24 - Estimate Your Retirement Income Requirements
Financial independence is achieved when you live on less than you earn from your
employment. Financial wealth is acquired when you have accumulated enough
funds to live comfortably and no longer need to work for the rest of your life. The
Fidelity Investment newsletter has described the changes in life expectancies over
the last years. Over the course of recent decades, weve seen a seismic shift in
the nature of retirement. People are living longer. On average, a 65-year-old
woman has 23 years to live; a 65-year-old man, 20 years. And those years are often
healthy and active ones. (Fidelity Viewpoints, January 31, 2011, p.1). Accurately
determining how much money will be needed in retirement becomes even more
important based on the increase in life expectancies and overall improved health
into ones later years.
To properly prepare for retirement years the following questions need to be
considered:
How much total savings do you need to retire comfortably?

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 How much do you need to save each working year or month between now (or
whenever you start saving) and your retirement to accumulate sufficient
savings?
Many costs by retirement age will either decrease/diminish or disappear such as a
mortgage payment, food, paying toward a retirement fund, transportation (if you
determine that only one vehicle is necessary), and taxes. Other expenses partially
offset the reduction of costs mentioned above such as medical expenses, the cost of
leisure activities such as travel, gifts, and planning for inflation over the years of
your retirement
A general rule used by financial planners is that 75% of current income will be
required in retirement and that you must allow for an inflation rate of 3-5%. All
sources of income need to be analyzed to determine what percentage each source
can contribute to the overall amount needed to take you through your retirement
years. Some individuals will base what is needed by forecasting what will be
required only to provide income needed till death, while others will forecast what
will be needed leaving an inheritance for family members succeeding them in
death. Sources to draw from are Social Security, Employer Plans and Personal
Retirement Plans.
Social Security
Social Security benefits need to be understood as there are penalties to early
withdrawals and the longer that you work the higher the final benefit will be when
you begin drawing Social Security. The Social Security Administration has a website
that will provide important information to consider and can be viewed at
www.ssa.gov.
Employer Plans
There are two types of employer plans (1) Defined benefit plans where an employer
pays a specified month benefit for the life of the retiree or (2) Defined-contribution
plans where an employer may pay into a plan but no specific benefit is defined. The
most popular defined-contribution plan is a 401K. Most employers will match up to
a certain percentage what you pay into the plan. You should ALWAYS participate in
an employers 401K plan at least up to the amount that generates a matching
employer contribution.
Personal Retirement Plans
There are a number of personal retirement plans that can be set up the most
popular being an Individual Retirement Accounts (IRA) and Roth IRAs. One major
difference between the two plans is that money may be contributed into a Roth IRA
beyond age 70 which is not allowed in a standard IRA.

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Principle 25 - Calculating Retirement Needs

Below is an example of calculating retirement needs based on a percentage of your
current annual income that you wish to live off of in your retirement and the sources
of income you will be able to draw from.

Retirement Income Projection

Present Desired Annual Income

(A)

$60,000.00

Desired Retirement Annual Income

(75% of A)

(B)

$45,000.00

(C)

$170,171.81

Inflation Adjusted Income at Retirement

Years to Retirement
Years of Retirement divided by 2
Total Years of Inflation
Inflation Rate (%)
Total Inflated Retirement
Annual Income (future value)

Sources of Retirement Income

Social Security (___% of C)
Company Pension Plan (___% of C)
Personal Retirement Plan (___% of C)

35
10
45
3.00%

20%
20%
60%

Investment Fund Required for Personal Retirement

Plan
Estimated rate of return on Investment Funds
Years of Retirement
Total Fund Required (Present Value Annuity)
Annual Savings Required to Generate the
Investment Fund
Years to Retirement
Estimated Rate of Return
Annual Savings Required (Payment)

$34,034.36
$34,034.36
$102,103.09

10.00%
20
$869,261.14

40
10.00%

Monthly Savings Required (Annual divided by)

-$1,649.43
-$137.45

Principle 26 - Preserving Your Investment Principal

An important strategy in retirement planning is to preserve your investment
principal (the amount you have saved and invested) and live off of the interest or
income generated (interest or appreciation that you realize on your invested
assets). You will never run out of retirement income if you use this strategy and you

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will be able to sufficiently provide for your retirement years because your money
will work to earn retirement income. If you sell your assets to provide additional
income, you will eventually use up your retirement savings.
Conclusion
This is an overview of the principles which will be taught to the Hopeful family. As I
have reviewed their situation the approach and steps that I will use will be as
follows:

Gather and organize all Financial Records

Develop a working budget to be reviewed monthly

Prepare a Debt-Reduction schedule to be followed until all

debt is paid off

Determine an Investment Strategy

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Once debt has been paid off modify budget to save for
needed purchases in the future

Review current transportation needs

Housing

Review and make recommendations regarding

appropriate/adequate insurance coverages i.e. home, automobile, health
insurance, disability, and life insurance

Forecast retirement needs and come up with a plan

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