SFS- Financial Fundamentals Handbook 2017 by Jason Stokes Visual Solutions

Financial Fundamentals Handbook

Saundra Davis is a financial

coach and educator with a passion for teaching people to use their financial resources in a way that is congruent with their values and their heartâ&#x20AC;&#x2122;s desire. Saundra, a Veteran of the US Navy, is an advocate of living mindfully and teaches individuals, communities, and the staff of nonprofit organizations how to identify, understand and work within their personal money beliefs to become their own financial expert.

ÂŠâ&#x20AC;&#x2C6;2016 Sage Financial Solutions, inc.

Sage Financial Solutions (SFS) bridges the gap between financial service professions and low-wealth communities. We believe that everyone needs and deserves to have access to competent, ethical financial services and to that end we provide support to community based organizations (CBOs) and financial life skills programs for low-wealth individuals.

SFS is a nationally recognized provider of financial capability programming designed to facilitate the financial well-being of under-served communities. We provide program design, technical assistance, training and facilitation to partner community based organizations and funders to create community-wide integrated services. Our expertise spans the entire continuum of financial services from education to financial therapy. Our approach promotes collaboration and comprehensive solutions to the financial issues that poverty creates.

Put your money where your heart is.

FINANCIAL FUNDAMENTALS HANDBOOK

We have spent several years collaborating with CBOs to increase the financial capability of their staff and their constituencies. We believe that by sharing the findings of our work with thought leaders and policy advocates we can begin to address the systemic issues that create barriers to financial well-being. We believe that the tools that allow the wealthy to build and transfer assets must be available to low-wealth communities in order to change the trajectory of trans-generational poverty in the US and beyond.

Contents

FINANCIAL PLANNING OVERVIEW

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What is Financial Planning? �� 1 Financial Planning Steps �� 1

MONEY MANAGEMENT

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Personal Finance Statements �� 2

EMERGENCY SAVINGS

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Emergency Fund �� 4

CREDIT & DEBT MANAGEMENT

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Understanding Credit (Reporting & Scoring) �� 5 Using & Managing Debt �� 6

TAX PLANNING

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FINANCIAL FUNDAMENTALS HANDBOOK

Keeping What You Earn �� 8

ASSET BUILDING

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Investing for the Future �� 9 Home Ownership �� 9 Retirement �� 10

ASSET PROTECTION

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Insurance Basics ��

Your Life, Your Legacy and Your Estate Plan ��

Put your money where your heart is.

Financial Planning Overview

WHAT IS FINANCIAL PLANNING?

Financial planning is an ongoing process to help you identify and make the best decisions possible to achieve your financial goals. A financial plan is a written, action-oriented document that incorporates your current situation, your goals, and the steps necessary to meet your desired outcome.

Assess your current ﬁnancial situation

2 3

Explore alternative courses of action

4 5

Develop your ﬁnanical goals

Evaluate your options

Create and implement ﬁnancial plan

Review and revise the ﬁnancial plan

FINANCIAL PLANNING STEPS

DEFINE YOUR GOALS—Most of us don’t have “financial goals” we have life goals with financial implications. What do you want your life to look like in the short, intermediate, and long term? Be as specific as you can because the details matter when you are prioritizing your action steps. ASSESS YOUR CURRENT SITUATION—Take a close and honest look at what is going on now. How does your cash flow? Do you have more “month than money” or is there some extra cash that you want to use for a specific goal? Are you protecting what you have with appropriate insurance? Do your loved ones know what to do with your finances in case of an emergency? CREATE YOUR ACTION PLAN—Compare your current situation to your goals. How do you want to prioritize your goals? What happens when you have competing financial priorities? How do you monitor your plan and adjust as your life changes? Will your plan get you where you want to go? What milestones should be in place to help keep you motivated? What do you need to do to get (or stay) on track?

Put your money where your heart is.

FINANCIAL FUNDAMENTALS HANDBOOK

GATHER YOUR INFORMATION—Round up all of your financial documents. Be sure to include pay stubs, bank statements, credit card bills, and mortgage statements, anything that has anything to do with your income, spending and debts.

Money Management PERSONAL FINANCE STATEMENTS Three basic documents provide a snapshot of your current financial health and stability and are the foundation of any financial plan. Think of them as your financial GPS. 3 basic financial statements: PAST—Cash flow statements tell you where your money is going now. Your cash flow statement is a summary of your income and expenses over a specific period of time, usually a month. You can use this as the first draft of your budget. PRESENT—A balance Sheet is a snapshot of your financial status at a specific point in time. Assets (what you own) - Liabilities (what you owe) = Financial Net Worth FUTURE—A budget is a plan for your saving and spending. A budget is the first step in the action plan and is the foundation for all of your financial decisions. The information your budget provides will be an indicator of the success of your other goals. A cash surplus let's you know that there is money available for other priorities.

FINANCIAL FUNDAMENTALS HANDBOOK

TIPS:

CASH FLOW • Start where you are • Write what you know (rent/mortgage, utilities, phone, loan/debt payments) • Document your assets (home and account inventory) • Assess where your money is going now: 99 Keep receipts add up categories at the end of the month 99 Write all expenditures and total by categories at the end of the month 99 Use the envelope system (cash based system) 99 Use spending tracker mobile apps 99 Use your bank/credit union account management aggregation

Put your money where your heart is.

• Your money talks: Review your last 3 bank/credit card statements What do your bank/credit cards statements tell you? Use two highlighters Living Expenses Lifestyle Expenses ? I don’t know X wish I hadn’t spent • Create a goal-based budget/spending plan based on what you learn about your current cash flow and your financial goals. BUDGETING • Use estimates until you have an accurate picture of your spending habits. Start with fixed expenses, then, estimate variable expenses if you don’t know exact amounts. • Don’t ignore periodic expenses—identify the expenses you KNOW are coming (auto registrations, routine repairs, insurance deductibles, property taxes) and include them in your regular budget/spending plan. • Prioritize savings in your regular budget/spending plan. • Find an app, tool, or form that makes your tracking easy. • Start with weekly or monthly projections and build toward an annual budget. • Determine if there is a shortfall (ouch) or a surplus (yay), make a plan to deal with both. • Review your budget regularly and revise as your situation changes (or if it isn’t working). • Give the “Money Buckets” system a try.

RESOURCES: LEARN:

ACT:

• •

www.mint.com (aggregate all of your accounts) www.vertex42.com (see calculators) Family budget planner Simple budget planner with goal setting

REMEMBER: • PAST—Your cash flow is what you have DONE • PRESENT—Your balance sheet is where you ARE • FUTURE—Your budget is your PLAN

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FINANCIAL FUNDAMENTALS HANDBOOK

www.360financialliteracy.org

Emergency Savings EMERGENCY FUND An emergency fund is money set aside for unexpected expenses; the amount is determined by your budget/spending plan. Having an emergency fund helps you sleep better at night, or whenever you do your sleeping.

TIPS: • Make periodic expenses part of your monthly budget (total the annual amount and divide by 12). • Identify the amount you need if faced with a major catastrophe or financial hardship (job loss, natural disaster, major illness). • Add an emergency fund line item to your regular budget/spending plan. • If/when you use the fund, be sure to add repaying YOURSELF to your monthly budget/ spending plan. • Tier your emergency savings according to your needs, try these targets to get started: Rainy day = the amount of your insurance deductibles (savings account) Short term set back = 1 month of your household expenses (money market savings) Catastrophe = 3 to 6 months of your household expenses (taxable investment account)

RESOURCES: LEARN:

FINANCIAL FUNDAMENTALS HANDBOOK

http://www.americasaves.org/for-savers/make-a-plan-how-to-save-money

ACT: www.smartypig.com The 52-Week Money Challenge

REMEMBER: • Some stuff is NOT an emergency! Be clear about the difference between your periodic expenses and REAL emergencies. • Separate savings accounts according to goals (save/spend and save/don’t spend). • Money should be placed into a safe account with (not too) easy access—possibly linked to checking for overdraft protection.

Put your money where your heart is.

Credit & Debt Management UNDERSTANDING CREDIT (REPORTING & SCORING) Your credit report is a record of your actual history of borrowing and repaying what you owe. A good credit history will qualify you for lower fees and interest rates on borrowed money. Landlords and employers often use credit reports as an indicator of your financial stability and responsibility. Credit reports are a record of your complete credit history. Credit bureaus are agencies that collect information on how promptly people and businesses pay their bills. • Experian, TransUnion and Equifax are the 3 major credit bureaus. • Credit Bureaus obtain information from banks, finance companies stores, credit card companies and other lenders. • Each bureau has a proprietary score. A credit report consists of 5 main parts: 1. Potentially Negative Items 2. Accounts in Good Standing 3. Requests for Your Credit History 4. Your Personal Information 5. Personal Statement

Time limits on unfavorable data on credit report: • Adverse data can be reported for 7 years • Bankruptcy can be reported for 10 years A credit score is a number generated by a mathematical formula that uses the information from your credit report (history). GIGO—garbage in, garbage out. If your credit history is inaccurate, your credit score could be affected.

Put your money where your heart is.

FINANCIAL FUNDAMENTALS HANDBOOK

Only authorized persons have access to your report for approved legitimate business purposes.

30%

10%

Amounts Owed

New Credit

FICO®SCORE

35%

Payment History

15%

Length of Credit History

10% Credit Mix

There are several scoring models; the most often used for credit decisions is FICO. • FICO scores range from 300 – 850 and a higher number indicates lower risk of default • FICO scores can change frequently

FINANCIAL FUNDAMENTALS HANDBOOK

TIPS:

• Obtain your free copy of all three credit reports annually. • Review for identity theft; make sure all of the information reflected is your data. • Complete a thorough evaluation and take steps to correct inaccurate or outdated information. • Dispute inaccurate data or negative information that is older than the allowable time limit for reporting. • Assess your overall credit situation in context of your financial goals. • Develop a written credit management plan and monitor progress. • If you are planning to borrow money (major purchase or loan) or apply for housing or a job, check your FICO score BEFORE you apply.

USING & MANAGING DEBT Manage your credit usage and use debt as leverage to help you build assets. Debt is designed to use as leverage to build wealth. Borrowing, or using “other people’s money” to achieve your financial goals can be a good thing. Using excessive debt can be a recipe for financial disaster.

Put your money where your heart is.

TIPS: Got debt? Pay these first: 1. Family necessities 2. Housing related expenses 3. Essential utilities 4. Car expenses (if you need your car to get to work/school) 5. Legally required payments (child support, tax liens) 6. Unsecured loans/credit cards Using Debt Wisely: • Use credit cards only as part of monthly spending plan & pay IN FULL each month to avoid interest. • Opt out of “pre-approved offers” and choose credit cards wisely. • Pay installment loans faster than required to reduce interest paid. • Shop around and make sure you are using the best financial product for your needs. • Spending less than you earn is the only way to get out of debt. Create a plan, stick to it. • Financial coaches and credit counselors can help you manage your cash flow and get your credit/debt under control.

RESOURCES: http://www.myfico.com/crediteducation/articles/ ACT: www.annualcreditreport.com http://www.vertex42.com/Calculators/debt-reduction-calculator.html

REMEMBER: • Good credit is an asset. • Manage your credit file, review it regularly and keep your identity information safe. • Use debt wisely in ways that are appropriate and part of your plan.

Put your money where your heart is.

FINANCIAL FUNDAMENTALS HANDBOOK

LEARN:

Tax Planning KEEPING WHAT YOU EARN The main point of tax planning is to find legal ways to reduce, eliminate or defer income taxes. Planning also helps you make financial decisions that impact your retirement and other financial goals.

TIPS: • Your tax planning goals may differ from year to year depending on your overall financial goals. • Make sure that your employer withholdings (W-4) factor in your financial goals and income needs. • If you are self-employed don’t forget to pay your estimated taxes and have a system in place to simplify tax preparation. • Reduce your taxable income by knowing your allowable deductions and managing expenses that have tax implications. • Investment decisions, like contributing to employer sponsored plans or opening an individual retirement account, impact your adjusted gross income (AGI) and your tax liability.

RESOURCES: LEARN:

FINANCIAL FUNDAMENTALS HANDBOOK

www.irs.gov

ACT: Volunteer Income Tax Assistance (VITA)—https://www.irs.gov/Individuals/ Free-Tax-Return-Preparation-for-You-by-Volunteers

REMEMBER: • Tax planning is an important part of your plan. • Your withholding impacts your monthly income; consider both your income needs and your estimated tax liability. • Tracking and managing expenses during the year will make tax preparation an easier process.

Put your money where your heart is.

Asset Building INVESTING FOR THE FUTURE Investing is about growing your wealth. Your savings account is not likely to keep up with inflation and you may need to take some additional risk for a higher return. Investing wisely can help you achieve your longer-term financial goals. Make your money work as hard as you do.

TIPS: • • • • • •

Figure out your “why” before you think about investing. Investing isn’t a “goal” it is a method to reach your goals. Investing in financial markets comes with risk so know how much you can afford to lose. Know your risk tolerance AND your risk capacity. Match your investment plan with your other financial needs and goals. You know you are ready to invest when you: 99 Consistently have a budget surplus after savings and expenses (even a small amount). 99 Have appropriate insurance for your life and assets. 99 Have a plan.

HOME OWNERSHIP

TIPS: • • • •

Know what is important to you about home ownership before you decide to purchase. Go to homeownership counseling with a HUD-approved agency (whether required or not). Buy what you can comfortably afford and maintain. Explore all programs and benefits for your particular circumstance (first-time, veteran, or occupation). • Budget for the projected mortgage, property taxes, and maintenance before you shop.

Put your money where your heart is.

FINANCIAL FUNDAMENTALS HANDBOOK

Owning a home can be a dream or a drag. Deciding how owning your own home fits into your financial life is a personal decision that should be part of your overall financial plan.

RESOURCES: LEARN: Thinking about buying a home or need rental assistance? Visit HUD.gov, look for the “I Want to” section. ACT: Before you start shopping for a home, check out the HUD education pages on “Buying a Home”.

REMEMBER: • Walk through a “rent or buy” scenario to help you think of all of the realities of being a homeowner. • Get housing counseling from a reputable, HUD-approved agency. • “Try on” your homeownership budget for a few months to see if you are really ready.

RETIREMENT Most of us are projected to live 20 – 30 years in retirement. Our ability to live comfortably is in large part determined by how well we prepare (save, invest, plan) when we are young(er).

FINANCIAL FUNDAMENTALS HANDBOOK

TIPS:

• Define what “retirement” means for you and use a retirement calculator to get an idea of how much you might need. • Explore all options available to you: 99 Employer match 99 Government benefits 99 Personal savings plan 99 Small business opportunities • Do your research; get help from a trusted professional (fiduciary) if needed.

Put your money where your heart is.

RESOURCES: LEARN: http://www.finra.org/investors/prepare-invest www.personalcapital.com ACT: www.transparentinvesting.com (pro-consumer advice for setting up your investment accounts)

REMEMBER:

FINANCIAL FUNDAMENTALS HANDBOOK

• Investing is the mechanism to achieve your financial goals, not a goal itself. • Know your “why” and your risk tolerance and capacity before putting your hard earned money at risk. • Decide if you will by a DIY'er or work with a professional. If you hire a professional, be sure to look for someone who abides by the fiduciary standard.

Put your money where your heart is.

Asset Protection INSURANCE BASICS You have worked hard to create personal wealth so you need to protect it. Insurance is one of the most important purchases you can make for your financial security.

TIPS: • • • • • •

Assess your insurance needs—what can’t you afford to lose? Prioritize your insurance purchase(s) based on your financial situation and your level of risk. Make sure your health, life and possessions are adequately insured. Take advantage of group insurance through your employer or other associations/memberships. Shop around and get at least two quotes. Check your coverage for auto/home/renter’s insurance each year and ensure you are only paying for the appropriate coverage. • Examine the level of deductibles and the coverage amounts to get the protection you need at the lowest cost. • Consider a higher deductible (make sure you make appropriate adjustments to your emergency funds) to lower your premium.

YOUR LIFE, YOUR LEGACY AND YOUR ESTATE PLAN

FINANCIAL FUNDAMENTALS HANDBOOK

If you think you don’t have an “estate”, think again. Your estate comprises everything you own, your car, home, checking and savings accounts, investments, life insurance, furniture, personal possessions, etc.. Most importantly, your health care decisions, guardianship for your minor children and even your end of life decisions are all part of your estate plan.

• Your estate plan should include appropriate documents to: 99 Designate someone to make financial decisions if you are incapable of making them (durable power of attorney for finances) 99 Designate someone to make medical decisions if you are incapacitated (advanced health care directive) 99 Distribute your possessions 99 Appoint guardians for any minor children (simple will)

Put your money where your heart is.

• A well though-out estate plan helps to ensure your wishes are carried out and distributes your assets as you desire. • Keep your beneficiary designation forms current. Beneficiary designation forms on life insurance policies, retirement accounts and other assets will usually override a will or trust. • Review your plan and all beneficiary designations annually or if you have moved, had a change in your family situation (births or deaths) or a change in your financial status.

RESOURCES: LEARN: http://www.insurance.ca.gov/01-consumers/105-type/ https://www.estateplanning.com/What-is-Estate-Planning/ ACT: Visit: www.nolo.com for low-cost samples of these documents: 99 Will (& guardianship arrangements) 99 Advanced Health Care Directive 99 Trust (as appropriate) 99 Power of Attorney for finances Complete the documents that apply to YOUR life.

• When shopping for insurance products, match your needs with what the product offers and seek out the best deal. • If you are a DIY'er it may be a good idea to have an attorney review your documents to make sure they are thorough and accurate. • Asset protection starts with knowing what you have (inventory) and deciding on the best approach to manage the financial impact of loss.

Put your money where your heart is.

FINANCIAL FUNDAMENTALS HANDBOOK

REMEMBER:

FINANCIAL FUNDAMENTALS HANDBOOK

NOTES

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