Watch Your Six by Meliora

Learn. Be. Do. (515) 868-0150 | sdrake@iotalc.com | www.iotalc.com

Watch Your Six

Table of contents Workshop Objective

The Health-Wealth Connection

Why Financial Wellness

Improving Your Financial Wellbeing

Smart Money Opportunities

Increasing Income

Taxes 22

Manage Expenses

Reduce Debt

Your Action Plan

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Workshop Objectives Identify key concepts and tools to improve your financial wellbeing

Topics • The Health-Wealth Connection • Financial Wellness • Veterans.mylegacylink.com • Smart Money Formula • Strategies and Tips

Watch Your Six

The Health- Wealth Connection 1. Money problems are the chief cause of stress 2. Financial stress has a direct negative effect on health 3. Other stressors (work, family) often have a financial component Source:

www.workplacementalhealth.org/Publications-Surveys/Research-Works/Employee-Personal-Financial-Distress-and-How-Employers-Can-Help.aspx?FT=.pdf

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Total Wellbeing

SPIRITUAL WELLBEING Do I have a spiritual path?

PHYSICAL WELLBEING

Purpose

Am I living a vibrant life?

Energy

FINANCIAL WELLBEING Does my money fit my life?

Autonomy SOCIAL WELLBEING Do I have valuable relationships?

Passion

CAREER WELLBEING Am I fully engaged at work?

Mastery

Debt Stress: The Toll Owing Money Takes on the Body1

AP-AOL Poll retrieved at http://hosted.ap.org/specials/interactives/wdc/debt_stress/index.html

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Financial Impacts of Poor Health Behaviours Smoking • $6.36/day spent smoking (single pack national average cost) = $2,321/year • Opportnity cost of $2,321 per year for 20 years at 6% rate of return = $85,397 • Add another $35 per pack of cigarettes in additional healthcare costs2 Alcohol • 25-40% of patients in U.S. hospitals are being treated for alcohol related problems3 • Cost of excessive alcohol consumption is $1.90 per drink4 Metabolic Risk • 24% increase in healthcare cost per metabolic risk factor • Double healthcare cost for diabetes • 10% weight loss lowers lifetime healthcare costs by up to $5,3005

$6.36

$2,321 Yearly cost of smoking a pack a day

Single Pack of Cigarettes

$85,397 Opportunity cost of $2,321

$35.00

per year for 20 year at 6% rate if return

A Pack for Additional Healthcare Costs

www.cancer.org/research/infographicgallery/tobacco-related-healthcare-costs?gclid=CNLa2cipjb0CFewRMwodlS4AMQ

www.alcoholpolicymd.com/alcohol_and_health/costs.htm#_edn3

www.cdc.gov/media/releases/2011/p1017_alcohol_consumption.html

www.cdc.gov/nccdphp/publications/factsheets/prevention/pdf/obesity.pdf

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Notes

Imagine...... • Having money in the bank to pay for emergencies • Living completely debt • Paying cash for your child’s education • Retiring 4-5 years earlier... if you want to Copyright 2014, Iota, lc. All Rights Reserved

Watch Your Six

Why Financial Wellness? Improve financial wellbeing by providing the knowledge and skills required to: • Live within your means • Prepare for financial emergencies • Leverage your employee benefits • Set and reach financial goals

To meet these four objectives, you will need to develop the following knowledge and skills: • • • • • • • • • 8

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The three things I want to accomplish this year with my money are: 1.

Define one financial goal for 2014: I will _______________________________________________ by_________________________to______________________ ____________________________________________________ by finding $_________________________per month!

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Improving Your Financial Wellbeing

• • • •

Use the financial wellness portal: veterans.mylegacylink.com Benchmark your financial wellbeing Take initial improvement steps Confidential, no cost, no obligation

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Create • • • • • • • •

an account

Go to veterans.mylegacylink.com Select “I’m a First Time User” Select “Veteran” Enter your username and date of birth provided in a My LegancyLink email Follow the prompts to fill-in personal info Read & accept “Terms & Conditions” Click on “Begin Risk Assessment” Complete the Financial Wellness Risk Assessment

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To complete the Financial Wellness Risk Assessment (FWRA):

• Completed online at veterans.mylegacylink.com • 20-25 minutes to complete • Secure and confidential • Do not need statements, account info, etc

Sample Question

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Participant

Dashboard (Pre-FWRA)

Notes:

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Risk

Categories and Scores

Notes:

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Financial Wellness

Playbook

Notes:

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Do you have a leaky bucket?

Notes:

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Notes:

Smart Money Formula I

Income

Taxes

Consumptive Uses

Productive Uses

Interest + Dividends + Capital Gains

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Smart Money Opportunites Smart money opportunities

Income Earned Income Unearned Income

Taxes Tax Plan, FSA, HSA HCRA, 401(k), 403(b), 457, IRA

Consumptive Budget Surplus, DeďŹ cit Debt Reduction

Productive Emergency Fund Savings Goals Investments, Charity Risk Management

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Income Differences

Military Base Pay Federal Tax (10%) State Tax (3%) FICA (7.65%) Total Tax Subtotal After-Tax Pay BAH BAS Special Pay

$30,661 ($3,066) ($ 920) ($2,346) ($6,332) $24,330 $10,616 $ 4,291 $ 0 $14,907

Total After-Tax Pay Health Insurance ($500/mo) Tax on BAH & BAS (20.65%) Civilian Equivalent Pay

$39,237 $6,000 $3,078

}

Equivalent Standard of Living

$48,315

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Increasing Income Ways to increase income: 1. Increase earned income a. Increase your time b. Increase your productivity c. Increase your value 2. Increase unearned income

Am I fully engaged at work? Am I with the right organization?

Are we headed in the right direction?

Am I adequately equipped?

Am I in the right role?

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INCOME

INDENTIFY SOURCE AND AMOUNTS OF INCOME Source

Current Amount

Potential for Increase

Gross Salary & Wages Social Security Pension or Other Retirement Investment or Rental Income Business Income Alimony and Child Support Other Income Total Income

Notes:

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Taxes TAX PLANNING •

Around October 1st of each year, review your tax situation for the current year and project

your tax liability.

•

Based on your projection, determine what actions you need to take prior to December 31st

to minimize taxes owed (you have until April 15th to make contributions to an IRA).

•

When completing taxes, double-check all current adjustments, deductions, and credits.

•

After completing all tax forms in February-March, adjust your W-4 as needed to keep your

tax refund to $1,000 or less.

•

Keep all tax-related receipts and records on an ongoing basis throughout the year.

•

Retain each year’s tax file (forms, records, receipts, etc.) for seven years.

TAX PREPARATION AND FILING •

Information on forms, payments, refunds, deductions and credits, tips, calculators, and other

resources: www.irs.gov

ADJUST WITHHOLDING •

IRS Publication 505 “Tax Withholding and Estimated Tax”:

www.irs.gov/pub/irs-pdf/p505.pdf

•

Form W-4: www.irs.gov/pub/irs-pdf/fw4.pdf

•

Withholding Calculator: www.irs.gov/Individuals/IRS-Withholding-Calculator

ELIGIBLE EXPENSES FOR FSA AND HSA •

IRS Publication 502 “Medical and Dental Expenses”:

www.irs.gov/pub/irs-pdf/p502.pdf

•

IRS Publication 503 “Child and Dependent Care Expenses”:

www.irs.gov/pub/irs-pdf/p503.pdf

FAFSA •

FAFSA Deadlines: https://fafsa.ed.gov/fotw1314/pdf/Deadlines.pdf

IRA

•

For Traditional IRA deduction limits see

www.irs.gov/Retirement-Plans/IRA-Deduction-Limits

•

For Roth IRA income limits see www.irs.gov/Retirement-Plans/Plan-Participant,-

Employee/Amount-of-Roth-IRA-Contributions-That-You-Can-Make-for-2014

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INCOME TAX MINIMIZATION • Use tax planning

• Maximize use of tax- favored accounts and investments (FSA, HSA, 401(k), IRA, etc.) • Maximize use of all adjustments, exemptions, deductions, and credits • Keep refund to $1,000 or less

PRE-TAX SAVINGS EXAMPLE Applies to Flexible Saving Account (FSA), Health Savings Account (HSA), and Limited Purpose Healthcare Reimbursement Account (HCRA) Annual Employee Contribution

Tax Savings Single

Tax Savings Married

$2,500

$700

$1,025

Single Tax Rates

Married Tax Rates

Federal

15.0%

28.0%

State

5.3%

FICA

6.2%

Medicare

1.5%

Total

28%

41%

Why let the government hold your money?

Watch Your Six

TAX-DEFERRED GROWTH Salary: $30,000 with elective 6% deferral = $18,000 Tax Bracket: 15% Federal, 3% Without 401(k)

With 401(k)

$1,800

-$324

-$0

$1,476

$1,800

+$89

+$108

-$16

$1,549

$1,908

Employer Matching Contribution 4%

+$1,200

Earnings on Match

+$72

$1,549

$3,180

Amount to be Saved Taxes After Tax Investment Earning @ 6% Less Tax on Earnings Subtotal

One Year Result

COURAGEOUS CONVERSATION WHO AM I? SPENDER

SAVER

INVESTOR

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Manage â&#x20AC;&#x153;Câ&#x20AC;? Expenses What has been your experience with using a budget, managing your expenses, and reducing your debt?

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Manage Expenses CREATE AND USE A BUDGET

Use the Find the Money! spreadsheet or Home Budget Analysis calculator at

www.veterans.mylegacylink.com, or some other budgeting tool.

Identify all income.

Track cash and credit transactions each day for 1 month using the Cash and

Credit Daily Tracking Sheet.

Track all payroll deductions, savings, and expenses each day for 1 month using

the Daily Money Log.

Copy the 30 day sums for each line item in the Daily Money Log (column AH) to

the “From Daily Money Log” column (column C) in the Budget sheet.

Calculate your surplus/deficit (row 95 in the Budget sheet).

Adjust expense line items until budget balances or has a slight surplus – use

Step Down Spending and Think in Percentage Terms.

Enter adjusted amounts in the first month’s budget (column F) – you now have a

budget to use in month 1!

Repeat steps 3 through 5 to get actual expenditures during the first month using

the budget.

10.

Calculate your surplus/deficit at the end of month 1.

11.

Adjust expense line items until budget balances or has a slight surplus – use

Step Down Spending and Think in Percentage Terms.

12.

Enter adjusted amounts in month 2 budget (column I).

13.

Repeat each month.

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CASH AND CREDIT DAILY TRACKING SHEET DATE_________________________ Credit Card Transactions

Cash Transactions

Item

Amount

Total

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DAILY MONEY LOG (Sample Section) Month___________________________ Day

Fixed Expenses Debt and Obligations

House Payment (PITI + PMI) or Rent Home Equity Loan Property Taxes Auto Loan or Lease Credit Card 1 Credit Card 2

Variable Expenses Food

Groceries Dining Out

Transportation

Incidentals Gas Maintenance & Repairs Other Transportation Expense

Housing

Electricity/Gas Water/Sewer/Trash Cable/Dish/Internet Home Maintenance & Repairs

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DAILY MONEY LOG (Conâ&#x20AC;&#x2122;t) Day

Personal Care

Medical Care, Co-Pays, Deductibles Prescriptions Clothing Dry-Cleaning Personal Care

Education &Recreation

Tuition, Lessons, Materials Babysitting Movies, Plays, Concerts, Books, Music Club Dues Hobbies Vacation Subscriptions Allowances

Other Expense

Gifts Child Care Unreimbursed Business Expense Pet Care Other Expenses

Total Expenses

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SCRUB THE BUDGET! To scrub your budget is to make the necessary adjustments to each line item in your budget so that either your budget balances (Income – Savings – Taxes – Debt/Obligations – Expenses = $0) or has a slight surplus (>$1) after you allocate dollars to your various savings goals, pay taxes, satisfy all debt and other financial obligations, and pay all expenses. As an exercise, consider the Smith’s household budget in the table on the next page. Steve and Sally Smith are in their forties and have two teenaged girls. Make adjustments (increase or decrease the budgeted amount) to one or more line items in order to achieve a balanced budget.

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The Smithâ&#x20AC;&#x2122;s Monthly Household Budget Budget

$325

State Withholding

Groceries

$500

$130

Dining Out

$250

FICA

$497

Incidentals

Total Taxes

$200

$952

Transportation

$100

Gas, Maintenance & Repairs

$27

Housing Expenses

Savings

Retirement Plan Contribution FSA/HSA/HCRA

$208

Electricity/Gas

College Savings

$150

Water/Sewer/Trash

Charitable Giving

$150

Total Savings

$635

Debt & Obligations House Payment (PITI + PMI) or Rent

Fixed Expenses

Property Taxes Auto Loan or Lease Credit Card 1

$1,250 $0 $350 $100

Insurance Auto Insurance

$90

Property or Liability Insurance

$110

Health Insurance Premium

$350

Dental Insurance Life Insurance Total Fixed Expenses Auto Registration Total Periodic Expenses

$40 $125 $2,415

Adjusted

Food

$6,500

Federal Withholding

Emergency Reserve Savings

Misc.

Budget

Variable Expenses

Taxes

Total Income

Adjusted

Home Phone/Cell Phone Cable/Dish/Internet Personal Care Medical Care, CoPays, Deductibles Prescriptions Clothing Dry-Cleaning Education & Recreation Tuition, Lessons, Materials Movies, Music, Concerts, Books

$225

$175 $50 $150 $200 $60 $50 $20 $100 $75

$60 $150

Club Dues/Hobbies

$125

Vacation

$150

Subscriptions Gifts

$30

Total Variables Expenses

$30

Surplus/Deficit

$35 $100 $2,675

($208) 31

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STEP DOWN SPENDING Developed by Alena C. Johnson at Utah State University, Step Down Spending is a method of lowering expenses by choosing a less expensive alternative. The method can be very effective because it focuses on reducing a particular expense rather than eliminating it. This takes less emotional toll, particularly regarding our favorite expenses, such as buying a lattĂŠ each day. Consider, for example, the expense of dining out and how, using the Step Down Spending method, we can continue to enjoy going out to eat, but for far less money.

Hamburger, fries and drink

$16

$12

Gourmet Restaurant

Family Restaurant

Diner

Fast Food

Home

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Now, Step Down one of your expenses: Expense:

$__

___________

Notes:

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AVERAGE CONSUMER EXPENDITURES (2012)

SAV V Y SHOPPER TECHNIQUES

•

66 Ways to Save Money

http://publications.usa.gov/epublications/66ways/test.htm#autoinsurance

•

51 Ways to Save Hundreds on Loans and Credit Cards http://publications.usa.gov/

USAPubs.php?PubID=6030&PHPSESSID=4rt9obosdsac58eou6g0vba0q3

•

Consumer’s Almanac http://publications.usa.gov/USAPubs.php?PubID=3285

•

Focus on Finances: Preparing for Your Future

http://publications.usa.gov/USAPubs.php?PubID=976

•

Keep a Lid on Checking Account Fees

http://publications.usa.gov/USAPubs.php?PubID=6113

•

Managing Your Money in Good Times and Bad

http://publications.usa.gov/USAPubs.php?PubID=6068

•

Money Tips for All Ages: Your Finances at Different Stages of Life

http://publications.usa.gov/USAPubs.php?PubID=6043

•

Protecting Yourself from Overdraft and Bounce Check Fees

http://publications.usa.gov/USAPubs.php?PubID=3375

•

Saving and Investing: A Roadmap to Your Financial Security Through Saving and

Investing http://publications.usa.gov/USAPubs.php?PubID=5744

•

You Can Organize and Simplify Your Financial Life: A How To Guide

http://publications.usa.gov/USAPubs.php?PubID=6094

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Reduce Debt Example: $5,000 credit card; 18% interest • Make minimum payments (2% of balance = $100) • Time to payoff: 39.3 years • Total interest paid: $13,396 • Opportunity cost of average annual interest ($344) over 39 years at 8%: $88,659

TEN STEPS TO ELIMINATING DEBT 1. Be ready to change your spending habits. 2. Actively use a balanced budget and not incur new debt. 3. Use extra cash as an accelerator to pay off debt faster. 4. Have all family members onboard 5. Identify all debt. 6. Try to negotiate a lower interest rate with credit card issuers. 7. Select an elimination method (highest interest rate or lowest balance. 8. Use a debt reduction calculator at vanmeter.mylegacylink.com 9. Set a Debt Free Date!

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Financial Dashboard MONTHLY SURPLUS/DEFICIT

=MONTHLY CASH INFLOW - MONTHLY CASH OUTFLOW

=GROSS MONTHLY INCOME - (TAXES + SAVINGS + EXPENSES +DEBT PAYMENTS)

NET WORTH

=ASSETS - LIABILITIES

DEBT-TO-INCOME RATIO

=MINIMUM MONTHLY DEBT PAYMENTS (EXCLUDING MORTGAGE)/ MONTHLY

NET INCOME

EXAMPLE: $1,000/$3,600 = 28%

TARGETS: < 15% GOOD, 15-20% WARNING ZONE, > 20 % DANGER ZONE

FRONT-END (HOUSING) RATIO

=PITI+PMI/MONTHLY GROSS INCOME

EXAMPLE: $1,200/$4,800 = 25%

TARGETS: CONVENTIONAL 28%, FHA 29%

BACK-END (DEBT) RATIO

=TOTAL MONTHLY DEBT PAYMENTS/MONTHLY GROSS INCOME

EXAMPLE: $2,200/$4,800 = 46%

TARGETS: CONVENTIONAL 36%, VA/FHA/USDA 41%

RETIREMENT SAVINGS RATIO

=TOTAL MONTHLY RETIREMENT SAVINGS (INCLUDING MATCH)/ GROSS INCOME

EXAMPLE: $500/$4,800 = 10.4%

TARGET: > 10% GOOD, 5-10% WARNING ZONE, < 5% DANGER ZONE

TOTAL SAVINGS RATIO

= ALL MONTHLY SAVINGS (RETIREMENT, COLLEGE, OTHER)/ GROSS INCOME

EXAMPLE: $800/$4,800 = 16.7%

TARGET: BENCHMARK VARIES ACCORDING TO PERSONAL GOALS

EFFECTIVE TAX RATE

= (INCOME TAX DUE (FEDERAL, STATE, LOCAL) + FICA)/GROSS INCOME

EXAMPLE: ($3,500+$1,500+$0+$3825)/$50,000= 17.7%

TARGET: KEEP EFFECTIVE RATE AS LOW AS LEGALLY POSSIBLE

PORTFOLIO RETURN

= SEE ACCOUNT STATEMENT (NEED 3+ YEARS TO BE MEANINGFUL)

EXAMPLE: 5% SINCE INCEPTION, -2% THIS PERIOD, 14% YTD, ETC.

TARGETS: 1. YOUR GOAL 2. BENCHMARK RETURN 3. PEER GROUP RETURN

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MY FINANCIAL DASHBOARD Metric

Current Measure

Date

Target Measure

Date

Monthly Surplus/Deficit Net Worth Debt-to Income Ratio Front-End Ratio Back-End Ratio Retirement Saving Ratio Total Saving Ratio Effective Tax Rate Portfolio

How will you use your money in 2014?

Income

Taxes

Consumptive Uses

Productive Uses

Interest + Dividends + Capital Gains

Watch Your Six

Your Action Plan Setting Priorities 1.

Set your goals, manage yor priorities

Achieve positive monthly cash flow

Have basic insurance coverages and legal documents in place

Accelerate credit card repayment

Build emergency fund

Save for annual healthcare deductible and out-of-pocket expences

Defer 5% or more to your 401(k)

Eliminate debt

Save for long-term goals

10.

Pursue philanthropic interests

SAMPLE SMART MONEY CALENDAR January

February

April

May

Review Credit Report

June

ESPP Enrollment

July

Insurance Review

August

Review Legal Documents

September October

ESPP Enrollment

Complete Tax Return

ESPP Enrollment

Plan Vacation

Set Budget

Adjust Withholding

Complete Dashboard

Complete PFWC

Monitor Goals

Portfolio Review

Fund HSA

Review 401(k) Deferment

File Tax Return

Monitor Budget

Deplete HCRA

Monitor Budget

Portfolio Review

Review Goals

Open enrollment

November December

Set Goals

Complete FAFSA

March

Monitor Budget

Plan Holidays

ESPP Enrollment

Deplete FSA

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ACTION PLANNER My Priority (High, Med, Low)

Target Date

Set your goals, manage your priorities Achieve positive monthly cash flow

Set Priorities

Have basic insurance coverage and legal documents in place Accelerate credit card repayment Build emergency fund Save for annual healthcare deductible and out-of-pocket cost Defer 5% or more to your 401(k) Eliminate debt Save for long-term goals Pursue philanthropic interests

Tax Savings

Minimize tax with tax planning Adjust withholding as necessary Complete FAFSA (if applicable) Use FSA funds by year-end Fund HSA (payroll deduction and/or lump sum) Use HCRA funds by year-end Target at least 5% deferment into 401(k)

Cash Flow

Write down your financial goals Create and use a budget

Completed

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Make line item cuts to achieve a balanced budget (focus on variable/ discretionary expenses)

☐

Use “savvy shopper” techniques on a regular basis

☐

Manage expectations

☐

Watch Your Six

ACTION PLANNER My Priority (High, Med, Low)

Target Date

Ready for change Actively using a budget with positive cash flow (no new debt)

Reduce Debt

Use extra cash as an accelerator All stakeholders onboard Identify all debt Try to negotiate a lower interest rate Select an elimination method Use a debt reduction calculator Set a Debt Free Date!

Risk Management

Dump the debt!.

Review auto and home deductibles (target $1,000) and coverages Review liability coverage (target $1,000,000) Review will, POA, living will, medical directive, and trust documents Obtain and review your credit report at www.annualcreditreport.com

Completed

☐ ☐ ☐ ☐ ☐ ☐ ☐ ☐ ☐ ☐ ☐ ☐ ☐ ☐

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Notes

Get in touch 515-868-0150 sdrake@iotalc.com www.iotalc.com

1200 Valley West Drive, Suite 609 West Des Moines, IA 50266