Path to Financial Security

2005 University of Wisconsin-Madison Board of Regents

What is financial security?
The ability of households to manage
their ongoing economic needs and to
prepare for the future

This requires that families acquire
knowledge and engage in prudent
action in three main spheres of
financial resource management
A Model of Financial Security
Risk
Management
Wealth
Accumulation
Cash & Credit
Management
Financial
Security
Economic
Environment
Preferences
And Needs
Access
e.g. Awareness


Budget for a targeted surplus
Maintain sufficient liquidity
Use efficient financial services
Engage in prudent tax planning





Concepts related to cash and
credit management
Taxes
Household record keeping
Estimated financial position
Compound interest and cash flows
Credit and borrowing
Credit reports and scores

Building Wealth
Allocate current resources to future consumption for
an increase in the purchasing power of its value
Money can grow at an exponential rate relative to
time

A Model of Financial Security
Allocate current resources to future consumption
for an increase in purchasing power

Risk
Management
Wealth
Accumulation
Cash & Credit
Management
Financial
Security
Economic
Environment
Preferences
And Needs
Access
e.g. Awareness
Why is it important to
build wealth?
Shift from defined benefit pensions to defined
contribution plans
Smooth consumption over changes in resources and
situation
Time off for maternity
Changing jobs
Think about retirement
Achieve financial goals such as buying a home, funding
education for children or yourselves
Having something for a rainy day
Starting early is a key issue!!


Investment Race
Ron and Jon are twin brothers, both age 21.
Ron invests $2,000 each year for the next
10 years and then he lets that money sit
until he is 55.
Jon will wait until he is 35 and then invest
$2,000 a year until he is 55.
If they would both earn
8.7% per year, who will
have the most?
RON:
JON:
$2,000 per year for 10 years, and
then left to sit earning 8.7% will
grow to ($29,954 after 10 years then
left to sit for 24 more years)
$221,801

$2,000 per year for 20 years at 8.7%
$98,939
Difference of $122,862
Jon would have to increase his
annual contribution by $2,285 per
year to catch up to Ron.
Investing Your Money
Money that we will not need for spending
today should be invested
Using things like stocks, bonds, mutual
funds, real estate
Goal Setting
Most goals can be formulated as
Objective Statements
Financial Objective Statements include
Horizon
Dollar amount
Makes it measurable and sets stage for
investing or cash flow planning
We work backwards-if we know where we
want to be, then we can figure out how to
get there
How about an example? What is my goal?
What about risk management?
We can pay someone else to
assume these risks
A Model of Financial Security
Risk
Management
Wealth
Accumulation
Cash & Credit
Management
Financial
Security
Economic
Environment
Preferences
And Needs
Access
e.g. Awareness
Deciding how to deal with things that can threaten our resources
Protecting Your Resources
Protect your income
Disability insurance, life insurance
Protect your wealth
Property and casualty
Protect you
Health insurance
So how do we deal with these?
We will learn the strategies and issues in
managing household risks
We can
Avoid the risk
Retain the risk
Reduce the risk
Transfer the risk
Create a financial plan
Strategy that is consistent with
Your goals
Your preferences
Your resources
Your family situation
Key elements of a sound
financial plan
Strategies to help you reach your goals
Implementation protocols
What types of accounts, services,
products do you need?
How should you invest?
Flexible and evolves over time