Basics of Personal Finance - J.P. Morgan

Basics of Personal Finance

Understanding how to manage your personal finances is key to leading a successful and well-rounded financial life. Once you understand the basics of budgeting, investing and establishing credit, you can plan for major goals such as education, buying a home and retirement. To help you get started on thinking about the big picture, we highlight the importance of saving early, setting goals and revisiting them regularly.

MANAGING YOUR PERSONAL FINANCES:

There are several important steps you can take to successfully manage your personal finances:

? W rite down your goals and reassess them frequently ? M onitor your spending ? E stablish an emergency fund of three to six months

of living expenses ? C ontribute to your retirement plans--401(k) or Roth 401(k)

and traditional IRA or Roth IRA

SAMPLE GOALS BY TIME HORIZON

? S tart building your credit through a credit card ? S et up recurring payments to avoid late payments, which

negatively impact your credit

The first step to managing your personal finances is to identify your short-, medium- and long-term goals according to your time horizon. For example, a short-term goal might be to pay for a new car, a medium-term goal could be to buy your first home and a long-term goal would be to save enough for a comfortable retirement.

SHORT TERM

? Saving for a spring break trip ? Purchasing a new car ? Paying for graduate school

MEDIUM TERM

? Starting a business ? Buying your first home ? Paying for your wedding

LONG TERM

? Funding your children's college education ? Buying a vacation home ? Saving for retirement

For illustrative purposes only. This information does not reflect the performance of any specific investment scenario. The views and strategies described herein may not be suitable for all investors, and more complete information is available which discusses risks, liquidity, and other matters of interest. This information is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Outlooks and past performance is no guarantee of future results. It is not possible to invest directly in an index. Please refer to "Definition of Indices and Terms" at the end of this presentation for important information. The information presented is being provided for informational and educational purposes only. It is not intended nor should it be relied upon as investment advice, guidance or a recommendation to purchase, hold or sell any investment or strategy.

INVESTMENT AND INSURANCE PRODUCTS ARE: ? NOT FDIC INSURED ? NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY ? NOT A DEPOSIT OR OTHER OBLIGATION OF, OR GUARANTEED BY, JPMORGAN CHASE BANK, N.A. OR ANY OF ITS AFFILIATES

? SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF THE PRINCIPAL AMOUNT INVESTED

Once you've established your goals, take a look at your income to see how much you need to allocate to each based on which category they fall into: Essential, Personal or Savings. We recommend the 50-30-20 approach:

HOW TO LOOK AT YOUR PAYCHECK: 50-30-20 RULE

This simple budgeting plan is designed to help you manage your money effectively. A typical rule of thumb is to spend 50% of your after-tax income on needs and obligations and the remaining half should be split up between 20% savings and debt repayment and 30% to everything else.

30% 20%

50%

ESSENTIALS

PERSONAL

(NEEDS)--50% (WANTS)--30% SAVINGS--20%

? Housing ? Food ? Transportation costs ? Utility bills

? Eating out ? Gym memberships ? Weekend trips

? Emergency fund ? Paying off outstanding debt ? College education for children ? Retirement

There are numerous advantages to saving and investing early, not least of which is getting a head start on financing life's major milestones and realizing your long-term goals. We've outlined some of the benefits below:

THE BENEFITS OF SAVING AND INVESTING EARLY

Saving early and investing what you save, are some of the keys to a successful retirement due to the power of compounding over the long term

ACCOUNT GROWTH OF $200 INVESTED/SAVED MONTHLY

$450,000

Consistent Chloe invests from age 25 to 65 earning 6.0% 400,000 ($96,000 total)

350,000 300,000 250,000 200,000 150,000 100,000

Late Lyla invests from ages 35 to 65 earning 6.0% ($72,000 total)

Quitter Quincy invests from ages 25 to 35 earning 6.0% ($24,000 total)

Nervous Noah saves from ages 25 to 65 in cash earning 2.0% ($96,000 total)

50,000

0 25 30 35 40 45 50 55 60 65 AGE

Source: J.P. Morgan Asset Management.

$393,714

$201,124

$192,590

$147,864

76%

88%

Investment returns

34%

Savings

64%

SAVING FUNDAMENTALS

Saving early and often, and investing what you save, are some of the keys to a successful retirement due to the power compounding over the long term

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To maintain a comfortable lifestyle in retirement, use the table below to find out how much you would need to save each year based on your age and household income.

ANNUAL SAVINGS NEEDED IF STARTING TODAY

$30,000 $40,000 $50,000 $60,000 $70,000 $80,000 $90,000

Start saving age

Saving rate (xcurrent household income)

25

7%

7%

8%

8%

9%

10%

10%

30

9%

9%

10%

10%

12%

13%

13%

35

12%

12%

13%

13%

15%

16%

18%

40

15%

16%

17%

18%

20%

22%

24%

45

22%

23%

24%

25%

28%

31%

33%

50

32%

34%

35%

38%

42%

46%

49%

HOW TO USE:

? G o to the intersection of your current age and your closest current household income

? This is the percentage of your current household income you should contribute annually going forward if you have $0 saved for retirement today

? Example: A 40-year-old with a household income of $50,000 and $0 saved for retirement today may need to save 17% every year until retirement

THINGS TO KNOW:

? M odest forward-looking returns may require higher savings going forward

? Values assume you would like to maintain an equivalent lifestyle in retirement

? Household income is assumed to be gross income (before taxes and savings)

MODEL ASSUMPTIONS Pre-retirement investment return: 6.0% Post-retirement investment return: 5.0% Inflation rate: 2.0% Retirement age: ? Primary earner: 65 ? Spouse: 62 Years in retirement: 30

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Housing often takes up a large part of a budget. When considering your savings and investing plan, it's helpful to weigh the pros and cons of buying versus renting to see which option will serve you better.

HOUSING--BUY OR RENT?

BUYING

RENTING

PROS

? Build equity over time ? Potential tax benefits ? Freedom to update to your liking ? Sense of belonging/community

CONS

? Potential for financial loss ? Responsible for maintenance and repairs ? R esponsible for furnishing (time, money

and energy) ? High upfront costs

? No responsibility for maintenance or repairs ? Flexibility to relocate ? Shielded from impacts on real estate market ? Smaller financial hurdles than buying

? No equity building ? Limited control over annual rent increases ? Limited housing security

ADDITIONAL CONSIDERATIONS IF YOU DECIDE TO BUY

? Just because you were approved, doesn't mean you should ? Factor in carrying costs in your decision:

-- Property taxes -- Home Owners Association fees -- O ngoing maintenance (yard, general maintenance) -- L arge upgrades or repairs (roof, air conditioning, etc.)

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It's never too early to start saving for retirement. Be sure to take advantage of an opportunity to invest in your employer's retirement or 401(k) plan.

PRIORITIZING LONG-TERM RETIREMENT SAVINGS

ACCOUNT TYPE

1

401(k) / 403(b) / 456(b) Up to company match

2

HSA1

3a

401(k) / 403(b) / 456(b) Up to pre-tax maximum

ELIGIBILITY

KEY CONSIDERATIONS

If offered by employer

Capture "free money"

If: High Deductible Health Plan3 No other health coverage Not claimed as dependent

Not collecting Social Security

Triple tax free

If offered by employer

Max out tax-advantaged savings

3b Deferred compensation

If offered by employer and client Potential for tax-deferred growth:

meets company-implemented value of account is subject to credit

earnings threshold

risk of the company

Tax-deductibility phased out based Even if over-deduction phase

3c

IRA2

on income limits, non-deductible out limits, capture tax-sheltered

contributions allowed

growth opportunities

4

401(k) / 403(b) / 456(b) Up to after-tax maximum

If allowed under plan rules

Still capture some tax benefits

5 Taxable accounts

Available for everyone

No tax benefits

1 Health Savings Account. 2 Individual Retirement Account. 3 $1,350 single, $2,700 family; check for HSA eligibility of healthcare plan with employer Note: Traditional or Roth dependent upon client circumstances and tax outlook.

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