Take It To The Bank A Guide to Saving and Investments

Pay Yourself First So you have your first job. Before you spend money, “Pay Yourself First” Why Save? Emergencies Unforeseen opportunities Retirement One of the most important things to learn about money management is to learn (or get into the habit to) “Pay Yourself First”. This means you put a portion of your income to a savings before you start spending money. It is a good idea to get into the habit of saving 5%-10% of your income. You do not have to limit yourself to 10%. If you are living at home and do not have living expenses, you should try to save more. If you are paying your own living expenses, 5%-10% is a good goal. It is a good idea to divide this into short-term savings for things like vacations, down payments on cars as well as emergencies. Some money should go into long-term goals such as retirement or to meet educational goals. When you are young, it seems like retirement is a long way off; but if you start saving a little for retirement when you are young, the money has a long time to grow and you will have more money when you retire. You want to have money when you retire because you have more time and more opportunities to try new things. What is a bucket list? Why are people deciding to retire at an older age? Do you have a savings account? What are you saving for?

Time and Money The more money you invest, the more money it will earn The higher the rate of interest, the more money it will earn The sooner you invest, the more time your money has to earn more money The time value of money refers to the relationship between the money, time, and rate of interest. When you invest or save money, you earn interest. This is money paid to you for the use of your money. If you save money over a long period of time, you earn money on the interest you have earned and we call that compounding interest. This is the key to making good long-term investments. How does compound interest work?

Worth the Wait Yes, it does take discipline and commitment to save money, but there is satisfaction in watching your money grow and having the money to make some dreams come true It takes discipline to save your money when there is always something you would like to spend it on. This discipline will give you satisfaction later when you have enough money to make your dreams come true. What is a dream vacation? What is your dream car?

Ways to Save Savings Account - lower rate of interest, but you can withdraw money whenever you want to without penalty Money Market - works like a checking account but pays you interest Certificates of Deposit -You agree to keep your money on deposit for a specific length of time for a higher rate of interest Three common ways to save through banks or credit unions is savings accounts, money market accounts and certificates of deposit, commonly called CDs. Let’s talk about the advantages and disadvantages of each. The savings account is often the first account a person has. Sometimes, parents set them up for children. The federal government guarantees the accounts up to $100,000.00 so these are considered low-risk. You can take the money out when needed without a penalty so they are considered a great liquid asset. Money market accounts work like a savings account and usually pay a higher rate of interest than a savings account; but lower than a CD. They are also insured by the federal government. They require a larger minimum balance and you may be limited to how many times you can withdraw from the account without paying a penalty fee. Certificates of deposits are like a bank’s version of a savings bond. You agree to keep your money on deposit for a specific length of time for a higher rate of interest. When you buy a CD, you are agreeing to let the bank use your money for a set period of time and in return, they pay you a higher rate of interest. You will pay a penalty if you cash them in early.

Savings vs. Investment Saving is used for short-term goals or emergencies Investing is for long-term goals and it is riskier business. There is no guarantee the money will grow, but there is potential for great growth Typically, savings is something you do to have liquid assets; where investing is done for long-term savings. Investing is a great way to save for long-term goals such as retirement and educational goals for children. When you invest, you are looking to make money off of the money you are saving and you are committed to letting someone else use it for a longer length of time. When you invest in retirement accounts such as 401k or 403b, you are investing that money with the expectation of letting it grow until you are at least 59 ½ years old, because withdrawal before that age results in penalties with exception of a few circumstances.

Rule of 72 This is a simple way to see your money grow: Divide 72 / your interest rate = the number of years for your money to double Divide 72 / by years = the rate of interest needed to double your money Rule of 72 is a way to watch your money grow. Have you ever wondered how long it will take to double your money? Well, you can figure it out with the rule of 72. You can use it a couple of different ways. Divide 72 by the interest rate you are receiving and the answer is the number of years it will take you to double your money. If you have an investment paying 8% interest on your money and you have invested $1,000.00 it will take 9 years to have $2,000.00 even if you do not add any more money to the account. This shows you how important it is to invest when you are young. You can also use it to determine what interest rate you need to have to double your money in a certain period of time. For instance, what rate of interest would you have to earn to turn $20,000.00 into $40,000.00 in 10 years?

Risky Investments When we think of investments, we think of “stocks” and risks involved - but all investments have risks The risk also comes with the potential for greater rewards All investments have risks. Even a savings account that is guaranteed by the government has the risk of the interest not keeping up with inflation. The greater the risk you take, the potential for greater rewards exists. The key is to find the investment right for you. Some people are willing to take greater risks than others. If you have a long time before retirement, you have time to take a greater risk. As you get closer to retirement and that money has earned a lot of interest and you do not want to chance a loss, you may move it to a safer investment that will have lower returns, but less chance of loss. What are some risks that could affect the interest rates or investments? Some examples are: • Economy falls due to natural disasters • Poor job market • New technology that makes older technology companies obsolete • Politics • Wars • Major world events • Dishonest investment managers

Other Investments U.S. Savings Bonds Money Market Mutual Funds Corporate and Government Bonds Real Estate Mutual Funds Collectibles These are some other types of common investments that we will talk about individually.

US Savings Bonds A bond is an agreement where the borrower (usually the Federal Government) uses your money for a set period of time Time of investment is two to thirty years If you take out money before the end of the agreed time, you pay a penalty and lose some money Each bond has a face value with a stated rate of interest that will be paid annually until the bond matures or reaches its full value. A typical length for a bond to mature is five years, but it can be much longer. Let’s say the face value (or the amount you invest) is $1,000.00 at 9% interest that matures in five years. Each year the company would pay you $90.00 for five years. At the end of five years, the bondholder will pay you the face value ($1,000.00) of the bond. Typically the longer the bond is held, the higher the rate of interest. How much will you have earned over the five year period? Answer: $450.00

Money Market Mutual Funds Offered by banks and credit unions Works like a checking account You can take out money without penalty May limit number of checks written each month Usually requires a minimum balance Money Market Mutual Funds are offered by banks and credit unions. One advantage is that they are insured up to $100,000.00 in deposits. They work much like checking accounts except you are paid interest. You might think this is a no-brainer. I can get paid interest and the services of a checking account, why would I not have a money market account? One reason is that they do require a minimum balance that you must keep in the account. Often, individuals do not have the money required as the minimum balance. The other reason might be that some funds limit the number of checks you can write each month.

Corporate or Government Bonds U.S. Savings bonds are safer than corporate bonds Corporate bonds yield higher rate of interest Time of investment is two to thirty years Although many bonds purchased are U.S. Government bonds, you can also purchase corporate bonds which normally yield a higher rate of interest, but may be riskier. Some government bonds do not pay regular interest payments. At the end of the maturity date, the bond is redeemed in full. For instance, let’s say you invest $500.00, then at the maturity date, (say seven years), you are paid $1,000.00. The U.S. treasury issues treasury bonds to finance the debt of the United States Government.

Real Estate Property investors purchase real estate in hopes of generating a profit when it is sold This is less liquid than other investments because you have to sell it to gain a profit Many people invest in real estate by buying their own home. After all, you need a place to live and you will either pay rent or have a mortgage payment. If you expect to live in the same area for a long time, you may choose to invest in a home. The hope is that should you decide to sell at a later date, you will be able to sell the property for more than you paid for it. This often happens, but it is dependent on the housing market. The longer you live in a home, the likelihood of generating profit increases

Mutual Funds Offered by mutual fund companies which are companies that invest shareholders’ money in a variety of ways Considered to be very safe, but are not insured by the federal government like bank accounts Mutual funds are considered a very safe investment because they should be managed by expert investors. The money is diversified into many investments so the money is safer. The expert manager will move money around to get the greatest return. Interest rates vary with how well the investments do. These are considered very safe, but they are not guaranteed like an account at a bank or credit union.

Collectibles Items that are rare in number such as paintings, sculptures, antiques, baseball cards or coin collections They are less liquid than other investments Collectors buy these items in hopes they will increase in value over time and they can sell them at a profit. They are less liquid than other investments because you have to find a buyer to sell the item to and then you have to sell it for more than you invested or you will take a loss. Many people will invest in collectibles that they enjoy themselves, and then it is not as important to sell.

References and Resources Microsoft Clip Art: Used with permission from Microsoft. Textbooks: Madura, Jeff, K. Michael. Casey, and Sherry J. Roberts. Personal Financial Literacy. Boston: Pearson Addison-Wesley, 2010. Print. Websites: It’s easy to Understand What’s Going on with Your Money Mint automatically organizes your spending into categories—like rent, gas, clothes, lattes—and shows you where your money goes in easy-to-understand charts. https://www.mint.com/ NEFE High School Financial Planning Program NEFE HSFPP." NEFE High School Financial Planning Program | NEFE HSFPP. National Endowment for Financial Education https://www.hsfpp.org/