Manage Your Money Karsten Jeske, Ph.D. Federal Reserve Bank of Atlanta

Purpose of This Session To show: Why it’s important to save Why it’s important to save How you can save money How you can save money Examples of investments Examples of investments Use credit wisely Use credit wisely

Why Save?

How to Save Money From each paycheck. From each paycheck. From gifts. From gifts. Building up loose change. Building up loose change.

Tips to Saving Money Be realistic Be systematic

Example Alice starts saving at age 25: 10% of her income Alice starts saving at age 25: 10% of her income Bea starts saving at age 30: 13.3% of her income Bea starts saving at age 30: 13.3% of her income Chris starts saving at age 35: 17.9% of his income Chris starts saving at age 35: 17.9% of his income Dan starts saving at age 40: 24.6% of his income Dan starts saving at age 40: 24.6% of his income Ellis starts saving at age 45: 35.1% of his income Ellis starts saving at age 45: 35.1% of his income At age 65: They all have the same wealth: Worth ~12 times their final income! At age 65: They all have the same wealth: Worth ~12 times their final income!

Remember… Even lower-income people can become wealthy through good savings habits. A lot of people who might look wealthy have no cash and are always in debt. We are so broke!

Key Point About Saving Money The AMOUNT saved isn’t as important as getting into the HABIT!

Examples of Investments –Savings Accounts –Interest Checking –Money Market –Certificate of Deposit –Stocks –Bonds –Mutual Funds –Real Estate (& R/E Funds)

Risk and Return Stocks Stocks Bonds Bonds Certificate of Deposit Certificate of Deposit Money Market Fund Money Market Fund Savings Account Savings Account Higher Return Higher Risk Lower Return Lower Risk

Compound Interest Year 1 $100 x 10% = $10 $100 + $10 = $110 Year 2 $110 x 10% = $11 $110 + $11 = $121

Comparison Shop Consider things like the following: Minimum balance requirements Interest rate How interest is calculated Fees, charges, penalties, etc. Convenience Risk

Don’t Be a Victim of Fraud! Know who you’re investing with Know who you’re investing with –Do your research Be wary of get rich quick schemes Be wary of get rich quick schemes Protect yourself Protect yourself – – –

Use of Credit Advantages: Advantages: –Able to buy needed items now –Don’t have to carry cash –Creates record of purchases –More convenient than writing check Disadvantages: Disadvantages: –Interest –May require additional fees –Increased impulse buying may occur –May loose track of how much one spends in a month

Use of Credit Distinguish “wants” vs. “needs” Distinguish “wants” vs. “needs” Books for school? Books for school?“need” Caribbean Cruise? Caribbean Cruise?“want” A new car? A new car?depends Jewelry? Jewelry?“want” Roof repair? Roof repair?“need”

Use of Credit Never buy “wants” on credit Never buy “wants” on credit Buy “needs” on credit if necessary. Buy “needs” on credit if necessary. But follow the rule: But follow the rule: –Don’t carry more than 20% of annual income in debt (outside of home mortgage). –Don’t carry debt that makes you pay more than 10% of monthly income in debt service (outside of home mortgage).

Summary Get in the habit of saving: The earlier you start the easier it is Get in the habit of saving: The earlier you start the easier it is If you use credit, do so only for “needs” If you use credit, do so only for “needs” Keep a lid on debt: rule! Keep a lid on debt: rule!