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Financial Education: Pay Yourself First



Saving money is an important part of building your financial future. This course will give you some tips to help you get started. It will also show you how your money can grow when you save.

Paying yourself means that when you get a paycheck, you first put away the money you want to save for your goals. There are many reasons to pay yourself first. Some of the benefits of paying yourself first include:

  • You can learn to manage your money better.
  • You can increase your savings.
  • You can improve your standard of living.

By the end of this course, you will be able to recognize the importance of saving money. You will know:

Why Save?

Reasons to Save Money

Some major expenses people save for include:

  • Unexpected events such as loss of job, car repair or hospitalization
  • Down payment for a house, car or other large purchase
  • College Education
  • Vacation
  • Retirement

Think about what your goals are for the future and what you might want to start saving for.

Many people spend all the money they make, but saving money is important. Many people don't think they have enough money to start saving. However, saving money doesn't have to be hard. Next, learn some money saving tips!

Saving Tips

Tips to Help You Save Money

Saving money doesn't have to be hard. Take a look at some of the saving tips listed below:

1. Consider needs vs. wants. Think about the items you purchase on a regular basis. These add up. Where can you save?

• Do you eat out at restaurants a lot?
• Can you cut back on daily expenses, such as coffee, candy, soda or cigarettes?
• Do you have services you do not really need, such as cable television or a cell phone?

2. Direct deposit or automatic transfer to savings.

• When you get paid, put a portion in savings through direct deposit or automatic transfer.
• If you have a checking account, you can sign up to have money moved into your savings account every month.
• What you don't see, you won't miss!
• U.S. savings bonds can be purchased through payroll deducation.
• Make savings a habit!

3. Pay your bills on time. This saves the added expense of:

• Late fees
• Extra interest charges
• Disconnection fees for phone, electricity or other services
• Fees to reestablish connection if your service is disconnected
• The cost of eviction
• Repossession of cars or other possessions
• Bill collectors

4. If you use check-cashing stores regularly, you might pay $3 - $5 for each check you cash. This can easily add up to several hundred dollars in fees every year. Consider opening a checking account at a bank or credit union.

5. If you get a raise or bonus from your employer, save that extra money.

6. If you have paid off a loan, keep making the monthly payments to yourself. You can save or invest the money for your future goals.

7. If you receive cash as a gift, save at least part of it.

8. Avoid debt that does not build up long-term financial security. For example, avoid borrowing money for things that do not provide financial benefits or that do not last as long as the loan. Examples include: a vacation, clothing and dinners out in restaurants. Examples of debt that helps build long-term financial security include:

• Paying for college education (for you or your child)
• Buying or remodeling a house
• Buying a car to get to work

9. Save your change at the end of the day. Take that change and deposit it into the bank (every week or month).

10. When you get a tax refund, save as much of it as possible.

11. If your employer offers a retirement plan, such as a 401(k) or 403(b) plan that deducts money from your paycheck, join in! Many employers will match a portion of your contributions. The matched amount is free money!

12. If you decide to make investments, do your homework. Know what you are investing in. Get professional advice if you need it. You should have enough money in savings to pay for 2-6 months of expenses in case of emergency. Make sure you have an emergency savings account before considering investing in non-deposit products.

13. If you own stocks, reinvest the dividends to purchase more stocks. Some companies offer an easy way to do this called a Dividend Reinvestment program (DRIP). This process increases your investment more quickly, similar to compounding.

14. If you are interested in learning about investing, you might want to consider an investment club. The National Association of Investment Clubs (NAIC) is the corporation that supports this investment style. Investment clubs are groups of people who work together to understand the process and value of investing even small amounts of money (as little as $5-$10).

We have reviewed why it is important to save and identified some tips for saving money. Now let's look at the real benefit of saving money -- how your money can grow!

How Money Grows

How Money Grows

Making regular payments to yourself, even in small amounts, can add up over time. The amount by which your money grows depends on the interest earned and the amount of time you leave it in the account.

Here's an example of your money not growing:

If you have $1,000 stashed away under your mattress for 1 year, it will still be $1,000 at the end of the year. Your mattress is not paying you interest for keeping your money.

Now let's look at interest and the power of compounding. This is how your money can grow.

When you compound interest, you earn money on the interest you leave in your account. Interest can be compounded daily, monthly, quarterly or annually. Not all savings accounts are created equal!

Compound Interest Exercise:

$1,000 @ 5% compounded annually earns $50 of interest at the end of one year. (You made more than if you kept it under your mattress!)

If you deposit $1,000 in an account that has daily compounding, at the end of the first day you would have $1,000.14. ($1,000 @ 5% divided by 365 days)

The next day, the interest is calculated based on the entire amount of your original deposit of $1,000 PLUS the previously earned interest -- $1,000.14 rather than just $1,000.

By the end of one year you would have $1,051.27. The extra $1.27 does not seem like much at this point. However, the table below shows the difference it makes over time.

Interest Type 5 Years 10 Years
No Interest $1,000 $1,000
Annual Compounding at 5% $1,276 $1,629
Monthly Compounding at 5% $1,283 $1,647
Daily Compounding at 5% $1,284 $1,649

This table uses the same $1,000 to show how your money grows faster the more often interest is compounded and the longer it stays in the account. The 14 cents adds up over time!

The table below shows that even small amounts of savings add up. Look what happens when you save just $1 a day.

Years No Interest 5% Daily
Year 1 $365 $374
Year 5 $1,825 $2,073
Year 10 $3,650 $4,735
Year 30 $10,950 $25,415

At the end of year 1, you would make an extra $9 compounding interest. The real power of compounding shows at the end of 30 years, you would make an extra $14,465!

The table below shows what happens to your money when you save just $5 a day. Look at the difference when your money is invested in an account that compounds interest daily.

Years No Interest 5% Daily
Years 1 $1,825 $1,871
Years 5 $9,125 $10,366
Years 10 $18,250 $23,677
Years 30 $54,750 $127,077

The table shows a difference of only $46 at the end of the first year. However, compounding daily after 30 years show a difference of $72,327!

Saving Options

Saving Options

Most people save money in a bank savings account or by purchasing investments. In a savings account, you make money by earning interest.

The bank pays you interest for borrowing your money. A bank savings account ensures your money is safe and you can access your money.

Savings in a financial institution are generally insured up to $100,000 by the Federal Deposit Insurance Corporation -- FDIC -- or the National Credit Union Association -- NCUA.

That means if your financial institution goes out of business, and it can't pay your money, the FDIC or NCUA will make sure you get your money.

Let's review the types of savings products available at most banks.

Statement Savings Account
A statement savings account is an account that earns interest. If you have a statement savings account, you will usually receive a quarterly statement that lists all of your transactions (withdrawals, deposits, fees and interest earned).

Passbook Savings Accounts
Passbook savings are similar to statement savings accounts. The difference is the record keeping. Instead of receiving a quarterly statement, all transactions are recorded in a passbook. You have to take your passbook to the bank when making transactions. The teller will update your account information when you go to the bank.

Club Account
A club account is a type of savings account you "join" to save money for a special reason, such as holidays or family vacations. Club accounts usually require you to make regular deposits.

Money Market Accounts
A money market account is one that usually pays a higher rate of interest than a regular savings account. Money market accounts usually require a higher minimum balance to earn interest, but they also pay higher rates for higher balances.

Certificates of Deposit (CDs)
CDs are accounts where you leave your money for a set period of time, such as six months, one, two or five years, called a term. You usually earn a higher rate of interest than in a regular savings account. The longer you promise to keep your money in a CD, the higher the interest rate. Be sure to think about your cash needs before opening a CD because you will pay a penalty if you withdraw your money early.

Let's review the savings and point out the differences.

Statement savings and passbook savings accounts are similar. They both earn interest. The difference is in the record keeping. Club accounts are for saving for a specific purpose, such as a vacation or a holiday.

CDs and Money Market accounts generally earn higher interest rates and require higher minimum balances. CDs are held for a fixed term. This means you cannot make deposits or withdrawals during the term. Money Market accounts do not have a fixed term. You can make deposits and withdrawals.

Always check your records and statements for accuracy. Banks are not perfect and can make mistakes.

Now that we have reviewed various savings options, you should know about some special accounts offered at some financial institutions.

Special Accounts: Frequently Asked Questions

Q. What is an Individual Development Account?
A. Individual Development Accounts (IDAS) are matched savings accounts. When an account is matched, it means another organization, such as a foundation, corporation or government entity agrees to add money to your account.

Q. Why would an organization do that?
A. Organizations will match the money people save in IDAs to encourage low-income families to save money on a regular basis. IDAs are based on the concept that asset building is necessary to break the cycle of poverty and to help families become financially independent. Asset building refers to people purchasing or holding items that will help them financially in the future. Organizations involved in IDA programs want to help low-income families achieve self-sufficiency.

Q. What can I use IDAs for?
A. If you open an IDA, the money must be used for a specific purpose. Allowable purposes include:

Ask local community action agencies, other community groups and bankers if they know of any programs in the area.

Q. What is an Electronic Transfer Account (ETA)?
A. An ETA is a low-cost account that provides federal payment recipients with the opportunity to receive their federal payments through direct deposit. The ETA is offered only through certain federally-insured banks, thrifts and credit unions.

Q. Who is qualified to open an ETA?
A. All federal payment recipients who receive any of the following can take advantage of an ETA:

• Social Security
• Supplemental Security Income (SSI)
• Veterans benefits
• Federal employee salary or retirement
• Railroad retirement payments

Q. How does an ETA work?
A. The ETA is a voluntary program for both the consumer and the financial institution. Banks, thrifts and credit unions that partner with the U.S. Treasury to provide the ETA offer an account that features:

• A monthly fee of $3 or less
• At least four cash withdrawals and four balance inquiries per month at no additional charge
• No minimum balance, except as required by state law
• Online point-of-sale transactions in the institution's network, for example, U.S. Post Office and grocery stores
• Monthly statements
• The same consumer protections as other account holders

Some banks offer more or better services for their ETA program than these minimum requirements. For example, some financial institutions might give the consumer the option to deposit other types of payments into the ETA account. Some institutions may also pay interest.

Q. How can I open an ETA?
A. Look for participating banks in your area. Access the Internet and check the following web site: http://www.eta-find.gov to find banks in your area. Participating banks and credit unions cannot refuse to open an account regardless of your credit history unless you have previously held an ETA that was closed because of fraud.

Q. What is Section 529 Plan?
A. A Section 529 Plan is a prepaid savings program for higher education. Any person can set up a plan for a child pursuing higher education. The money grows tax-deferred and is taxed at the child's rate when withdrawn for educational purposes. The donor may have state income tax breaks. The savings can be applied to any college in any state. Many plans can be started with only $25 a month. More information about state tuition programs can be found at: http://www.irs.gov.

Investment Options

Investment Options

An investment is a savings option that you purchase for future income or financial benefit. Many banks now sell investment products such as mutual funds.

Although some investment products are sold at banks, they are not the same as deposit accounts and your money is not federally-insured.

When you invest your money, there is a greater risk of losing it than if you put your money in a savings or deposit account.

There is a possibility you might lose the entire amount you invest if the investment does not perform well.

Because of the risk you take, there is also the opportunity for your investment to earn more than your regular savings account might. The higher the risk, the higher the expected return on investment.

How can you make money from investments?

You can make money on investments by selling them for more than you paid for them or by earning dividends and interest.

This income is taxable income. Some of the more popular types of investments are:

• Stocks
• Bonds, and
• Mutual Funds

It is important to note that most financial advisors recommend you have a savings cushion of 2-6 months worth of expenses. In case of an emergency, a sudden illness or a job loss, you need to be able to access your savings.

Let's review stocks.

When you buy stocks or shares, you own part of the company.

If the company does well, you might receive periodic dividends. Dividends are part of a company's profits that it gives back to you as a shareholder.

Another way to make money from stocks is to sell them at a profit. If the company does well, others might be willing to buy your stock at a higher price than you paid.

Keep in mind that if a company does poorly, you might lose money. For example, if you buy $100 worth of stock and the company is not doing well when you want to sell it, you might be able to receive only $60. In this case, you would have lost $40.

Now let's review bonds.

When you purchase a bond, you are loaning money to a corporation or to the government for a certain period of time called a term.

The bond certificate promises the corporation or government will repay you on a specific date, usually with a fixed rate of interest. Bond terms can range from a few months to 30 years. You need to research the company before you invest to make sure it has the ability to repay the loan. Corporate bonds have varying degrees of risk.

U.S. Savings bonds are a long-term investment option backed by the U.S. government.

Buying savings bonds is an easy and safe way to save small amounts of money and are frequently purchased for a child's education; however, they may be used for any purpose.

Savings bonds can be purchased at a financial institution for as little as $25 or through payroll deducation.

The U.S. government issues other securities with higher returns to pay for government activities.

Similar to U.S. Savings Bonds, they are backed by the U.S. government.

The longer you hold the investment, the better the return. U.S. government securities require a minimum investment of $1,000 and include:

• Treasury bills, which mature in 1 year or less
• Treasury notes, which mature in 1 to 10 years
• Treasury bonds, which mature in 10 to 30 years

You will get all your money back when you invest in U.S. government bonds. As with stocks, other bonds have various degrees of risk.

Bonds are long-term investments held for a specific period of time. This term is generally longer than a month and can range up to 30 years.

Finally, let's review mutual funds.

A mutual fund is a professionally-managed collection of money from a group of investors. A mutual fund manager invests your money in some combination of various stocks, bonds and other products.

The fund manager determines the best time to buy and sell the products in the fund. By combining your resources with other investors in a mutual fund, you can diversify even a small investment, which should reduce risk.

Diversification is the concept of "don't put all your eggs in one basket." This means you spread the risk of loss in a variety of savings and investment options.

Mutual funds generally have a higher return over the long term than a regular savings account. Because you can diversify your investment, there is usually less risk than buying stocks and some bonds.

Retirement investments generally grow tax free until the money is withdrawn during retirement. Retirement plans allow you to choose from different types of investments depending on how much risk you want to take.

Retirement investments include:

• Individual Retirement Accounts or IRAs
• 401(k) and 403(b) Plans and
• Keogh Plans and Simplified Employee Pension Plans

If you are interested in learning more about tax-deferred investment accounts, go to a bank or an investment firm. You can also do your own research. A public library or the Internet are good places to start.

Owning a home is an investment because the home generally increases or appreciates in value. When your home increases in value and your debt decreases in amount, your equity increases.

Equity is the difference between how much the house is worth and how much you owe on a house.

Here's an example:

Value of Home - Debt (how much you owe) = Equity

$100,000 (value of home) - $70,000.00 (debt) - $30,000.00 (equity)

Owning a business is also an investment. Although starting a business can be risky, if planned and managed correctly, it has the potential to increase your future financial security.

Now you know something about savings and investment options. Let's look at how you can decide what is best for you.

There are three main decision factors for selecting the right savings or investment:

• How much do you want to accumulate over a certain period of time?
• How long can you leave your money invested?
• How do you feel about risking your money?

These decision factors will help you choose the right savings or investment option.

Let's review some examples:

If you think you might need access to your money right away, it might be best for you to keep it in a savings account where you have immediate access.

If you are not comfortable with risk and cannot afford to lose the money, take less risk by depositing money in an insured financial institution. Shop around for the account that best meets your needs.

If you have some money you won't need for several years, you might consider different investment options such as stocks, bonds or mutual funds.

Create an action plan for paying yourself first. Consider the following questions:

What can I do now to save?

For example: If you cut down on the number of sodas you drink each day and save that money - saving just $.50 a day adds up to $182 by the end of the year!

What can I do by the end of the month to save?

For example: You could pay off a loan and continue making the loan payments to yourself.

What can you do by the end of the year to save?

For example: By the end of the year, you could buy a US Savings Bond.



The FDIC provides information about the nation's banking system including deposit insurance coverage. You can call the following toll free number with consumer questions: 1-877-ASK-FDIC (1-877-275-3342).

Building Wealth: A Beginners Guide to Securing Your Financial Future.

The U.S. Securities and Exchange Commission's Office of Investor Education and Assistance provides information about investing. You can call 1-800-SEC-0330.

http://www.usa.gov | http://www.consumer.gov
These web sites provide access to all online U.S. Federal Government resources.

The Federal Consumer Information Center (FCIC) provides lots of free online consumer information to help the public. The FCIC produces the Consumer Action Handbook, which is designed to help citizens find the best and most direct source for assistance with their consumer problems and questions. You can call 1-800-688-9889.

Better Investing Website
The National Association of Investors Corporation provides investment information for individuals and clubs. You can call 1-877-ASK-NAIC or (1-877-275-6242).

This site includes information about college savings plans.