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:
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
Think about what your goals are for the future and what you might want to start
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!
Tips to Help You Save Money
Saving money doesn't have to be hard. Take a look at some of the saving tips listed
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
• 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
• 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
Now let's look at interest and the power of compounding. This is how your money
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
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
Annual Compounding at 5%
Monthly Compounding at 5%
Daily Compounding at 5%
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.
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
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!
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
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.
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
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:
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:
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:
• 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
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
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
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
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 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
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:
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.
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.