Tab 4b, Saving and Investing

Financial Financial Fitness Program Fitness Program

Saving and Investing

Key Points

Importance of saving and investing

Resources to aid saving

Strategies to reduce spending and increase income

Savings tools and challenges

Key Points

Difference between saving and investing

Basic investment strategies and terms

Retirement planning and Social security

What is SavingsWhat is Savings

Setting aside money to meet known or unexpected short-term needs

An act of economizing; reduction in cost; "it was a small economy to walk to work every day"; "there was a saving of $2.00"

Characterized by thriftiness; "wealthy by inheritance but saving by constitution"- Ellen Glasgow

Savings in the USA Savings in the USA Why is it so Difficult ?Why is it so Difficult ?

#1 Reason's)The capacity to save has become difficult in recent years due to :

“Consumer Mentality”"I Want It Now" or " I Must Have It

Immediately"

“an illness that, apparently, is only cured when you spend your money on items or assets that will give short or maybe even long term happiness but will definitely not increase in value. In other words - A Depreciable Asset".

Savings in the USA Savings in the USA Why is it so Difficult ?Why is it so Difficult ?

#1 Reason's)The capacity to save has become difficult in recent years due to :

Internal vs. External Factors

Savings in the USA Savings in the USA Why is it so Difficult ?Why is it so Difficult ?

#1 Reason's)The capacity to save has become difficult in recent years due to :

Internal FactorsHigher consumer debt levels Employees not vested or not fully

utilizing 401(K) or other company retirement plans.

56% of working-age households won't be able to maintain their pre-retirement standard of living after they retire.

Savings in the USA Savings in the USA Why is it so Difficult ?Why is it so Difficult ?

#1 Reason (con’t)The capacity to save has become difficult in recent years due to :

External Factors Low savings rates due to low market interest rates in

general Living wage is higher on average than the minimum

wage. Higher interest rates on credit cards. i.e. “the credit

card trap” Costs associated with Sub Prime and Predatory Lending

loan products, as well as other fringe banking services. – Pay Day Loans– Check Cashers

Why is Saving ImportantWhy is Saving ImportantTO YOU?TO YOU?

To keep from living pay check to pay check where all the house hold funds are exhausted by meeting monthly obligations

To meet emergencies and unexpected expenses without having to incur new or additional debt

To pay for certain goals in life such as a house, car, education, retirement, lifestyle etc…

You must Save to become an Investor

Importance of SavingImportance of Saving

“The Coffee Compound”“The Coffee Compound”

$1,561.53 in 2 years

$2/ day 5% interest =

$2 a day for 2 years at 5% interest

Understanding and Calculating Understanding and Calculating InterestInterest Simple Interest

Dollar Amount x Interest Rate x Term (Years)=Amount Earned$100 x .06 x 1= $6 2 years: $12

Compound Interest(Original Amount + Earned Interest) x Interest Rate x Term (Years)= Amount Earned$100 x .06 x 1= $6$100 x .06 x 1= $62 years: $106 x .06 x 1= $6.36 + $106 = 2 years: $106 x .06 x 1= $6.36 + $106 = $112.36$112.36

Rule of 72Rule of 72

Doubles 3% interest72/3=24

6% interest72/6=12

12% interest72/12=6

Age Time for money to double21 $2,000 $2,000 $2,000

27 $4,000

33 $4,000 $8,000

39 $16,000

45 $4,000 $8,000 $32,000

51 $64,000

57 $16,000 $128,000

63 $256,000

69 $8,000 $32,000 $512,000

Types of SavingsTypes of Savings

Set-aside account for periodic and unexpected expenses

Account to reach specific goals

Tips for SaversTips for Savers

Pay yourself first

Open a savings account far away from home and work

Bank change at end of day

Bank surprises

Tips for SaversTips for Savers

Make it a habit

Start small

Hang in there

Ideas for Increasing IncomeIdeas for Increasing Income

Overtime or a second job Other family members work Better paying job Savings Negotiate with creditors Other resources

Savings ToolsSavings Tools

Savings Accounts Money Market Accounts Certificates of Deposits (CDs) Individual Development Accounts

(IDAs)

Choosing an AccountChoosing an Account

Interest rate

Fees, charges and penalties

Balance requirements

Balance calculation method

Savings BarriersSavings Barriers

Funds exhausted by meeting monthly obligations

Emergencies and unexpected expenses

Savings Versus InvestingSavings Versus Investing

Saving is for emergencies and short-term goals and accounts earn less money

Investing is for longer-term goals and plans get paid at higher rate

Financial Financial Fitness Program Fitness Program

Investing

Investing Started SimpleInvesting Started Simple

In The End You’ll Learn…In The End You’ll Learn…

Asset Building Opportunities

Long Term Planning

Future Retirement Funds

Why Bother?Why Bother?

Social Security Income

Enhance Quality Of Life

Future Medical Needs

Why BotherWhy Bother

Inflation

Estate planning

Life Expectancy

Minimize Work Schedules

Desired Outcome and TimeDesired Outcome and Time

Ability to absorb risk and speculate future needs drives investing behavior

3%?

6%? Graduated Risk

9%?

Real PossibilitiesReal Possibilities

Investing At Age 35

Earning $18,000/year

Saving 3% with 401k, 403b, etc.

Rate of return 6% (moderate risk)

Nest egg at 65: $48,214

Real PossibilitiesReal PossibilitiesInvesting At Age 45

Earning $30,000/year

Saving 5% with 401k, 403b, etc.

Rate of return 4% (safe risks)

Nest egg at 65: $46,958

How To Do It: Door Number 1How To Do It: Door Number 1

Employer Programs

Pensions

401(k)s

403(b)s

SEPs, SIMPLES

How To Do It: Door Number 2How To Do It: Door Number 2

Personal Efforts

IRA

Annuities

Certificates of Deposit

PensionsPensionsEmployer Contribution Plans

Primary indicators

Not adjusted for inflation

Eligibility (FT/Vested)

Not guaranteed

401(k)s and 403(b)s401(k)s and 403(b)s

Employer-Sponsored PlanTax-deferred

Withdrawal after age 59-1/2

Contributions may be matched

(Similar to an IDA - “free” dollars)

SEPsSEPs

Simplified Employee Pension Plan

Set up by the employer

May be a tax-deferred IRA or annuity

SIMPLESIMPLE

Savings Incentive Match Plan

Pre-tax benefits

Employer % contribution

Contributions limits

The IRA Very BasicsThe IRA Very Basics

Individual Retirement Account

Traditional IRAs:

– Annual contribution caps

– Tax-deductible or non-deductible

– Taxes are deferred

The IRA Very BasicsThe IRA Very Basics

Roth IRAs

– Tax-free withdrawals IF…

– Contributions not tax deductible

AnnuitiesAnnuities

Periodic payments from an insurance company to a policyholder

– Pretax salary reductions

– Earns tax-deferred income

Certificates of DepositCertificates of Deposit

Like a short term savings goal it can be established for longer terms

Least cumbersome paperwork

Easiest to draw funds

Lowest risk and lowest return

Websites to HyperlinkWebsites to Hyperlink Money

– http://www.money.com/ Kiplinger

– http://www.kiplinger.com/ The Motley Fool

– http://www.fool.com/ Bankrate

– http://www.bankrate.com/ Investopedia

– www.investopedia.com

Retirement PlansRetirement Plans

Social Security

Employer Savings Plans

Personal Savings Plans

Financial PlanFinancial Plan

Usually a document prepared by an insurance or investment professional

Evaluate the likelihood of your reaching your financial goals given your age, asset allocation, and tax obligation.

Plans concentrate on specific goals such funding a college education, planning for retirement, or reducing estate taxes

Financial PlanFinancial Plan

Should list your stated goalsGive a timetable to reach themHave financial projections related to your stated

goals and asset allocationProvide disability, life, and liability insurance

evaluationsMake investment recommendations related to

your goalsGive income tax management strategies

Why is a Financial Plan Why is a Financial Plan Important? Important?

Help clarify and achieve numerous financial goalsDetermine where you are spending your moneyCan be tax deductibleUnderstand the commitment necessary to meet

financial goalsHelp understand real insurance needsDetermine the most effective way to invest

resources

Choosing A Financial Choosing A Financial Advisor/Planner Advisor/Planner

How long have you been in the business? Do you specialize in any product or service? How are you compensated? Will other members of the company help prepare the

plan? How many clients do you have? What is the average net worth or portfolio of your

client base? How many of your clients have written financial

plans and can I see one?

ResourcesResources

National Association of Personal Financial Advisors

www.napfa.org

Institute of Certified Financial Planners

www.cfp-ca.org

SummarySummary

A little bit of savings adds up over time

Pay yourself first

Make savings a habit

Look for ways to trim expenses

Save and invest (in your future)