Slide 1: Pay Yourself First Money Smart Course Indiana Department of Financial Institutions Copyright, 1996 © Dale Carnegie & Associates, Inc.
Slide 2: YOU WILL KNOW  Ways to save money  How money can grow  The difference between savings and investment accounts
Slide 3: OVERVIEW OF SAVINGS Paying yourself first means that when you get a paycheck, you put away the money you want to save for your goals. There are many reasons to pay yourself first. For example:  Manage your money better  Increase your savings  Improve your standard of living.
Slide 4: Overview Of Savings Some major expenses people save for include:  Unexpected events such as loss of job, car repair, or hospitalization  Downpayment for a house, car, or other large purchase.  College education  Vacation, and  Retirement
Slide 5: SAVING TIPS  Consider needs vs. wants  Direct deposit to savings  Pay your bills on time  Use a checking account vs. check- cashing stores  Save extra money from raises or bonuses  Keep making loan payments to yourself
Slide 6: Saving Tips The first tip is to consider ‘needs versus wants.’ Where can you save?  Do you eat out a lot?  Can you cut back on coffee, candy, soda, or cigarettes?  Do you have services you do not really need such as a cable television, cell phone, or call waiting?
Slide 7: Saving Tips The second tip is to use direct deposit or automatic transfer to your savings account. Put a portion of your paycheck in your savings account through direct deposit or automatic transfer. Transfer some money from your checking account into your savings account regularly. Purchase U.S. savings bonds through payroll deduction. Make saving a habit.
Slide 8: Saving Tips The third tip is to pay your bills on time. This saves the added expense of:  Late fees  Extra finance charges  Disconnect fees for phone, electricity, etc.  Fees to reestablish connection if your service is disconnected  The cost of eviction  Repossession of cars or other
Slide 9: Saving Tips The fourth tip is to understand the expense of using check-cashing stores. At $3-$5 for each check you cash, this can add up to several hundred dollars in a year. Consider opening a checking account at a bank or credit union. If you would like more information about checking accounts, you can take the Check it Out course.
Slide 10: Saving Tips The next three tips are some more ideas for paying yourself first:  If you get a raise or bonus from your employer, save that extra money.  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.  If you receive cash as a gift, save at lease part of it.
Slide 11: BENEFITS OF PAYING YOURSELF FIRST A step-by-step plan for meeting expenses in a given period of time. $avings plus Interest $avings
Slide 12: Benefits Of Paying Yourself First Making regular payments to yourself, even in small amounts, can add up over time. The amount your money grows depends on the interest earned and the amount of time you leave it in the account. The following is an example of your money not growing.
Slide 13: Benefits Of Paying Yourself First If you have a $1,000 stashed away in a jar or under your mattress for 1 year, it will still be $1,000 at the end of the year. Your jar or mattress is not paying you interest for keeping your money.
Slide 14: Compounding Interest Interest and the power of compounding. 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, or annually.
Slide 15: Compounding Interest 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. The next day, the interest is calculated based on the entire amount of your original deposit or $1,000 PLUS the previously earned interest; $1,000.14 rather than $1,000.
Slide 16: COMPOUND INTEREST EXERCISE ANNUAL COMPOUNDING $1,000 @ 5% compounded annually $1,000.00 at the end of the first day DAILY COMPOUNDING $1,000 @ 5% compounded daily $1,000.14 at the end of the first day On the second and following days the earned interest is added and the total amount is compounded $1,051.27 (End of Year 1) $1,050 (End of Year 1)
Slide 17: Compounding Interest 5 YEARS 10 YEARS No Interest Annual Compounding at 5% Monthly Compounding at 5% Daily Compounding at 5% $1,000 $1,276 $1,283 $1,284 $1,000 $1,629 $1,647 $1,649
Slide 18: Compounding Interest The more often your money compounds, the more interest you will receive. The interest you earn is considered income and is taxable.
Slide 19: Annual Percentage Yield Annual Percentage Yield, or APY, is the amount of interest you will earn on a yearly basis expressed as a percentage. The APY includes the effect of compounding. When comparing different accounts, you should compare the APYs of the savings products, not the rates.
Slide 20: SAVING $1 A DAY NO INTEREST $ 365 $ 1,825 $ 3,650 $10,950 5% DAILY COMPOUNDING $ 374 $ 2,073 $ 4,735 $25,415 Year 1 Year 5 Year 10 Year 30
Slide 21: Saving $1 A Day This table shows that even small amounts of savings add up. Look at what happens when you save just $1 a day At the end of one year you made $9 compounded interest. At the end of 30 years, you made an extra $14,465!
Slide 22: SAVING $5 A DAY NO INTEREST $ 1,825 $ 9,125 $18,250 $54,750 5% DAILY COMPOUNDING $ 1,871 $10,366 $23,677 $127,077 Year 1 Year 5 Year 10 Year 30
Slide 23: Saving $5 A Day This table 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. There is a difference of only $46 at the end of the first year. However compounding daily after 30 years shows a difference of $72,327!
Slide 24: SAVINGS 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.
Slide 25: Savings Options 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). If your financial institution goes out of business and it can’t pay your money, the FDIC or NCUA will see you get your money.
Slide 26: SAVINGS ACCOUNTS  Statement savings account  Passbook savings account  Club account  Money Market account  Certificate of Deposit (CD)
Slide 27: Statement Savings Account This account earns interest and you will usually receive a quarterly statement that lists all your transactions  withdrawals, deposits, fees, and interest earned.
Slide 28: Passbook Savings Account With this account, you must go to the bank to make transactions. The teller will update your deposit or withdrawal information when you go to the bank. Statement savings and passbook savings accounts are similar. They both earn interest. The difference is in the recordkeeping.
Slide 29: Club Account This is an account you ‘join’ to save money for a special reason, such as a holiday, family vacation, or college. These accounts usually require to you make regular deposits.
Slide 30: Certificate of Deposit This is an account 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. The longer you promise to keep your money in the account, the higher the interest rate. You can not make deposits or withdrawals during the term. There is a penalty for withdrawing your money before the fixed term of the CD.
Slide 31: Money Market Account This account usually pays a higher rate of interest and usually requires a higher minimum balance to earn interest. This account pays a higher rate for higher balances. Money Market accounts do not have a fixed term. You can make deposits and withdrawals.
Slide 32: SPECIAL ACCOUNTS  Individual Development Account or IDA.  Electronic Transfer Account or ETA.  Section 529 Plans
Slide 33: Individual Development Account or IDA Organizations will match the money people save in IDAs to encourage lowincome families to save money on a regular basis. Most IDAs are only used to save for college, job training, a downpayment or closing costs for a first home purchase, or to start a business.
Slide 34: Electronic Transfer Account or ETA ETAs are low-cost savings accounts that allow individuals that receive federal payments to receive those payments through direct deposit. ETAs are offered only through federallyinsured banks, thrifts, and credit unions.
Slide 35: Electronic Transfer Account You can take advantage of an ETA if you receive:  Social Security payments  Supplemental Security Income, or SSI payments  Veterans benefits  A federal employee salary or retirement, or Railroad retirement payments.
Slide 36: Section 529 Plans These are prepaid savings plans for higher education. Anyone can set up a plan for a child’s education. The money grows taxdeferred and is taxed as the child’s rate when withdrawn. The savings can be applied to any college in any state. Many plans start with only $25 a month contribution. The accounts are generally managed by large investment companies.
Slide 37: INVESTMENTS  Stocks  Bonds  Mutual Funds $
Slide 38: 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.
Slide 39: Investment Options When you invest your money, there is a greater risk of losing it than if you put your money in a savings or other deposit account. There is a possibility you might lose the entire amount you invest if the investment does not perform well.
Slide 40: Investment Options 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 the investment. You can make money on investments by selling them for more than you paid for them or by earning dividends and interest.
Slide 41: Savings Cushion 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.
Slide 42: 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.
Slide 43: Stocks Buying stocks is not a good investment option if you cannot afford to lose your money. 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 for your stock, you would have lost $40.
Slide 44: 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.
Slide 45: U S Savings Bonds 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. Savings bonds can be purchased at a financial institution for as little as $25 or through payroll deduction.
Slide 46: Other U S Securities 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.
Slide 47: Other U S Securities 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.
Slide 48: U S Securities 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.
Slide 49: RETIREMENT INVESTMENTS  Individual Retirement Account (IRA)  401(k) and 403 (b) Plans  Keogh Plans and Simplified Employee Pension Plans
Slide 50: Retirement Investments 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. 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 is a good place to start.
Slide 51: Owning A Home 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.
Slide 52: Equity Value of Home - Debt (how much you owe) = Equity Use the following dollar values as an example: $ 100,000 (value of home) -$ 70,000 (debt) =$ 30,000 (equity)
Slide 53: Owning A Business Owning a business is an investment. Although starting a business can be risky, if planned and managed correctly, it has the potential to increase your future financial security.
Slide 54: DECISION FACTORS  How much do you want to accumulate?  How long can you leave your money invested?  How do you feel about risking your money?
Slide 55: Decision Factors These decision factors will help you choose the right savings or investment option. 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. You should always keep some savings available for emergencies.
Slide 56: Decision Factors 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.
Slide 57: Decision Factors The questions to consider are: What I can do now to save? For example: Right now I can cut down on the number of sodas I drink each day and save that money – saving just $.50 a day adds up to $182 by the end of the year!
Slide 58: Decision Factors What I can do by the end of the month to save? For example: Next month I can pay off a loan and continue making the loan payments to myself.
Slide 59: Decision Factors What I will do by the end of the year to save? For example: By the end of the year, I can buy a US Savings Bond.