| New Employee Savings Tips |
| Savings and Checking |
| Start Saving |
| 529 Plans |
| FDIC Deposit Insurance Coverage |
| Manage Your Risks - Maximize Your Returns |
| Magic of Compounding |
| Rule of 72 |
You’re starting a new job. Perhaps it’s your first full-time job or maybe you’ve been working for a while. It may feel like there are many demands on your income: rent, credit card debt, school loans, or car payments. Although it’s important to save for these short-term goals, remember to save for your long-term goals as well. If you start saving now, the money will have years to grow and you’ll have a better chance of being able to do all the things you want to do in the future. Plus, by starting early, you will need to save a lot less later on.
1. Find the money and get started Take a look at what you’re earning and how much you’re spending. Put together a budget, and find some money to put into savings. Some ideas are: • Take your lunch, your coffee, or your sodas to work, • Work some extra hours, get a second job, • Give up cable TV, or skip happy hour. But in the end, you have to decide how you’re going to save and get yourself started. 2. Take advantage of your employer’s retirement savings plan. Workplace savings plans are the easiest way to save. If your employer offers a 401(k) or similar retirement savings plan, this is how it works: • You generally need to take the first step and sign up for it. Sometimes, your employer will automatically sign you up. • Then you decide how much you will contribute from each paycheck and where the money is invested. • Often, there’s free money involved in a 401(k). The technical term for the free money is an employer match – many employers contribute to their employees’ 401(k) accounts once the employee begins to put money in. If, for example, your employer matches 50 cents for each dollar you contribute, that’s an immediate 50% return. There is no other investment that will give you that kind of guaranteed return – don’t pass it up. Find out how much your employer match is and how much you need to contribute to get all of it. Some larger employers offer a traditional, old-fashioned defined benefit pension plan.
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In this type of plan, the employer contributes the money, invests it and pays a benefit to retirees based on their pay and the number of years they worked for the employer. For more information, check out the resources at the end. 3. Open an Individual Retirement Account (IRA) Whether or not your employer has a retirement savings plan, you can start saving in an IRA. An IRA is a personal account that you set up with a financial institution, like a bank or a mutual fund company. You can send a check to the financial institution or have a certain amount deducted regularly from your checking or savings account, or from your paycheck. There are two different types of IRAs, Traditional and Roth IRAs, which offer different tax advantages. It’s tricky to determine absolutely which one will provide the greater tax advantages, so do some research and make your best guess. The important thing is to get started. There are income limits and limits on how much you can contribute to an IRA each year. But for many of us the problem is that money is tight. Keep in mind that you can start with a much smaller amount and then increase it later when you have more to save. 4. Learn about some basic investment choices Whether you sign up for a 401(k) account at work or start saving money in an IRA, you will have to decide where the money will be invested. Many investors focus largely on mutual funds, and if you are just starting to invest, take a look at these two types of mutual funds: index funds and life cycle funds. |
An index fund is a mutual fund that mirrors the performance of some particular segment or part of the stock or bond market. The fees that you pay can be quite low because the fund manager plays a limited role. One popular type of index fund, a Standard & Poor’s (S&P) 500 Index fund, tracks the stock prices of 500 large companies. A life cycle fund is a mutual fund geared toward investors by age. If, for example, you plan to retire somewhere around the year 2045 you might choose a 2045 fund. The advantage of this type of fund is that it adjusts the balance of your investments (usually stocks and bonds) to fit your age and the number of years until retirement. 5. Leave the money there. This may be the hardest part of all. When you change jobs or think you need some extra cash – resist the urge to cash out these accounts and spend the money. Instead, leave it there and watch it grow. How much more will Jen have than Mike? In this example, using a 7% interest rate, Jen has $20,601 more. Although the amounts will change depending on the interest rate, the person who starts early and leaves it there will always have the advantage. Think about this: Jennifer puts $1,000 into savings every year from age 20 to age 30, contributing a total of $11,000. She stops, but she doesn’t spend it – she leaves it there. Michael starts at age 30 and saves $1,000 a year until he is 64, contributing a total of $35,000. But guess what. Jennifer’s account is worth more* than Michael’s at age 65, even though she put in a lot less. Why? Jennifer started earlier and compound interest has longer to make her money grow. |
| How much more will Jen have than Mike? In this example, using a 7% interest rate, Jen has $20,601 more. Although the amounts will change depending on the interest rate, the person who starts early and leaves it there will always have the advantage. | ||
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When it comes to finding a safe place to put your money, there are a lot of options. Savings accounts, checking accounts, certificate of deposits and money market accounts are popular choices. Each has different rules and benefits that fit different needs. When choosing the one that is right for you, consider:
* Minimum deposit requirements. Some accounts can only be set up with a minimum dollar amount. If your account goes below the minimum, no interest is paid or you are charged extra fees.
* Limits on withdrawals. Can you take money out whenever you want? Are there any penalties for doing so?
* Interest. How much (if anything) is paid and when: daily, monthly, quarterly, yearly?
* Deposit insurance. Look for a sign that says your money is protected by the Federal Deposit Insurance Corporation. Credit union accounts have similar protection from the National Credit Union Administration.
* Convenience. How easy is it to put money in and take it out? Are there tellers or ATM machines close to where you work and live? Or would you receive most of your service via the telephone or Internet? Can you make direct deposits and other electronic transfers?
If you are considering a checking account or another type of account with check-writing privileges, add these items to your list of things to think about:
* Number of checks. Is there a maximum number of checks you can write per month? If you write more, what is the charge?
* Amount of check. Is there a minimum or maximum amount for any one check?
* Account and check fees. Is there a monthly fee for the account or a charge for each check you write? Some accounts only charge a fee if you write more than a certain number of checks per month.
* Holds on checks. Is there a "hold" or waiting period before you can access the money you deposit in your account? There may be a longer hold period for out-of-state checks.
* Overdrafts. If you write a check for more money than you have in your account, what happens? You may be able to link your checking account to a savings account to protect yourself. There could also be high fees for "bounced" checks (from you or written to you). Bounced checks can blemish your credit record so it's better to be covered.
Source: Federal Citizen Information Center
Small amounts of money saved regularly add up fast. Compound interest, which lets you earn interest on interest, will make your savings grow even faster.
TRY THIS:
Open a savings account. Have part of your paycheck deposited directly into your savings account every month.
■ Shop for the best interest rates.
■ Understand all fees and charges.
■ Take advantage of your company’s 401(k) or invest in an IRA (individual retirement account).
■ As your income rises, increase the percentage you save.
■ Know that the greater the potential profit on an investment, the greater the potential risk of losing your money.
TIP: The earlier in life you start saving, the more you’ll have later.
Source: Federal Reserve System
A 529 plan is a tax-advantaged savings plan designed to encourage saving for future college costs. 529 plans, legally known as “qualified tuition plans,” are sponsored by states, state agencies, or educational institutions and are authorized by Section 529 of the Internal Revenue Code.
There are two types of 529 plans: pre-paid tuition plans and college savings plans. All fifty states and the District of Columbia sponsor at least one type of 529 plan. In addition, a group of private colleges and universities sponsor a pre-paid tuition plan.
What are the differences between pre-paid tuition plans and college savings plans?
Pre-paid tuition plans generally allow college savers to purchase units or credits at participating colleges and universities for future tuition and, in some cases, room and board. Most prepaid tuition plans are sponsored by state governments and have residency requirements. Many state governments guarantee investments in pre-paid tuition plans that they sponsor.
College savings plans generally permit a college saver (also called the “account holder”) to establish an account for a student (the “beneficiary”) for the purpose of paying the beneficiary’s eligible college expenses. An account holder may typically choose among several investment options for his or her contributions, which the college savings plan invests on behalf of the account holder. Investment options often include stock mutual funds, bond mutual funds, and money market funds, as well as, age-based portfolios that automatically shift toward more conservative investments as the beneficiary gets closer to college age. Withdrawals from college savings plans can generally be used at any college or university. Investments in college savings plans that invest in mutual funds are not guaranteed by state governments and are not federally insured.
Investing in a 529 plan may offer college savers special tax benefits. Earnings in 529 plans are not subject to federal tax, and in most cases, state tax, so long as you use withdrawals for eligible college expenses, such as tuition and room and board.
However, if you withdraw money from a 529 plan and do not use it on an eligible college expense, you generally will be subject to income tax and an additional 10% federal tax penalty on earnings. Many states offer state income tax or other benefits, such as matching grants, for investing in a 529 plan. But you may only be eligible for these benefits if you participate in a 529 plan sponsored by your state of residence. Just a few states allow residents to deduct contributions to any 529 plan from state income tax returns.
Table: FINRA
Source: Securities & Excahnge Ccommission
FDIC Deposit Insurance Coverage
The Federal Deposit Insurance Corporation (FDIC) is an independent agency of the United States government that protects against the loss of insured deposits if an FDIC-insured bank or savings association fails. FDIC deposit insurance is backed by the full faith and credit of the United States government. Since the FDIC was established, no depositor has ever lost a single penny of FDIC-insured funds.
FDIC insurance covers funds in deposit accounts, including checking and savings accounts, money market deposit accounts and certificates of deposit (CDs). FDIC insurance does not, however, cover other financial products and services that insured banks may offer, such as stocks, bonds, mutual fund shares, life insurance policies, annuities or municipal securities.
There is no need for depositors to apply for FDIC insurance or even to request it. Coverage is automatic.
To ensure funds are fully protected, depositors should understand their coverage limits. The FDIC provides separate coverage for deposits held in different account ownership categories. The coverage limits shown in the chart below refer to the total of all deposits that an accountholder has in the same ownership categories at each FDIC-insured bank. The chart shows only the most common ownership categories that apply to individual and family deposits, and assumes that all FDIC requirements are met.
Basic FDIC Deposit Insurance Coverage Limits*
Single Accounts (owned by one person) $250,000 per owner
Joint Accounts (two or more persons) $250,000 per co-owner
IRAs and certain other retirement accounts $250,000 per owner
Trust Accounts $250,000 per owner per beneficiary subject to specific limitations and requirements
Corporation, Partnership and Unincorporated Association Accounts $250,000 per corporation, partnership or unincorporated association
Employee Benefit Plan Accounts $250,000 for the non-contingent, ascertainable interest of each participant
Government Accounts $250,000 per official custodian
Non-interest Bearing Transaction Accounts Unlimited coverage – only at participating FDIC-insured banks and savings associations **
* On January 1, 2010, the standard coverage limit will return to $100,000 for all deposit categories except IRAs and Certain Retirement Accounts, which will continue to be insured up to $250,000 per owner.
** Unlimited deposit insurance coverage is available through December 31, 2009, for non-interest bearing transaction accounts at institutions participating in FDIC’s Temporary Liquidity Guarantee Program.
Manage Your Risks - Maximize Your Returns
When you start saving early and consistently, you can take a slow and steady route to your goals. Let’s say that you have a goal to save $100,000. If you have 20 years to reach this goal, you could choose fairly conservative investments that earn, for example, a 4% rate of return. At this earnings rate, you need to invest $3,272 per year, and the magic of compounding helps you reach your goal.
But what if you shorten your savings period to just 10 years? Then you have to save more and/or consider taking more risk. It would be almost impossible to earn a rate of return high enough to reach your $100,000 goal with the same amount of annual savings in just 10 years. So, what if you invested your annual savings in a vehicle earning an 8% rate of return? You would need to save $6,559 each year to reach $100,000. Remember, the higher the rate of return an investment vehicle has the potential to earn, the higher the risk that you could lose some or all of your money.
Source: Choose To Save
The Magic of Compound Interest
Simply stated, compound interest means that you earn interest on the original amount you’ve saved, and then you continue to earn interest on the interest. This phenomenon goes on and on—packing your savings with power and moving you steadily toward your savings goals. Over time, the results can be dramatic. To achieve lifetime fi nancial security, you want your money to grow many times larger than its original value.
With the magic of compounding at work, you can predict when you will double your money. It’s called the Rule of 72—you simply divide 72 by the interest rate you’ll earn on your investment. For instance, at a constant 6% interest rate, your money will double in approximately 12 years (72 divided by 6). The best news is that you can earn interest on even small amounts of savings—so you can start the magic of compounding today.
There's a Lot to Learn About Money
Federal Reserve System
New Employee Savings Tips
U.S. Department of Labor
Building Wealth: A Beginner's Guide to Securing Your Financial Future
Federal Reserve Bank of Dallas
Certificates of Deposit: Tips for Savers
The Truth in Savings Act requires disclosures about interest rates and fees and prohibits misleading or inaccurate advertising for checking and savings accounts.
Calculate Your Deposit Account's FDIC Insurance Coverage
Find Out What Your Savings Bonds Are Worth
Approximate the Future Value of Your Savings Bonds
$300 per Month Conservatively Invested for 40 Years Equals Well Over $1 Million