Pay yourself first. Schwab Moneywise Workshop Series Month Date, Year

Transcription

1 Pay yourself first. Schwab Moneywise Workshop Series Month Date, Year

2 Today we ll talk about 8 simple savings steps How to pay yourself first How to put your savings to work for you 2

3 The Schwab savings fundamentals 1 Save enough in your workplace retirement plan to maximize the match 2 Payoff nondeductible high-interest rate debt 3 Create an emergency fund equal to at least 3 months of essential living expenses 4 Save the maximum in tax-advantaged retirement accounts 5 Save for child s education 6 Save for a down payment on a home 7 Pay down deductible high-rate debt 8 Keep investing 3

4 You can get paid to save Your employer offers a match against your contributions To receive the full match, you have to contribute enough yourself Employer money can boost retirement savings Matching amounts may benefit from compounding 4

5 It pays to get your full match Full Match: 6% of your salary Partial Match: 1% of your salary $3,000 $42/month $500 $500 $3,000 $250/month $103,832 in 30 years $622,922 in 30 years Company match Your contribution Source: Schwab Center for Financial Research. Savings example assumes that a percentage of the paycheck was contributed monthly to a 401(k) account that earns a constant 6% annual rate of return with monthly compounding. This chart represents a hypothetical investment and is for illustrative purposes only. The actual annual rate of return will fluctuate with market conditions. Salary is assumed to be $50,000 and to grow annually at 2.2% inflation. The employer matches 100% of the employee's contribution, up to 6% of salary. 5

6 Pay off credit cards and other high-interest debt Why pay off nondeductible, high-interest debt? More expensive than other debt Paying off debt frees up money Not needed for interest payments Reduces what you can save Can be used to increase savings 6

7 Increasing card payments makes a big difference SAVE $1,889 Monthly payment $120 Monthly payment $300 Card paid off in 6 years Interest $2,689 Card paid off in 2 years Interest $800 This chart represents a hypothetical scenario and is for illustrative purposes only. Example shows what you can save by increasing your monthly payment on a credit card with a $6,000 balance charging 13% interest (if no further charges incurred). 7

8 Cover yourself in case of emergency Everyone has unexpected expenses Create an emergency fund At least 3 months of essential living expenses 8

9 How to save for emergencies Easy access accounts Separate from other accounts Being prepared may keep you on track even when emergencies occur 9

10 Caroline Balancing short-term expenses with long-term goals Hear from real people via multi-media experience Pay yourself first

11 Retirement savings Traditional Tax-Deferred Savings Roth Savings Pre-tax contribution Reduce current income taxes Pay ordinary income taxes at distribution Post-tax contribution No reduction of current income taxes No taxes at distribution: Age 59½ 5 years 11

12 How does my 401(K) contributions change my take home pay? Tax rate: 15% Traditional 401(k) Save - $146 Reduction in pay - $124 Roth 401(k) Save - $146 Reduction in pay - $146 Roth 401(k) contribution reduces take-home pay an additional $22 per paycheck. For illustrative purposes only. Tax rates will vary. Based on semi-monthly contributions of 10% of $35,000 income.. 12

13 You ve taken control of your finances. What next? 13

14 The Schwab savings fundamentals 1 Save enough in your workplace retirement plan to maximize the match 2 Payoff nondeductible high-interest rate debt 3 Create an emergency fund equal to at least 3 months of essential living expenses 4 Save the maximum in tax-advantaged retirement accounts 5 Save for child s education 6 Save for a down payment on a home 7 Pay down deductible high-rate debt 8 Keep investing 14

15 Children heading to college? Start saving now, and pay less later Projected cost of college in 15 years: $215,460 Your out-of-pocket cost $215,460 Your out-of-pocket cost $108,150 Your out-of-pocket cost $90,750 Don t save ahead Pay $53,865/yr for 4 years Save ahead in taxable account Save $7,210/yr for 15 years Save ahead in taxadvantage 529 Plan Save $6,050/yr for 15 years Your investment earnings Your out-of-pocket cost Source: Schwab Center for Financial Research. The examples assume an 8% annual return, composed of 2% interest income and 6% long-term capital gains. Interest income is taxed at a 35% ordinary income tax rate, while capital gains are taxed at 15% throughout the 15-year period. This represents a hypothetical investment and is for illustrative purposes only; the actual rate of return will fluctuate with market conditions and is subject to changes in tax law. This is not intended to represent the performance of any specific investments. 15

16 Tips for saving for a home 1. Get an idea of the purchase price and monthly mortgage payments you can afford. Note: General rule of thumb is to pay no more than 28% of your gross income on principal, interest, property taxes, and insurance. Remember to consider those extras that can add up Homeowner s Insurance Property tax Ongoing maintenance & repair Homeowner s association (HOA) fees 2. To start saving, choose investments and accounts that are appropriate for your risk tolerance and timing needs. 3. Avoid tapping tax-deferred retirement accounts. Use taxable accounts to put savings toward your major purchase goals. 16

17 Pay down tax-deductible, high-interest debt like mortgages 1. Reducing high-interest-rate debt even if it's a tax-deductible mortgage, home equity line of credit, or student loan can enhance your ability to save. Refinancing considerations If interest rates have fallen since you took out your mortgage, refinancing could lower your monthly payments in the near term and save you money over time. Be sure to factor in any transaction and closing costs that may be included in refinancing. 2. For long-term financial stability, start paying down overall debt to a manageable level once you've taken care of your other savings priorities. 17

18 Never forget to pay yourself first. 18

19 Pay yourself first Make saving automatic Pay yourself (savings, retirement, or investments) before any other monthly expense Your employer s pre-tax 401(k) is one of the easiest ways to get started Follow up with automatic contributions to a savings account 19

20 Your next steps Take charge of your money 20

21 Valuable resources for you Schwabsavingsfundamentals.com schwabmoneywise.com Access to electronic services may be limited or unavailable during periods of peak demand, market volatility, systems upgrade, maintenance, or for other reasons. 21

22 We are here to help Go online to enroll, change contribution rate, access education, etc. Talk to someone - contact your Schwab Advice Consultant Ask question or enroll in advice Review your quarterly statement 22

23 Important information The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc. The information in this presentation is for informational purposes only. It is not intended to be a substitute for specific individualized tax, legal or investment planning advice. Where specific advice is necessary or appropriate, consult with a qualified tax advisor, CPA, financial planner or investment manager., Inc. provides recordkeeping and related services with respect to retirement plans and has provided this communication to you as part of the recordkeeping services it provides to the Plan. The material contained herein is proprietary to, Inc. ("SRPS ) and for informational purposes only. None of the information constitutes a recommendation by SRPS. The information is not intended to provide tax, legal, or investment advice. SRPS does not guarantee the suitability or potential value of any particular investment or information source. Certain information presented herein may be subject to change. Neither the presentation nor any information or material contained in it may be copied, assigned, transferred, disclosed, or utilized without the express written approval of SRPS. 2014, Inc. All rights reserved. ( ) 23

24 Thank you.