Money management. for young professionals FINANCIAL RESOURCES. MidWestOne.com/FinancialResources Member FDIC

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1 Money management for young professionals FINANCIAL MidWestOne.com/FinancialResources

2 Money management for young professionals As a young professional, you are confronted every day with new experiences. Managing your personal finances is just one of these many challenges. What exactly is a 401(k)? What s the smart way to pay off college loans? How can I start to save? What is my credit score, and why does it matter? In this booklet you ll find a collection of our favorite money management articles for young professionals from the Financial Resources page on MidWestOne s website. These simple and actionable articles are designed to help you make more informed decision about your finances. Happy reading! MidWestOne.com/FinancialResources

3 Table of contents Understanding financial terminology How to request and review your credit report 6 basic rules to financial freedom Getting into the habit of saving 7 tips to manage your debt What is a 401(k) and how does it work? Do you know where your money is going? 5 tips to track your money 3 money management rules every college grad should know How to tackle college debt Take advantage of the power of compound interest MidWestOne.com/FinancialResources

4 Understanding financial terminology Financial terminology can be confusing and intimidating especially if you re just entering the world of finances and investments. To help you get a grip on some of the most common words and phrases, we ve put together a little cheat sheet for common financial terminology. Accrued Interest Interest that accumulates over time on a debt that you owe or on the savings that you have. Annual Percentage Rate (APR) The rate of interest (in terms of a percent, such as 9.4%) being charged for a loan over a year s time. The APR includes interest, transaction fees and service fees. Look for APRs on such things as credit cards, student loans and car loans. Appreciate To grow in value. Usually a term used in relation to investments (stocks) or collectibles (old stamps, baseball cards, rare coins, etc.) that are now worth more than you originally paid for them. Asset Any item of value that you own: house, car, property, jewelry, stocks, bonds, money in savings, etc. Balance 1) In reference to loans, the balance is the difference between the original amount owed and the amount paid on the loan to date. In other words, the money you still have to pay. 2) In reference to checkbooks, balancing means to account for all money that came into and went out of your account. 3) In reference to savings, your balance is what is left in your savings account after you deposit or withdraw money. Bankruptcy A legal procedure governed by federal law that helps consumers who have too much debt. There are two bankruptcy options for consumers Chapter 13 reorganization and Chapter 11 liquidation. Blue Chip Stock A name given to the stocks of major corporations. The name comes from the most highly-valued poker chip, the blue chip. Bond A kind of investment in which you lend money to a corporation or government for a certain amount of time and at a certain interest rate. You receive regular interest payments, also known as a coupon. At the end of the bond s term, the corporation or government returns to you the amount you originally lent, also known as the bond s face value. Budget A plan you create for controlling spending and encouraging saving. Certificate of Deposit A type of investment that requires you to invest money for a certain length of time and guarantees the same rate of return (interest) for that entire period. CDs usually require a minimum deposit. Checking Account (or Share Draft Account) An account where you deposit money to fund the purchases you make on your debit card or checks you write. A credit union checking account is called a share draft account. Collateral Assets pledged as security for a secured debt. If you do not pay a debt that you have collateralized, the creditor can take ownership of the collateral. Collection Agency A business that collects past due debts for other businesses, as well as individuals. Most collection agencies get paid for their services by taking a percentage of what they collect for their clients. Compound Interest Interest on an investment that is calculated not only on the amount originally invested, but also on any interest the investment has already earned. For example, if you invest $100 dollars in a savings account and get 5% interest, after one period you will have $105. During the next period, you will earn interest on the $105 (not just on the $100 originally invested) and end up with $ Credit A loan that enables people to buy something now and pay for it in the future. Credit Agreement A contract between a borrower and a creditor that details the amount borrowed, the applicable interest rate and all other terms of the credit. MidWestOne.com/FinancialResources 3

5 Continued from previous page. Credit Limit The highest amount you may charge on a credit card. Your limit is set by your credit card company s opinion of your ability to handle debt. Credit History A record of your borrowing and paying habits. Credit reporting companies track your history and supply this information to credit card companies, financial institutions and other lenders. Credit Rating A score that a credit agency assigns you based on your ability to manage credit responsibility. Your credit rating depends upon factors such as on-time payments, age and amount of debt accumulated. Creditor A person or business to whom you owe money. Debt Money or goods you owe. Debt Consolidation The process of taking out a larger loan to pay off one or more smaller loans. Debit Card (or Checking Card) A card like a credit card that you can use to pay for things directly from your checking account without paying interest. You have to have the funds in your account in order to spend them with your debit card. Deposit To put money into a checking, savings or other investment account. Dividend A payment made by a company to a stockholder to share in the company s profits. In a credit union, a dividend is the interest paid on your savings or share account. Discount To reduce from an original price or an item s full worth. Earned Income Wages paid in exchange for work. Effective Annual Rate (EAR) The compound interest rate plus fees calculated across a year. Entrepreneur A person who assumes the risk to start a business with the idea of making a profit. Expenses Things you pay money for both needs and wants. Finance Charge Another term for the amount of interest you pay a company when you do not pay your debt in full each month, as well as the amount of interest you pay on your outstanding debt. The finance charge is expressed as a percentage. Fixed Expenses Expenses that stay basically the same from month to month, such as rent, transportation and tuition. Foreclosure The process whereby a mortgage lender or another creditor with a lien on your home or on some other piece of real estate that you own takes that asset because the terms of your agreement with your creditor were broken. Grace Period The time in which you can pay your account balance in full without incurring finance charges. Income Tax Money that wage earners pay the government each year. The amount of the tax depends upon how much income you earn. Insufficient Funds Insufficient funds means you did not have enough money to cover an expense. Usually checks that bounce are returned stamped with the phrase insufficient funds. The amount of the check was larger than the balance in the checking account. Interest The amount paid by a borrower to a lender for the privilege of borrowing the money. Interest Rate The price paid for borrowing money, expressed as an annual percentage rate, such as 10.5%. Invest To put your money into CDs, money market accounts, mutual funds, savings accounts, bonds, stocks or objects that you hope will grow in value and earn a profit. Loan Money or an object that is lent with the understanding that the loan will be paid back, usually with interest. Minimum Payment The smallest payment you are required to make each month on a debt. Mutual Fund A savings fund that uses money from a group of savers to buy a wide range of securities, like stocks, bonds and real estate. This allows you to diversify your investments because you own small units of each of the fund s investments. MidWestOne.com/FinancialResources 4

6 Continued from previous page. Opportunity Cost The next best alternative that is given up when a choice is made. Penny Stock A nickname for extremely low-priced stock, usually only a few dollars a share. These stocks are considered quite risky. They are priced low because they have not yet proven themselves in the market. Periodic Rate An interest rate that charges periodically. The terms of the change are spelled out in your credit agreement. Principal The amount of money you borrow. Principal does not include interest. Profit The money you ve earned after you subtract a) any money you had to spend to make the product or perform the service, or b) any taxes that had to be paid on your earnings. Rate of Compounding When an account compounds interest it does so in regular intervals. Compounding can take place annually, semi-annually, quarterly, monthly or daily. The more often interest is compounded the faster your money will grow. Return The amount of money you receive from a savings account or fund. The return is usually expressed as a percentage, such as this account returns 6.3%. Stock Market An organized way for 1) people to buy and sell stocks and 2) corporations to raise money. There are stock exchanges all around the world, but perhaps the best known are the New York Stock Exchange (NYSE), the American Stock Exchange (AYSE) and the National Association of Securities Dealers Automated Quotation System (NASDAQ). Unearned Income Income that is not the result of your labor, such as interest from a savings account or another kind of investment. Unsecured Debt A debt for which no assets are pledged to guarantee payment. The most common type of unsecured debt is credit card debt. Variable Expenses Spending that changes from month to month. For example, entertainment can be a variable expense. Depending on your preferences, the amount you spend on movies, CDs, video games and eating out will be different each month. With variable expenses, you have choices. Withdraw To take money out of an account. Risk The likelihood that you will lose money on an investment. Save Holding onto your money for a future goal instead of spending it now. Saving is the opposite of spending. Savings Account A bank account that pays you interest for keeping your money in it. Share A unit of ownership in an investment or a company. Shareholder Someone who owns stock in a company. Stock A certificate representing a share of ownership in a company. MidWestOne.com/FinancialResources 5

7 How to request and review your credit report Although your credit score only consists of three digits, it s a complicated and often times exasperating part of your financial life. While it can be challenging to understand exactly how your credit score comes to be, it s much simpler to request and review your credit report. A credit report is essentially a file on you, your accounts and your payment history. It s the information used to determine your actual credit score. This collection of data usually begins when you first apply for a credit card, loan, insurance, lease or job. It s important to establish and maintain good credit because: A credit report is a record of where you work and live, how you pay your bills and whether you ve been sued, arrested or have filed for bankruptcy. Employers can legally look at your credit report if you sign an authorization form when you apply for the job. Employers can look at your credit report to gauge your personal integrity and financial honesty. You can refuse to sign the form, but consequently, a company may assume that you have something to hide. This means your application and chance of employment could be dismissed. Banks, insurance companies and landlords look at your credit report for similar reasons. They re looking at your ability to pay off debt and paying your debts on time. How to Request Your Credit Report The Fair and Accurate Credit Transaction (FACT) Act allows you to get one free copy of your credit report every 12 months from each of the three nationwide credit reporting agencies that s three free reports each year! The national credit reporting agencies Equifax, Experian and Trans Union must provide a single point of contact so you can get reports from all three national credit reporting agencies with a single Internet request, telephone call or mail form. Free annual credit reports are available to all consumers through the Federal Trade Commission (FTC). You have the option to order all three free credit reports at the same time, which allows you to compare the information in each report, or you can choose to order your free reports at different times throughout a 12-month period. To get your free annual credit report, go through the FTC s website at call (877) or write: Annual Credit Report Request Service, PO Box , Atlanta, GA, Keep in mind that is the only authorized source to get your free annual credit report under federal law, while sites like freecreditreport.com charge membership fees to view your credit report. Reviewing Your Credit Report: A Checklist When you receive your credit report, take some time to closely review the information it contains: Check all accounts and account numbers to make sure all accounts listed are yours. Make sure all outstanding balances are accurate. Make sure all past due amounts are correct. Make sure all dates showing the last activity on each account are correct. Make sure no entries appear more than once. Make sure all court and public records, if any, are accurate. Make sure all personal information (name, address, Social Security number, etc.) is correct. If you find an error, the credit reporting agency or the creditor reporting the information must investigate and respond, generally within 30 to 45 days. Use the following contact information to report errors directly to the credit reporting agency: Equifax: (800) , Experian: (800) , TransUnion: (800) , If you suspect identity theft, you may need to place a fraud alert on your credit report, close compromised accounts, file a complaint with the FTC or file a police report. For more information, visit the FTC s identity theft website. MidWestOne.com/FinancialResources 6

8 6 basic rules to financial freedom Managing your finances can be a confusing and daunting process. But the reality is that mastering money isn t that difficult. If you stick to a few basic rules and principles you ll set yourself up for a life of financial freedom. Keep in mind that most of these rules are behavioral in nature, and changing your habits is never easy. Commit yourself to these rules and consciously try to change your behavior. Before you know it, they ll become second nature. Rule #1: Provide a 20% down payment on large purchases. When it comes to big ticket items, such as cars, homes, furniture, boats, etc., save up so you ll be able to put down a minimum 20% down payment. This will instantly give you equity in the item and will protect you in case of an emergency. A down payment of about 20% also means you will likely receive lower interest rates, which will help you save in the long run. Rule #2: Establish a structured savings program. Develop an automated system to help you save. Work with your bank, employer or financial advisor to set up bi-weekly or monthly automatic deposits into a savings account. By automating this process you will not be tempted to spend the money instead of saving it. If you are planning to purchase a large item allocate a certain amount of your monthly savings toward that purchase. If, for example, you are saving to buy a new car, and you automatically transfer $100 into your saving account every two weeks, allocate $20 towards your car fund. Rule #3: Maximize your retirement contributions. If you are not contributing the maximum amount towards your retirement savings plan, then you are missing out on a lot of money. Many Americans are not stretching to maximize their contributions when they can. What s worse, they tend to rely on guesswork when setting contribution levels, and don t fully understand the importance and long-term impact of small increases in contribution rates. Educate yourself about your 401(k) or IRA, and make sure you are reaping all the benefits. Rule #4: Pay off your credit card debt within 90 days. Most people have at least one, if not two, credit cards that are used on an ongoing basis. While this is ok, it s important to stay on top of the debt and not allow it to get out of control. To avoid interest payments it s best to pay off your card immediately. If this isn t feasible, establish a program that will allow you to pay off all the debt within 90 days. If you are not able to do this, you are likely living beyond your means and should re-examine your spending habits. Rule #5: Be smart when it comes to taking out loans. It s inevitable that at some point in your life you will have to take out a loan. When you do take out a loan, keep in mind that the more you borrow, the more interest you will be charged. You should only borrow the minimum you need in order to keep the interest charges down. In addition, the longer the repayment period, the larger your interest bill, so try to keep the term of your loan as short as possible, while keeping your monthly payments affordable. Most importantly, match your loan terms with the item you are purchasing. For example, don t take out a six-year loan on a used car with more than 50,000 miles on it. That s when many people get in trouble, since the chances are high that the car won t be working for 6 more years. Rule #6: Set a monthly budget and stick to it. One of the most important things you can do when it comes to your personal finances is to set a monthly budget. By consistently tracking your income and expenditures you will become astutely aware of your spending habits, making it much easier to manage your money. While this takes some discipline in the beginning, it will be well worth it. Consider using online tools such as Mint to help you. The road to financial freedom isn t as difficult as you may think. However, the willingness to put in the effort and do something is vital. MidWestOne.com/FinancialResources 7

9 Getting into the habit of saving Like many things in life, setting money aside as savings is a habit that needs to be developed. It doesn t take a miracle to save money. But if you want to see your nest egg grow, you need to do what you can to encourage a habit of saving especially as a young adult! We ve put together some simple tips to help you start saving, and stick to it. Determine exactly where your money is going. For the next days keep track of every single dime you spend. Use a little pocket journal to jot down notes as you go, as if you were keeping track of expenses on a business trip. This will give you an exact snapshot of where your money is going and make you astutely aware of what you are spending. Create a budget. Use the insight you gained from your moneytracking experience to create a budget. Determine what your income is and what your short and long-term expenses are. Based on this information you ll be able to determine how much you can reasonably save on a monthly basis. (For more information about setting up a budget, check out our article How to set up a budget for your family and stick to it.) Pay yourself first. The first bill you pay each month should be to yourself. Before you pay your monthly expenses, go shopping or use your income for anything else, automatically set aside a portion of your income to save. This habit, developed early, can help you build a tremendous nest egg over the years. Participate in your employer s retirement plan. Start contributing money to your company s employer-sponsored retirement plan immediately. Whether it s a 401(k) or an IRA, starting to save for your retirement early will have a dramatic impact down the road. If you can t participate at the maximum limit, start where you can and commit to increasing your investment 1 percent each year until you reach the maximum. Take time to understand your benefits. It s astonishing how little people understand about their benefits package. Make sure you fully understand your retirement plan, flex spending accounts and other benefits. These things add up when you use them over time to save on taxes and opportunity costs. Don t give yourself a choice when it comes to savings. Commit to these simple savings tactics and you ll hardly notice that you re saving for your future. Establish an emergency fund. If you haven t already, start setting aside money for an emergency fund. Financial emergencies can come in the form of a job loss, significant medical expenses, home or auto repairs or something you ve never dreamed of. Having an emergency fund will help you weather these challenges. Make it a goal to build up cash reserves to cover between 3 and 6 months worth of living expenses for your emergency fund. Automate your savings. Work with your bank to set up automatic transfers on a bi-weekly or monthly basis into your savings account. Automating this process will ensure that you save on a consistent basis and aren t tempted to spend the money on something else. MidWestOne.com/FinancialResources HandsOnAdvice.com 10 8

10 7 tips to manage your debt Managing debt is an important skill to master especially when you re just starting off on your own. After all, as a young adult you re laying the foundation for your future financial life. By following these simple tips, you will soon become a pro at debt management. 1. Always make your payments on time. The consequences of late payments are significant. Not only will you be penalized with a late fee, many credit cards also jack up interest rates significantly when a payment is delayed. Consider signing up for automatic bill pay to ensure you are never late. 2. Go beyond your minimum payment. If you only pay the monthly minimum payment on your credit card bill you are not whittling away at the principal debt. It s best to pay off your credit in its entirety; however, if that s not possible make sure you at least pay more than the monthly minimum. Otherwise debt can quickly get out of hand. Also, if you have more than one credit card and are carrying debt on each card, be strategic about which one you pay off first. Pay the card with highest rate first and then focus on the others. 5. Understand the terms of your credit card. Take the time to read through the terms and conditions on your line of credit so that you fully understand the consequences. It s really important to understand your interest rate and how it works. If you aren t satisfied with the terms, don t hesitate to shop around for another card. 6. Continue to make payments on your student loan. There is a high default rate on student loans, which can be a costly mistake for young adults and can have a dramatic impact on future purchases. Don t blow off your payments. Also, consider sitting down and evaluating your consolidation options. 7. Become aware of the debt you are carrying. It s frightening how some people have no idea how much debt they are accumulating. Make sure you are aware of your debt so that it doesn t get out of hand. Sit down on a regular basis and review your spending and expenses, and try to adjust your habits accordingly. 3. Avoid department store credit cards. It can be easy to fall for the initial savings associated with opening department store lines of credit. However, many of these credit cards have huge interest rates associated with them that can quickly result in a large amount of debt. If you do have these types of cards, make sure you fully understand the terms. 4. Evaluate your spending habits. Take some time to track your monthly spending to get a better sense of where your money is going. Train yourself to distinguish between a want and a need, and don t purchase things on a whim. It can be hard to become this disciplined with your spending, but it will be well worth it in the long run. MidWestOne.com/FinancialResources HandsOnAdvice.com 10 9

11 What is a 401(k) and how does it work? When you re starting out, one of the most important things you can do for your financial future is to start investing in a 401(k) retirement plan. It may seem counterintuitive to start saving for your retirement when you re at the beginning of your professional life. Nonetheless, if you opt out of this savings opportunity you may be leaving thousands of dollars on the table. Signing up for your 401(k) as soon as possible will give you an incredible head start and may just be one of the smartest money moves you make. You ll look back when you re older and feel great about your decision! What is a 401(k)? A 401(k) is an employer-sponsored retirement plan that allows you to take a portion of your earnings either a set dollar amount or a percentage of your salary and move it to a tax-deferred investment account. The money is invested at your direction into money market funds, growth funds and indexes, which will accumulate value over time. The actual work of administration and monitoring of accounts is usually outsourced to independent banks, mutual fund companies, financial service enterprises and more. Once enrolled, your 401(k) contributions are automatically deducted from your paycheck each pay period. What should you invest in? Your employer will let you select your own 401(k) investments from a list of mutual funds. Target-date or life-cycle funds are popular. With these types of funds, you fill in the year you plan to retire for example Professional fund managers handle the rest, gradually shifting your funds from an aggressive stock-heavy portfolio early on to a conservative bond-heavy mix as you near retirement. Benefits of a 401(k) 401(k) plans are a powerful investment tool. Some of the benefits include: Matching contributions When an employer offers a 401(k) to employees, the company often matches a portion of the money that goes into your account. Sometimes it can be as much as 50 percent. This is essentially free money or extra pay for you. Always make sure that you re contributing enough to your 401(k) account so that you are taking advantage of these matching contributions. Customization and flexibility 401(k) plans give you the power to decide how to invest your assets. If you know you don t have a high tolerance for risk you could opt for a higher asset allocation in low-risk investments such as short-term bonds; likewise, a young professional interested in building long-term wealth could place a heavier emphasis on equities. Tax advantages Dividend, interest and capital gains are not taxed until they are disbursed, which means you can rack up substantial savings. Plus, your account s investment earnings will grow tax free until you withdraw. (Withdrawal restrictions may apply.) Portability One of the biggest benefits of a 401(k) account is that you can take the funds with you when you switch jobs. You ll have the choice of either rolling over the money into your new employer s 401(k) plan, or allocating into an Individual Retirement Account (IRA). Investors should consider the investment objectives, risks, charges and expenses of the investment company carefully before investing. The prospectus contains this and other information and the investment company. You can obtain a prospectus from your financial representative. Read carefully before investing. Investing in mutual funds involves risk, including possible loss of principle. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values and yields will decline as interest rates rise and bonds are subject to availability and change in price. Stock investing involves risk including loss of principle. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate to you, consult your financial advisor prior to investing. Securities and Insurance products offered through LPL Financial and its affiliates member FINRA/SIPC. MidWestOne Bank is not a registered broker/dealer and is not affiliated with LPL Financial. Not FDIC Insured No Bank Guarantee May Lose Value Not a Deposit Not Insured by any Federal Government Agency MidWestOne.com/FinancialResources 10

12 Do you know where your money is going? 5 tips to track your money Most people underestimate the amount of money they are spending. That s why it s so important to monitor your expenses on a consistent basis. After all if you want to save money, you need to know how much you re spending. The concept of tracking money is pretty straightforward write down how much money you are spending and what you re spending it on. Break it down into categories like mortgage, groceries, entertainment, etc. At the end of the month, add up the categories and you ll get a true picture of where your money is actually going. While the actual task is relatively simple, it s the motivation that s difficult. Many people start out with the best intentions, but then lose focus and give up. We ve put together some simple tips that will help you track your money and remain dedicated to the task. 1. Create a simple system. Tracking your money doesn t have to be an elaborate process that involves software programs and difficult formulas. Come up with a simple system that will work for you. This will be different for everyone. Some people prefer to track things by writing expenditures in a daily journal; others prefer an Excel spreadsheet or online tools like Mint or You Need a Budget. The most important thing is to find a system that you ll stick to and follow. 2. Create customized categories. Don t feel like you have to fit your expenditures into the standard budgeting categories. Personalize them to better fit your lifestyle so you can group expenditures and track where your money is going each month. 3. Develop a routine. Make it a habit to track your expenses whether it is on a daily or weekly basis. Just remember the longer you wait, the more transactions you will have to process. This will take some effort in the beginning. However, once you ve made it part of your regular routine it will soon become a habit. 4. Have a place for your receipts and bills. Identify a spot to collect your receipts and bills. This could be an accordion folder in your office, a wicker basket in the kitchen, a simple manila envelope or anything else that you can think of. 5. Partner up. Make sure your partner is on board with tracking expenses as well. In order for you to effectively track expenses you will both need to dedicate yourself to the task. While it will take some extra time and effort to track your expenditures on an ongoing basis, it is well worth the effort. And if you need extra help along the way, don t hesitate to meet with a financial advisor or your banker to get some assistance. MidWestOne.com/FinancialResources 11

13 3 money management rules every college grad should know When it comes to managing your money there are a seemingly endless number of tips and mantras people will throw your way: pay yourself first, don t ignore your money troubles, pay off your credit card in full, save at least 6-months worth of living expense, always max out your 401(k) contributions, don t live beyond your means, etc. And while these are valid tips, they can quickly become overwhelming especially if you recently graduated college and are still relatively new at managing your own money. That s why we ve pulled together three key money management rules that every college graduate should know. We re not saying all those individual financial planning tips won t help (because more than likely they will); these are simply the 3 key rules we feel you should stick to for a sound financial future. Rule #1: Never stop thinking about your retirement. When you re launching your career it will seem completely counterintuitive to think about how you will pay for your retirement. Trust us starting to save for your retirement early can make a huge difference. Why? The answer is simple compound interest. To explain how compound interest works, let s take a look at the two types of interest: Simple interest simple interest only charges based on principle value. Say, for example, you lend someone $100 on a 5% per year simple interest rate. That person would owe you $5 each year until he or she pay you back. Compound interest this type of interest rate charges on the principle value as well as the value of any interest accrued. So if you charged your friend 5% compounding interest, the person would owe $5 the first year, and then 5% of $105 the second year $5.25 and so on. That s why it s so important you start saving for retirement as soon as possible. Compounding will definitely work in your favor and help you achieve some exponential gains. Start contributing to your 401(k). Max out your employer s match. And if your employer doesn t offer a retirement package, look into Roth IRAs and other investment tools. Rule #2: Create a budget and stick to it. Knowing how much money you have coming in, and how much money you have going out is critical to successfully managing your money. Quite simply, a budget is a realistic financial plan, which you put together based on your income, expenses and goals. Here s how you set one up: Determine your income. Determine your fixed expenses. Determine your variable expenses. Compare your income to your expenses. Track your expenses. Adjust as needed. Evaluate your budget. Keep in mind that creating a budget doesn t mean that all of your problems are going to be solved. Nonetheless, it is an important step to determining your financial health and creating financial stability. It won t be too difficult to create a budget, but you may find it difficult to stick with one. Just remember, you can do it! Continued on next page... As you can see, this is great for a young investor because you essentially earn interest on your interest! MidWestOne.com/FinancialResources 12

14 Continued from previous page. Rule #3: Establish an emergency fund. You never know when life is going to throw you a curve ball. It s impossible to predict when you may get laid off, get in a car accident or face other financial troubles. That s why it s so important to establish an emergency fund. An emergency fund is an easily accessible chunk of money you can fall back on when you are faced with an unexpected expenditure. Most financial experts recommend 3-6 months worth of living expenses. In most cases this will give you enough money to address the issue and develop a new long-term financial plan. Since you will need to access your emergency fund on short notice, it s important you allocate the money where you are able to withdraw it without facing any penalties. Many people will set up a separate savings or higher-earning checking account for their emergency fund. With some added planning you could also allocate it in a series of 3-, 6-, 9- and 12-month CDs. This would likely give you a higher interest rate and allow you to have access to the funds every three months. MidWestOne.com/FinancialResources 13

15 How to tackle college debt In the U.S., most college students these days carry more than a heavy class load they also carry a significant amount of debt. It s undeniable that a college education in the United States has become increasingly more costly for families and students. The numbers are staggering. The average college student is now around $22,900 in debt at graduation. In fact, according to the Wall Street Journal, the class of 2011 graduated with a dubious distinction: the most indebted ever. Couple this with a challenging job market and it s not surprising that many recent graduates are overwhelmed at the mere thought of paying off student loans while trying to launch their careers. To help, we ve put together 9 tips to help you tackle college debt: 1. Complete exit counseling upon graduation. Use the time wisely and work with your financial aid advisor on fully understanding your payments and your debt load. 2. Utilize repayment calculators to determine what your monthly payments on your loans will be. This will help you establish a budget that will allow you to make those payments and keep the debt in perspective. 3. After you graduate you will typically have a six-month grace period before you will need to begin paying off your loans. During this time period you will likely be inundated with mail from your student loan providers. Don t make the mistake of simply ignoring the letters because you are overwhelmed. Take the time to read them and seek out help if you don t understand. 4. Explore the options of consolidating your loans. You will likely have more than one loan when you graduate. Combining these loans into one consolidated payment is not only simpler but often leads to lower monthly payments. Some of the lenders who offer consolidation are Chase, Direct Loans, Next Student, Student Loan Network and Wells Fargo. Look into these options, but shop smart. Study the terms and fees and then make an educated decision about whether loan consolidation is right for you. 5. When your grace period is over, make it a priority to begin paying off your loan. If you fail to repay your loan you will soon be faced with a number of negative consequences, such as garnished wages, offset federal and/or state income tax refunds and other payments. 6. If you are unable to find a job and are not financially able to begin making payments on your loans you have options. One such option is deferment or forbearance, which allow for postponement of payment under select circumstances. Most people know federal student loans can be deferred if you enroll in graduate school or the military. But you can also get a deferment for unemployment or economic hardship. While this will result in some repercussions, they will likely not be as damaging as if you consistently make late payments or go into default. Talk to a financial advisor and work with your student loan provider to determine if this is the right move for you. 7. As you become more established in your career, consider making more frequent payments on your loans. Even a small amount can make a difference. 8. If you are carrying other debt in addition to your student loans, focus on the higher-interest debt first. It is crucial, however that you continue making your payments on student loans, too. (See #5) 9. If you find yourself in a situation where you are unable to make your payments, address the situation immediately. Reach out to your lenders to see if they are willing to work with you. Avoiding the problem will only cause more troubles in the future. The key is to communicate with your lender. MidWestOne.com/FinancialResources 14

16 Take advantage of the power of compound interest You ve probably heard it before: It s never too early to start saving for retirement. In the back of your mind you know it s important to save for the future, yet it probably seems counterintuitive to start saving for retirement at the beginning of your career. Maybe you are waiting another year or two, for your next raise, until you find a new job or until you pay down your debts but you should know that the longer you wait to start saving, the more you are missing out on the power of compound interest. What is compound interest? Compound interest refers to interest you earn not only on the money you originally invested, but also on any interest the investment has already earned. Let s take a closer look at the power of compound interest and how it can help boost your retirement savings: Time is money literally. To take full advantage of compound interest, you ll want to start early. Waiting one year (or five years) to start saving will be costly. When it comes to compound interest, time is incredibly valuable. Consider this: If you save $100 per month starting at age 20 (with an interest rate of 8 percent) your savings will total nearly $530,000 at age 65. What if you waited 10 years? If you save $100 per month starting at age 30 (assuming the same interest rate of 8 percent) your savings will total nearly $230,000 at age 65. That is a difference of $300,000! And if you waited another 10 years and started saving $100 per month at age 40, your savings will only grow to approximately $95,000. As you can see, the power of compound interest and the value of time is astonishing! Decide how much to save. When it comes to compound interest, time is the most critical factor. But it s also important to save regularly. In the examples above, you saved $100 per month. In reality, the amount that you should save per month is based on your income, your spending habits, your retirement goals and what your budget will allow. The amount of money you ll need in retirement is also impacted by inflation, your life expectancy and your lifestyle. If saving is not a part of your monthly budget, start by making it a priority. Starting to save even a little money today is better than waiting until next month (or not saving at all). Decide where to save your money. When you ve figured out how much to save, you ll need to decide where to save your money. The sample calculations above assumed that you earned an interest rate of 8 percent each year. You may save your money in a tax-sheltered savings plan, such as a 401(k) or 403(b). Other options that may be available include the traditional individual retirement account (IRA) and the newer Roth IRA. Each type of retirement account has different tax implications and eligibility requirements, so you ll want to consult a tax advisor to discuss what is best for you. Get in the habit of saving each month. Automatic deductions make saving easy. Your employer may be able to automatically deduct a portion of your paycheck to contribute to a tax-sheltered savings plan. Your bank can also help you set up an automatic transfer to automatically move money from your checking account to your savings account each month so you don t have to think twice about it! Be patient and watch your money grow! Keep in mind that all of the calculations provided above are based on the fact that you did not touch your money while it was growing. You may be penalized for dipping into some types of retirement savings early. Plan to sit back, be patient and watch your money grow 15, 20, 30 and 40 years down the road, you ll be glad you did! MidWestOne.com/FinancialResources 15