Tips from the Treasurer Saving & Investing Money Saving for the Long Term Investing Responsibly City Treasurer Kurt Summers
SAVING FOR THE LONG TERM 53
Saving for College Education 529 College Savings Plans (Bright Start) A type of savings plan designed for your child s future education expenses, with special tax breaks Advantages Savings in a 529 account will grow tax-free (In a regular account, any interest earnings you gain would be taxed each year) Investments you make in the account are tax-deductible (up to $10,000 per parent) You won t be taxed later- Withdrawals are tax-free if used for qualified education expenses Savings can be invested in various types of mutual funds and exchange-traded fund portfolios Sources: Bright Start Savings Savings in 529 plan can be used to pay for: Tuition, fees, books, supplies, and equipment required for school; certain room and board expenses At private colleges, public universities, community colleges, graduate schools, and trade schools around the country Get Started Use Bright Start s calculator determine how much you should be saving: https://www.brightstartsavings.com/how-muchdo-i-need/ You can enroll online at www.brightstartsavings.com/ 54
Taking Out an Auto Loan What is the process? 1. Develop a budget: Determine what monthly payment you can afford (remember to factor in auto insurance, gas and maintenance) 2. Shop around: Compare quotes from banks, credit unions, car dealers and other lenders 3. Negotiate: Read more about what terms are negotiable at goo.gl/qodqet 4. Check that the deal paperwork matches the terms you negotiated What are the costs? Taking longer to pay back the loan increases your long-term cost, even if the interest rate and monthly payments are lower For a $15,000 car loan Used car loan, 36 months Used car loan, 48 months New car loan, 48 months New car loan, 60 months Interest Rate US average Total Amount to Pay Back 5.11% $16,199 5.06% $16,618 4.70% $16,450 4.60% $16,862 Sources: National Credit Union Administration Visit this link for more info: goo.gl/4gocjg 55
Auto Loans and Your Credit Score Before deciding whether to buy a car and take out an auto loan, check your credit score. If you do not have a credit history or have a low score: Strengthen your score: Try over a few months (see section on improving your credit score). Prepare a list of references: The lender may require you to provide contact details for friends or family who can verify information about you and whom the lender can contact if they need to reach you regarding a missed payment (but who will not be responsible for the payment). Find a cosigner: A cosigned takes full responsibility for loan repayment if you miss any payments. The loan and any missed payments will also impact their credit history as well as yours. 56
Planning for a House Typically, at least 5% of a home s price is required for the down payment and closing costs. A mortgage can help you spread out the rest of the cost of buying a home over a long period of time. If you have a poor credit score, these costs can go up to 11% or more. The average home in Chicago costs $187,500 The minimum savings required to buy a home can range from $9,400 to $20,600 57 Sources: Federal Housing Administration and Illinois Association of Realtors
Taking Out a Home Loan (Mortgage) What is the process? 1. Check your credit score and strengthen it if it is low 2. Decide how much you want to spend on a down payment and in monthly costs 3. Explore your mortgage options 4. Get a preapproval letter 5. Find the right home and make an offer 6. Compare loan offers 7. Choose the loan offer that s right for you 8. Shop for your closing services 9. Close on your new home What are the costs? Down payment which can range from 3.5% to 20% of home price depending on loan terms Interest rate which will determine your monthly payment and total cost over time Mortgage insurance is usually required if you make a down payment of less than 20% of the home s price Origination fees are charges from the bank to cover the initial costs of creating the loan Taxes related to purchasing a home Other purchase costs are charged for making sure the home price is reasonable (appraisal) and transferring the title to your name Visit this link for the CFPB s home-buying toolkit: goo.gl/thveln Sources: Consumer Financial Protection Bureau, 58
Sample Costs for Buying a Home Example for home with a price of $180,000 Amount due upfront to buy home Amount due monthly $26,054 $1,050! Down payment (10%) - $18,000 Origination fees - $1,802 Insurance and property taxes - $1,280 Other purchase fees (appraisal, risk assessment, title) - $4,887 Taxes and government fees - $85 For duration of mortgage In this example: 30 years Monthly loan payments (interest at 3.875% + principal) - $762 Monthly payments for insurance and property taxes ( Escrow ) - $206 Mortgage insurance - $82 *Figures are illustrative only, and each mortgage will vary greatly depending on loan terms and other factors. Source: https://www.consumerfinance.gov/owning-a-home/loan-estimate/ 59
Planning for Retirement The retirement age for young adults is 67, but the average millennial is expected to live well past 85. Saving up and investing early is the best way to make sure you can afford living expenses for 20 years or more of retirement. If you are a young adult with no retirement savings, an estimated target for how much you should save for retirement is at least 5-8% of your salary Learn more about planning for retirement at www.askebsa.dol.gov/savingsfitness/worksheets 60 Sources: US Department of Labor
Retirement Plans 401k A retirement savings account offered by some employers, which automatically deducts payments from your paycheck. IRA A retirement savings account you can open on your own at most banks or investment companies. Regular Savings A savings account at a bank which you plan to use to build retirement savings. No Savings Plan PROs The portion of your salary you invest into a 401k is not taxed Investment earnings are not taxed Most employers will offer to chip-in with you (referred to as matching ) The portion of your salary you invest is not taxed if you do not have a 401(k). Otherwise tax depends on your salary. Investment earnings are not taxed More investment options than 401k You only need to keep track of one account, but None CONs Limit on total amount put in each year ($18,000 in 2017, $18,500 in 2018)* Withdrawals from account are taxable Employer my require you to work with them for 6-12 months before starting Limit on total amount put in each year ($5,500 in 2017 and 2018)* Withdrawals from account are taxable Cannot make investments into stocks, bonds, mutual funds and other good choices for building long-term savings Earnings on your savings will be taxed At retirement, you will not be able to afford basic needs *Limits are higher if you are over the age of 50 61
Target Savings Rates for Retirement To retire at age 65 and enjoy 20 years of retirement, you will need to meet these target saving rates (as a percentage of your salary) Rates assume no current retirement savings 18.7% Target Savings Rate (% of salary) 5.9% 7.6% 10.0% 13.4% Sources: US Department of Labor 25 30 35 40 45 Age 62
INVESTING RESPONSIBLY 63
What Happens When You Invest Early If you save $100 today, and invest it in the stock market, you will have roughly twice as much money in 10 years and more than 7 times as much in 30 years. $761 $387 Save & Invest $100 $107 $114 $140 $197 Today Year 1 Year 2 Year 5 Year 10 Year 20 Year 30 *These calculations assume an average annual compounded return of 7% after inflation* 64
How Does My Money Grow? Start with $1 If you double it once, you have $2 If you double it again, you have $4 If you double it again, you have $8 If you double it again, you have $16 If you double it again, you have $32 This is an example of compounding. You have a higher amount at the start of each year because it grew the year before. When your money grows the next year, you earn even more money. Investments usually don t double every year. Rather, they grow a few percent. But because you start with more at the beginning of each year, you earn more and more as time goes on. 65
How Does Investing Work? A good investment: You invest $100 In a company A bad investment: You invest $100 In a company They use it to grow their business Their business does not succeed Company pays $110 Back to you Company can only pay $90 Back to you When you buy a stock in a company, you are lending them your money. It could be for any length of time a month, a year, or longer you decide. They use it to help grow their business. If they do well, you may get more money back. If they do poorly, you might get only some or none of your money back. 66
Types of Investments Stocks Stocks allow you to make an investment in a specific company, such as Apple or Nike. You earn more when the company does well. Bonds Treasury bonds allow you to put your savings in the U.S. government s bank. Corporate bonds are like stocks, but safer and usually pay less as a result. Certificates of Deposit $ CDs allow you to lock away your savings for 3 months, 6 months, etc., with the bank. At the end of the period, you will get back more than you put in. Mutual Funds Mutual funds are bundles of different stocks and bonds. Mixing together different stocks and bonds makes your investment safer. 67