financialgenius.usbank.com Course objectives learn about: Setting Your Financial Goals Budgeting Your Income Understanding Interest and the Power of Investing The Budget Zone Saving for A New Car Without Breaking the Bank
Index Budgeting Basics............................... 1 Budget Worksheet Example....................... 2 Plan Your Financial Goals......................... 3 Setting Financial Goals........................... 4 The Power of Investing........................... 5 Defining Interest................................ 5 The Value of Compound Interest................... 6 Value of Money............................... 7 Savings Account Basics.......................... 8 Summary...................................... 9 Take Home Budget Worksheet.................... 10 Glossary...................................... 11 Notes........................................ 12
Budgeting Basics Budgeting always gets a bad rap. Why? Because it seems like too much work for most people. The truth is, budgeting is all about setting priorities. Here are some tips to help you get started. Track what s coming in Use the budget worksheet included in this packet as a guide. Include income from second jobs, child support, alimony, and disability or social security payments. Track what s going out Estimate how much you spend on the necessities. If you don t have the exact figures, that s okay. Just make your best guess. And always pay yourself first that means you need to set aside at least 10% of your income to go to savings. Budget how to spend the rest Whatever funds you have left over is your discretionary money. This is the money you can spend on meals out, music, clothes, whatever you choose. The Budget Zone page 1
Budget Worksheet Example BUDGET ACTUAL INCOME Per Month Per Year Per Month Per Year Employment $2,200 $28,800 Interest Other $500 $6,000 EXPENSES Per Month Per Year Per Month Per Year FOOD Groceries $500 $6,000 Eating Out $200 $2,400 HOUSING Rent/Mortgage (or Room & Board) $700 $8,400 TRANSPORTATION Gas $60 $720 Parking $40 $480 Maintenance/Repairs UTILITIES Cell Phone $50 $600 Electric/Gas $50 $600 Cable $30 $360 CLOTHING Laundry/Dry Cleaning $40 $480 New $75 $900 LOAN PAYMENTS Auto Loan $250 $3,000 Credit Cards $100 $1,200 INSURANCE Renters/Homeowners Insurance $15 $180 Auto Insurance $80 $960 Health Insurance $180 $2,160 ENTERTAINMENT Events $40 $480 General $100 $1,200 MISCELLANEOUS Supplies $50 $600 Medical Other SAVINGS Banks $75 $900 Investments OTHER Item 1 Item 2 TOTAL INCOME $2,700 $32,400 TOTAL EXPENSES $2,535 $30,420 VARIANCE +165 +1,980 The Budget Zone page 2
Plan Your Financial Goals Envision your new life It s hard to imagine where you ll be thirty or forty years from now, get your first job, get married or do things on your own, but it s time to start thinking about how you want to live and how to prepare for your future. Can you afford a new car? Do you want to start your own small business? Or, are you looking forward to buying a house? Whatever your goals may be, plan for them now. Set goals for yourself Nobody ever got far with their financial goals without writing them down. There s something about seeing your goal in black and white that adds an air of finality to it. Keep your goals top-of-mind Out of sight, out of mind, right? If you aren t thinking about your financial goals, it s hard to stay on track. Post your written goal somewhere visible, a spot you look at every day. Or, better yet, use a visual to remind you of your goal. If your short-term financial goal is to save for a computer, clip a photo of a computer out of a magazine, and tape it to the inside of your day-planner, tack it on the front of your refrigerator, or a pin it to a message-board. Every time you re tempted to download a song or buy that expensive cup of coffee, seeing the picture of that computer will help you stay on course. Pay yourself every month No, you aren t paying yourself so you can buy that new TV you ve had your eye on. The money you save will help you achieve long-term goals, or those extra funds could help you in an emergency situation - like if your car engine suddenly catches on fire. Typically, it s recommended that you save at least 10% of your monthly income (no matter how meager that sum may seem). Most banks can set up a goal savings account that automatically transfers money from your checking account to your savings account bi-monthly, monthly, or as often as you like. This way, you won t even miss the money that s not there anymore. Use caution with credit cards. A credit card is just that a card that extends a line of credit to the cardholder. When you use your credit card, the issuer is essentially extending a short term loan to you. Pay off your balance each month and you ll begin to build solid credit; carry a balance month to month on your card and you ll pay the issuer interest on your balance. The Budget Zone page 3
Setting Financial Goals Separate into groups. Share with each other your individual Overall Financial Goal. Share with each other your individual Savings Goal Amount by age 25, 35, 50, 65, etc. Share with each other your individual plans to achieve your Overall Financial Goal. Share with each other your individual plans to achieve your Savings Goal Amount. Overall Financial Goal Savings Goal Amount Age 25 Age 35 Age 50 Age 65 Plan for Overall Financial Goal Plan for Savings Goal The Budget Zone page 4
The Power of Investing Investing in stocks and mutual funds is another way to help you save for the future, but since your investment is not FDIC-insured, like a Savings Account or Certificate of Deposit, they can be a little more uncertain. Here s a quick overview of the difference between stocks and mutual funds. Stock: a certificate of partial ownership in a corporation. A privately owned company will often sell portions of the business in order to expand more rapidly; the portions sold are shares of stock. Shareholders own a percentage of the company and are therefore entitled to a percentage of the profits, or dividends. Mutual Fund: a portfolio of investments or a pool of money overseen by a professional investment manager. Different mutual funds often have different goals, such as generating high rates of return or regular income. Mutual funds are perhaps the easiest and least stressful way to invest in the market, since your investment is being managed by a professional advisor. Consider reaching out to a professional advisor before investing in stocks and mutual funds, and remember that investments are: Not a deposit Not Insured by any Federal Government Agency Not Guaranteed by a Bank May Go Down in Value Not FDIC Insured Defining Interest There are two types of interest simple and compound. Simple interest is often used when you borrow money, whereas compound interest is more common when you re saving and investing. To understand the benefit of compound interest, let s look at an example. Say you invest $1,000 in an investment vehicle earning 10% interest compounded annually. Let s illustrate how your money can grow through each of these types of interest. Simple interest Simple interest allows you to earn interest only on your original investment, or principal. Formula: Interest rate x principal = the interest to be added to your account Year One: 10% x $1,000 = $100 Year Two: 10% x $1,000 = $100 Your Total Earnings: $1,000 + $100 (the interest earned in year one) + $100 (the interest you earned in year two) = $1,200 Compound interest Compound interest occurs when interest is earned on your original investment plus on the interest already earned on that account. We will use the same formula we used in calculating simple interest. Year One: 10% x $1,000 = $100 Year Two: 10% x $1,100 (the original principal plus the interest earned) = $110 Your Total Earnings: $1,000 + $100 (the interest earned in year one) + $110 (the interest you earned in year two) = $1210 The Budget Zone page 5
The Value of Compound Interest Let s compare twin sisters and how they save their money over the course of their lifetimes. Try to determine which sister will make more money as a result of compound interest. Maureen At age 15, Maureen starts working at the local Swirly-Whirl ice cream shop. Every year for the next 10 years, she saves $1,000 and invests that money earning 12% per year on average. After those 10 years, Maureen decides to stop investing. However, she leaves her $10,000 nest egg alone. Doreen Now, consider Maureen s twin sister, Doreen. Ignoring her parents financial advice, Doreen doesn t bother to save any money at all. This pattern follows her through her 20s and 30s. At age 40, Doreen picks up a magazine on smart finances and suddenly realizes the error of her ways. She starts saving $10,000 every year for the next 25 years. Guess who has more money at age 65? That s right, Maureen. Maureen enjoyed the power of compound interest. She saved just $10,000 in 10 years - the same amount Doreen invested in just one year. Her net earnings? $1.6 million by age 65. Now, back to Doreen. She painstakingly saved $10,000 each year for 25 years, investing a total of quarter-million dollars. Her earnings? Just under a million dollars. Maureen s Swirly-Whirl money grew for 50 years, twice as long as Doreen s. Therefore, the amount of money you invest isn t always as important as how soon you start investing it. The Budget Zone page 6
Value of Money When it comes to saving or investing, it really does pay to start early. This chart illustrates how $1,200 invested annually can grow over time, and how much less you ll have accumulated by age 65 if you wait five years, 10 years, 15 years or longer before starting to save or invest. This model assumes an annual return of 8%. Amount You ll Have Accumulated by Age 30 35 40 45 50 55 60 65 20 17,384 32,582 54,914 87,726 135,938 206,777 310,862 463,796 25 7,040 17,384 32,582 54,914 87,726 135,938 206,777 310,862 30 1,200 7,040 17,384 32,582 54,914 87,726 135,938 206,777 Begin at Age 35 1,200 7,040 17,384 32,582 54,914 87,726 135,938 40 1,200 7,040 17,384 32,582 54,914 87,726 45 1,200 7,040 17,384 32,582 54,914 50 1,200 7,040 17,384 32,582 55 1,200 7,040 17,384 60 1,200 7,040 65 1,200 The Budget Zone page 7
Savings Account Basics What Is a Savings Account? A type of account designed to save money to which you don t need immediate access, and when compared to checking accounts, tend to earn a slightly higher rate of interest. Savings accounts have certain transaction limitations and are not intended to access like a checking account that allows you an unlimited number of withdrawals. A source for saving discretionary income for either short-term or long-term savings needs. Can typically be accessed through a branch visit with the appropriate identification, an ATM or other methods established by the financial institution. Benefits of Savings Accounts Savings accounts are typically a safe and convenient way for you to save money. While your money is in a savings account, it continues to earn interest. The more money you put in the account, the more interest you earn. It might also be possible to link your savings account to your checking account. If you have money saved, this could be used to provide overdraft protection to your checking account if your balance becomes overdrawn. Remember that savings accounts have certain transaction limitations, of which overdraft protection transfers are included. Other Savings Opportunities Certificates of Deposit (CD) - This type of account earns a higher interest rate than a regular savings account, but you also are required to have a larger minimum deposit (usually between $1,000 and $5,000). Also, you have to keep your money in for a certain period of time (such as a one-year term) in order to reap the benefits of the account. If you take your money out early, you most likely will have to pay a penalty and/or an early withdrawal fee. Money Market Accounts - Like a CD, money market accounts earn higher interest rates, but they also require a larger minimum deposit (usually between $500 and $2,500). The Budget Zone page 8
Summary Account Comparison Checking The account in which you deposit and withdraw money for day-to-day expenses and for paying bills. Access funds through check cards, checks, online bill payment and branch transactions Savings A deposit account in which you can save money for short or long term needs. Money Market A deposit account which also allows withdrawals, in which you can save money for short or long term needs.. Typically earns a higher interest rate than a standard savings account, but requires a higher balance to earn the higher interest. Certificate of Deposit Time specific account in which you can save money for longer term needs. Provides a guaranteed fixed interest rate during a specific period of time. Penalties are incurred if you take out funds prior to the CD term coming due. The Budget Zone page 9
Take Home Budget Worksheet BUDGET ACTUAL INCOME Per Month Per Year Per Month Per Year Loans Employment Interest Other EXPENSES Per Month Per Year Per Month Per Year FOOD Groceries Eating Out HOUSING Rent/Mortgage TRANSPORTATION Gas Parking Maintenance/Repairs UTILITIES Cell Phone Electric/Gas Cable CLOTHING Laundry/Dry Cleaning New LOAN PAYMENTS Auto Loan Credit Cards Student Loans INSURANCE Renters/Homeowners Insurance Auto Insurance Life Insurance Health Insurance ENTERTAINMENT Events General MISCELLANEOUS Supplies Medical Other SAVINGS Banks Investments OTHER Item 1 Item 2 TOTAL INCOME TOTAL EXPENSES VARIANCE The Budget Zone page 10
Glossary Budget An estimate, often itemized, of expected income and expense for a given period in the future. Compound interest Compound interest occurs when interest is earned on your original investment plus on the interest already earned on that account. Interest Rate The percentage of an amount of money that is borrowed and is paid for during a specific period of time specified in the terms of the loan. The usual way of calculating interest as a percentage of the sum borrowed. Savings Account A deposit bank account on which interest is paid. Simple interest Simple interest allows you to earn interest only on your original investment, or principal. The Budget Zone page 11
Notes The Budget Zone page 12