2016 Money Matters Handbook by Stanford Alumni Association

A set of handouts to help guide you on how to keep your money in check.

Table of Contents 1. Budget Handout & Worksheet……………03-11 2. Your Credit Score…………………………12-16 3. Saving & Investing………………………..17-24

Money Matters is presented by the Stanford Alumni Association, Stanford Federal Credit Union and the Senior Class Cabinet. The content of these documents were provided by the Balance Financial Fitness Program.

BUILDING A BETTER BUDGET Why Budget? If you are one of the many people for whom the word “budget” is the same as the word “denial,” you may be surprised to learn that the opposite is true. A welldesigned budget is the best way for you to reach goals and achieve financial independence without having to sacrifice all of life’s pleasures.

the next couple of years, yet you have a $20,000 annual income and no current savings, you are setting yourself up for discouragement. Use your budget to create more realistic goals for yourself. Sometimes people put off developing a budget because they fear change. Budgeting, though, gives you the opportunity to break habits that may have prevented you from achieving your goals. For example, maybe you have become accustomed to turning to credit cards to pay for the things you want. A budget can help you stop that practice because you’ll plan ahead for the things you want instead of charging them.

Budgeting means analyzing what you have coming in and then developing a reasonable and goal-oriented plan for what goes out. Though your budget should be as unique as you are, there is a common rule: expenses should never exceed income. It should also be livable – flexible enough to allow for some changes, but not so loose as to be ineffective. Essentially, a budget is a tool to make the most out of your money. With it, you will be able to identify and eliminate wasteful spending while keeping and even adding to those expenses that are truly important to you.

By concentrating on the positive aspects of developing a budget, you will be able to overcome any obstacles. Always remember that the advantages of creating an effective spending and savings plan far outweigh the disadvantages.

Obstacles to Getting Started Various psychological obstacles prevent many people from starting a budget. Each person has his or her own reasons for delaying the budgeting process.

Set Goals Goals are important to all budgets. They are the final reward that encourages you to stick to your plan. To improve the odds that you will achieve your financial dreams, all your goals should have the same basic characteristics. In the words of author Paul J. Meyer, they should be S.M.A.R.T.:

It is easy to put off budgeting if you have a negative association with it in the first place. Therefore, keep in mind that budgeting is not about hardship, but about reaching your goals. And the sooner you start, the faster you will reach those goals. Another common internal block is the belief that there will never be enough money to pay for bills, much less save for an expensive goal. Yet many people fritter away countless dollars on unintended purchases simply because they don’t budget. A plan that you develop based on your income and needs will enable you to prioritize your expenses – redirecting your cash to where you really want it to go.

• • • • •

Specific Measurable Attainable Realistic Time-bound

Think about what you really want out of your money. Would you like to repay debt, buy a new car, or save for a down payment for a home? Each of these is a good example of a strong goal: they are specific rather than vague (e.g., the goal of “saving money” or “being able to relax about money”). After you decide what you would like to save for, determine how much it will cost and the time frame for achieving it. The next step is ensuring the goal is measurable. You should be able to break the price down into amounts that you can regularly deposit so you can monitor growth and track progress. For example, you may have a goal of taking a vacation one year from today. After researching the best deal, you have determined that it will cost you a total of $2,000. Therefore you will need

The past holds the key to the present. What you did up until today is what has led you to your current situation. You can avoid repeating past mistakes by analyzing them carefully and making a conscious decision to make healthier choices. Similarly, you can reinforce your existing strong habits by understanding how they positively impact your budget. Sometimes people postpone budgeting because the size of their goal seems overwhelming. If, for example, your dream is to purchase a million dollar home in 1

to set aside approximately $166 per month for twelve months ($2,000/12). Watching your savings grow as you advance toward your goal date will keep the drive to save strong.

To record your goals and develop a savings plan for achieving them, complete the Financial Goals Worksheet on page 6. Establish an Emergency Account Establishing and maintaining an emergency savings account is key to any sound financial plan. Having money in a liquid account (one that you can quickly access without tax or penalty consequences) will prevent you from turning to your credit cards or friends and family in times of financial crisis. A good rule of thumb is having three to six times the amount of your essential living expenses readily available.

Strive to keep your goals reasonable and reachable. Too modest a goal and you may not have the desire to continue, overly large and you can find yourself too discouraged to keep going. Lastly, your aspirations should have a proposed end date. This will let you know how much you need to save each month and will help you keep your progress on track.

Example: You have determined that your total monthly living expenses are $2,400. This includes such nonessential expenses as dining out, gifts, and gym membership. However, your essentials (rent, basic food needs, gas, utilities, etc.) run you $1,500 per month. In this case, an appropriate emergency account amount would be at least $4,500 ($1,500 x 3).

Once you have determined your goals, you are ready to distribute them into time frame categories. A shortterm goal will take 12 months or less to achieve, a midterm goal from one to five years, and a long-term goal will take more than five years. Many people will have more than one goal for each category. If that is the case, there may not be enough money to save for all your goals simultaneously. You will have to prioritize according to demand and desire.

Repay Debt while Saving for Other Goals If you have debt you would like to eliminate, you may be wondering if it wise to address it before putting money toward your other financial goals.

The calculation for short-term goals is simple: the amount of the goal divided by the number of months you have to save. There is little time for interest accumulation to help build savings. For mid- and long-term goals, however, the calculation is more complicated if you choose to invest your savings. Years of compounding interest will greatly increase your dollar power – you can afford to save less each month because interest will add to the total. It is also important to keep in mind that, due to inflation, the cost mid- and long-term goals may be higher in the future than they are now. The total goal amount should be the estimated cost at purchase, not the current cost.

The answer is that you often can – and probably should – do both at the same time. Having an emergency fund will help you avoid using credit for unexpected expenses. And by starting the fund now - even if all you can manage is $10 per month - you will get a jump-start on establishing healthy money management habits. You may want to put less vital goals (such as a vacation or a new computer) on hold while you concentrate on repaying credit card and unsecured loan obligations. In most cases the interest charged on consumer debt is much higher than the interest earned on savings vehicles.

Example: You would like to save $10,000 in 10 years. To achieve that goal with no investment earnings, you would need to set aside $84 each month. However, if you invested your savings into an account with an average return of 7%, you would only have to save $58 each month to reach your goal.

Saving for retirement is also recommended while repaying debt. Employer sponsored retirement plans, such as a 401(k) or 403(b), have many advantages that can help you maximize your dollars, both in the present and the future. If you do not contribute, you will miss out on such benefits as reducing your taxable income and letting pre-tax dollars collect interest. And since many employers match contributions up to a certain percentage, you lose free money by not taking advantage of the plan.

You can use the “How much should I save each month?” calculator at www.balancepro.net/education/ calculators.html to calculate how much you should save each month factoring in the rate of return. For investments with a variable return, like stocks, use a conservative estimate of what you expect the return to be. 2

Delete Your Credit Card Debt Why prioritize repaying credit cards as fast as possible and avoid unnecessary debt in the future? Because this type of debt can be very expensive to hold onto.

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Credit Card Example: • Balance: $2,000 • Interest rate: 19.8% • Minimum payment: 2.5% of the balance or $20, whichever is higher

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If you make only the minimum payments: • It will take almost 14.5 years to repay. • It will cost $2,848 in interest. (And that’s if you never made another purchase on it!)

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Start Saving Now So why do today what you can do tomorrow? Because waiting to save money until after you have paid all of your bills almost guarantees that you will put nothing aside. With money in a wallet or checking account, the urge to spend it often surpasses the desire to save it. However, by beginning with saving – depositing money into a savings account before or as other bills are paid – you can defeat the urge to postpone this very important task.

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Constructing Your Budget What does a budget look like? Remember that a budget is nothing more than a spending and savings plan. You can create it with a pen and paper using the Essential and Discretionary Expenses Worksheet on pages 8-9, or with a computer spreadsheet. Whatever shape it takes, your personal budget should include your income, expenses, and action items.

When you build your budget, you should be putting a fixed savings amount into your essential expenses. Why? Because your dreams – your goals – should take on as much importance to your budget as other necessary expenses. Track Where It Goes The last step to take before setting up your budget is to gain an accurate understanding of where you are spending your money every month. Ever wonder how the $40 ATM “fast cash” disappeared so quickly without any memory of where it went? An accurate budget depends on first being highly aware of every purchase you make.

Income Begin with income, as it will determine what you can afford to spend and save each month. Don’t forget the primary rule of budgeting: expenses should always fit within earnings. When completing the Monthly Income Worksheet on page 9, avoid overestimating your income. If you work overtime hours, include the extra income only if you are absolutely sure that it will continue. It is always best to use conservative figures for income. You may not be able to (or want to) work those hours in the future. Bonuses are also problematic when estimating income for the purposes of a budget – include them only if they are guaranteed.

There are several good methods you can use to track spending. However, when you begin the process, try to spend as you normally would. You can make adjustments based on your discoveries later. •

eep receipts. Keeping receipts from each purchase K you make and tallying them up at the end of the day is another method of tracking expenses. However, it won’t be absolutely accurate if you make purchases where no receipt is given, such as a newspaper or soda from a machine. Use checks or debit cards. While you aren’t guaranteed a completely accurate record, using a debit card or credit to track purchases gives you a handy electronic record of expenses. Of course, remember that using a credit card doesn’t give you an excuse to expand your spending habits. Monitor ATM use. While keeping tabs on how much cash you extract from the ATM won’t help you with tracking all of your purchases, it will help you become aware of how often you go and how quickly you spend that cash. Use expense tracking software. Plugging your expenses into tracking software cuts down on paperwork and makes it easier to look at your past spending habits. Some software even links to your accounts and automatically imports checking account and credit card purchases.

Write it down. Record your purchases using the Weekly Tracking Worksheet on page 7 or a small notebook. Make sure to note the date, item, and cost. Add up your spending at the end of the day and week. After several weeks of doing this, you will have a good idea of where and how you spend your cash.

If you are self-employed, or your income fluctuates because of commissions or seasonal work, you may have some challenges estimating your income exactly. In this case, use the previous year’s income as a base and estimate whether you think you will be earning more or less. Again, be conservative. It is better to have 3

money left over than be caught not being able to meet your expenses.

the very call to action that you need to make positive budgetary changes.

You should list both your gross (pre-tax) and net (posttax) income. If you get a large tax refund, you may want to increase the exemptions you claim on IRS Form W-4. This will reduce the amount of money taken out of each paycheck for taxes, increasing your net income. It is better to have the extra money throughout the year to put in savings and/or pay down debt than to wait until you file your return to get the cash. However, you do not want to increase your exemptions so much that you wind up owing money come tax time. The IRS’s withholding calculator (www.irs.gov/individuals) is a helpful tool for determining the proper number of exemptions to claim.

The proposed column is where you actively decide where you want your dollars to go each month. Using the current side as a guide, consider each expense carefully. If you are spending more than you are earning, some expenses will need to be reduced or cut. If you are not spending more than you are earning, you may want to keep things as they are now or you may want to rearrange your spending to better suit your wants and needs (e.g., reduce your dining out costs so that you will have money to take tap dancing lessons). As long as you are spending less than you are earning and dedicate enough money to meet your needs, you can spend your cash however you want.

Expenses When developing the expense section, you should have two columns to work with – one for what you have been spending your money on (using the tracking work you have already done) and the other for proposed spending.

Your goals are of vital importance to your budget. Again, in the proposed column, enter the amount you have earmarked for short-, mid-, and long-term goals. They are now an expense and you can “pay yourself” as you would any other important bill. Action Items The next step is to take action. If you found that your income is insufficient to pay for the expenses you consider important, consider ways to increase it. Do you have the opportunity to work longer hours or acquire part-time work? Now may be the perfect time to ask for a raise or seek out a better paying job. If you have property that you don’t need or use, consider selling it. The proceeds can be an instant emergency account.

Evaluate your cash flow by listing all of your expenses in the current column. Make sure you include everything. Many well-intentioned plans are tripped up by not accounting for such “unexpected” expenses as car repairs or veterinary bills. A workable budget makes room for the financial outlays that arise throughout the year. Of course, there are those truly unexpected expenses that you simply cannot plan for. This is why an emergency account should be part of your budget. Some essential expenses will be fixed (the same amount every month, such as your rent) while others will be variable (for example, your gas and electric bill may be more or less expensive based on the season). For those bills that fluctuate, determine an average by totaling what it typically costs you for the year, then divide that amount by 12 months.

If you determine that decreasing spending will empower you to achieve your goals, act now to make that a reality. Call your cable company to change your television package, get cheaper long distance, or cancel your cell phone. Substitute dining out for eating in more often, or skip gourmet coffees and make your own. Use your creativity to brainstorm ways to cuts costs and then put them into action.

Discretionary expenses are those that if you had to, you could live without. This is not to say they aren’t important – they make life fun and interesting. However, they will probably be your focal point when determining where to make cuts. Reducing nonessential expenses may be your answer to repaying debt, living within your means, or saving for a more important goal.

One essential action item is to open a savings account, if you don’t already have one. To help you save effectively, sign up for automatic deposit with your financial institution. Your monthly savings amount can be regularly transferred from your checking account into a savings account. If your goal is to save for retirement, your employer will deduct the amount from your paycheck for you. It’s up to you to make it happen.

Total your current expenses and then subtract the sum from your current income. Are you over or under? If you find there is more going out than is coming in, don’t panic. Very often this means you are charging what you cannot afford to pay with cash. This realization may be 4

Action Items

Will Complete By

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Budget Busters So, how do you stay on track with your newly developed budget? Start by avoiding the budget busters that can sabotage the best-laid plans. •

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ebt – Credit cards are wonderful tools that you D can use to your advantage. But if you keep a revolving balance, chances are you are spending beyond your means. Because debt can so easily spiral out of control, limit credit card use to only when you can afford to repay the balances in full. For the outstanding balances that you currently have, contact the creditor and request that your interest rates be reduced. The lower your interest rate, the more efficiently you can repay your debt. They are under no obligation to make an adjustment, but if you have been a good customer, they might. Spending – You make powerful choices everyday. From food to clothes to a mortgage payment, you not only have the power to spend, but also to save. To help you make the best decisions possible (and to keep you on your newly developed budget), take a moment to assess your money choices before you open your wallet.

pay dearly because of high interest rates, is it worth it? If you have determined that you really do need the item but don’t have the funds to pay for it today, consider saving for it. You don’t have to abandon what you want – just delay until you have the money to pay for it. What would happen if I didn’t have it? – Simply asking yourself this question can make the difference between bringing home a shopping bag full of impulse items and saving for things that you really do want or need. So, when standing next to the 50% off sale shelf, ask yourself: what if I didn’t? How would my life be affected without this pair of shoes, that DVD player, those 600 thread-count sheets? If you would be truly better off and you have the money to pay for it without sacrificing other necessary items, it passed the test. Otherwise, your options are to not buy it or buy it later after saving for it.

Stay Motivated You can stay motivated to stick to your budget by using the following techniques: • • • • •

Money Choice Assessment • Do I need it? – A want is a desire – something that if you had to, you could live without. A need is essential – living without it would cause extreme hardship. Simple? Not always. Wants can often feel like needs. Perhaps you have an expensive car payment and have to juggle bills every month to pay it. This want can mimic a need – certainly you require a vehicle to get you to and from work and perform the functions of everyday life. But does it really have to be a luxury SUV when an economy car or truck can provide the same transportation? • Do I need it now? – Do you need this item immediately or can you wait for it? A good rule is to never buy without first weighing the consequences. If you have to charge it, and then

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Visualize success. Picture yourself where you want to be financially, or tape a photo of your goals to your computer or refrigerator. Stay organized. Pay your bills on time, set up an area in your home for money management, and have your budget on hand and refer to it often. Be realistic. Recognize that you won’t achieve your goals overnight and that changing habits takes commitment. Monitor progress. Enjoy the process of watching your dollars grow. Marvel at your savings account each month – it is a real achievement. Expect setbacks. They happen. By knowing that they will eventually occur, you will be prepared and won’t be tempted to abandon your dreams. Reward yourself along the way. Your hard work deserves recognition from the most important person: you!

What Are You Going to Do Now? Keep the plan going! Decide now what specific tasks you will need to complete to achieve your goals. What can you do today, in the next three months, this year? Mark your calendar with proposed milestones. A well-developed budget is your springboard to financial independence. It will help you clarify objectives, organize your finances, refine spending, and attain those goals you previously only dreamed of. Success takes time. But by starting now, you will be that much closer tomorrow. 5

FINANCIAL GOALS WORKSHEET YOUR GOALS

Short-term Goals (under 1 year)

Mid-term Goals (1-5 years)

Long-term Goals (over 5 years)

TARGET DATE

TOTAL NEEDED

CURRENT SAVINGS

ADDITION- PAY PERI- SAVINGS AL ODS UNTIL NEEDED SAVINGS TARGET PER PAY NEEDED DATE PERIOD

SAVINGS NEEDED PER MONTH

WEEKLY TRACKING WORKSHEET ITEM

MON

Groceries Restaurants Laundry/Dry Cleaning Medical/ Dental Auto/Gas/ Parking Other Transportation Child Care Personal Care Clothing Bank Fees/ Postage Entertainment Books/ Music/Video Cigarettes/ Alcohol Gifts/Cards Home/ Garden Church/ Charity Contributions Other Other Other Other Other Other Other WEEKLY EXPENSE TOTALS

Notes

TUE

WED

THU

FRI

SAT

SUN

TOTAL EXPENSES

WEEKLY BUDGET

OVER / UNDER

ESSENTIAL EXPENSES WORKSHEET Household expenses are categorized into essential and discretionary. Since many expenses are variable, such as utilities and groceries, it is important to average these expenses. Other expenses are periodic (such as insurance or vehicle registration). Again, calculate the annual amount and divide by 12. CATEGORY

EXPENSE

Rent/Mortgage 2nd Mortgage/Equity Line Homeowner’s/Renter’s Insurance Condo Fees/HOA Dues Housing

Home Maintenance/Monitored Alarm Lawn/Garden/Pool Gas/Electric Water/Sewer/Garbage Internet/Cable/Satellite Landline/Cell Phone

Food Insurance

(exclude payroll deducted amounts)

Groceries/Household Items At Work/School Health/Dental/Vision Life/Disability Doctor/Chiropractor

Medical Care

(exclude payroll deducted amounts)

Optometrist/Lenses Dentist/Orthodontist Prescriptions Vehicle Payment #1 Vehicle Payment #2

Transportation

(exclude payroll deducted amounts)

Auto Insurance Registration Gasoline/Oil Maintenance/Repairs Public Transportation/Tolls/Parking

Child Care

(exclude payroll deducted amounts)

Miscellaneous

Income Taxes

Savings TOTAL ESSENTIAL EXPENSES

Daycare Child Support/Alimony Banking Fees Union Dues Federal/State Tax Repayment Estimated Tax Payments (Self-Employed) Emergency Goals

AVERAGE PER MONTH

GOAL PER MONTH

DISCRETIONARY EXPENSES WORKSHEET CATEGORY

EXPENSE

AVERAGE PER

GOAL PER MONTH

Beauty/Barber Clothing/Jewelry

Personal

Laundry Cosmetics/Manicure Movies/Concerts/Theater Books/Magazines CD/DVD

Entertainment

Dining Out Sports/Hobbies Vacation/Travel Other Tuition/Lessons Pet Care Postage Holiday/Birthday/Gifts

Miscellaneous

Cigarettes/Alcohol Charity/Religious Contributions Other Other

TOTAL DISCRETIONARY EXPENSES

MONTHLY INCOME WORKSHEET Enter your gross and net (after taxes) income from all sources. For income received infrequently, such as bonuses or tax returns, calculate the annual income, then divide by 12 to find the monthly amount. SOURCE

Income Source/Employer Part-time Employer/Second Job Retirement/Pension Child Support/Alimony Social Security Food Stamps Unemployment Insurance Support from Family/Friends Rental Income Other Income (variable or periodic) TOTAL MONTHLY INCOME

YOURS

SPOUSE/PARTNER

YOUR CREDIT SCORE Your credit score can have a major impact on your life. Not only do creditors typically check your score when deciding whether or not to approve your application and what interest rate to charge you if you are approved, but landlords, insurance companies, and even employers often check it as well. Having a good score can help you achieve your goals quickly and at the lowest possible cost.

risk. Generally, those with a higher score are more easily granted credit and get a better interest rate. While there is no standard for what constitutes a “good” credit score, one benchmark to keep in mind is that many mortgage lenders require a score of at least 620 for approval and 760 for the best interest rate. The following are the factors that are used to calculate your FICO score:

What Is a Credit Score? A credit score is a numerical measure of your credit worthiness – the likelihood you will repay what you borrow. There are several types of scores available that are calculated using a variety of factors and weights, but they focus on the information in your credit report and not on personal factors such as age, race, and gender.

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As the name implies, your credit report is a report of your credit activity. Credit includes things like credit cards, store cards, personal loans, car loans, mortgages, student loans, and lines of credit. For each account you have, your report shows who it is with, your payment history, the initial amount borrowed (for loans) or credit limit (for revolving credit, like credit cards), the current amount owed, and when it was opened/taken out. Your report also shows if you have experienced any credit-related legal actions, such as a judgment, foreclosure, bankruptcy, or repossession, and who has viewed your report (called an inquiry). There are three major credit bureaus that compile and maintain credit reports: Equifax, Experian, and TransUnion. Theoretically, all three of your reports should be the same, but it is not uncommon for one bureau to collect information that another one does not.

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Today, instead of reviewing and evaluating the report itself, many creditors simply pull your credit score. Not only does it save time, but credit scores provide an objective, consistent way of analyzing applications.

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FICO Scores The most commonly used scoring model was developed by a company called Fair, Isaac and Company. Called a FICO score, it ranges from 300 to 850, with a higher score being indicative of less

Payment history (35%): Making your payments on time boosts your score. Conversely, if you make a late payment, your score will take a hit. The more recent, frequent, and severe the lateness, the lower your score. Collection accounts and legal actions, such as a bankruptcy, foreclosure, or judgment, have a serious negative impact. Amounts owed (30%): Carrying balances on revolving debts – like credit cards or lines of credit – that are more than 50% of the limit on the account will bring down your FICO score. Length of credit history (15%): The longer you have had your accounts, the better. New credit (10%): This factor looks at the number and proportion of recently opened accounts and the number of inquiries. While many inquiries on your report will lower your score, all mortgage or auto loan inquiries that occur within a 45-day period are considered just one inquiry for scoring purposes in the latest version of the FICO scoring model. Accessing your own report is not damaging to your score nor are inquiries for pre-approval offers. However, having too many new accounts can bring down your score. For this reason, you should only open accounts you are sure you need. Types of credit used (10%): Having a variety of accounts – both revolving and installment – boosts your score because it demonstrates that you are capable of handling the responsibilities that come with each debt type. Examples of revolving accounts include credit cards and lines of credit, while personal loans, car loans and a mortgage are types of installment accounts.

Since your Equifax, Experian, and TransUnion credit reports do not necessarily contain the same information, your FICO score from each bureau may be different. When you apply for credit, the creditor may only check one of your scores or check all three and average them or take the lowest or middle score.

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Having a Low Score Can Cost You Not only does your score play a major role in whether you are approved for credit, but it typically also influences the interest rate you are charged if you are approved. You interest rate is not important for credit cards that you pay off in full each month, but for loans, having a higher interest rate can cost you a lot of money, as the chart below shows. A person with a score of 620 will pay over $150 more per month than a person with a score of 760. That adds up to an additional $54,609 over the life of the loan in this example.

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How to Improve Your FICO Score Following these habits can boost your score: •

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lways pay on time: Your payment history A makes up the largest chunk of your credit score, so making your payments on time is extremely important. Pay down existing debt: Even if you have never missed a payment, a large debt load will lower your score. Explore ways you can lower your interest rates and free up cash to make more than the minimum payments. Avoid taking on additional debt: Besides paying down existing debt, make an effort to not take

$200,000

•

on more debt in the future. For revolving credit, ideally you should not charge more than you can pay off in full the next month, but at the very least, try to keep the balance well under half of the credit limit. Check your report for errors: Many reports contain score-lowering errors. Check your credit report from the three bureaus at least annually, and file a dispute at the web site of the bureau reporting the mistaken information if you notice any errors. You can get a free copy of your report once a year from the Annual Credit Report Request Service (see page 4). Keep your old accounts: A long credit history with the same accounts indicates stability. Limit balance transfers: While transferring balances to “teaser rate” cards can be a way to efficiently get out of debt, it can also have a detrimental effect on your credit score. The accounts will be new and likely have balances close to the limit to maximize the advantage of the low rate – two factors that lower your score. Avoid excess credit applications: Frequently applying for new credit can bring down your score. If you do it frequently, a creditor may see it as a sign that you need to rely on credit to pay your bills. Be patient: It may feel like credit mistakes can haunt you forever, but your payment history from the past two years is more important that what happened before that, and most negative information is removed from your report after seven years.

/ 30-Year Mortgage

FICO Score

Annual Percentage Rate*

Monthly Payment

Total Paid Over Life of Loan

Interest Paid Over Life of Loan

760-850

3.75%

$879.92

$316,770.87

$126,770.87

700-759

3.90%

$896.17

$322,620.78

$132,620.78

680-699

4.10%

$918.08

$330,506.58

$140,506.58

660-679

4.40%

$951.45

$342,518.87

$152,518.87

640-659

4.70%

$985.41

$354,749.14

$164,749.14

620-639

5.10%

$1,031.60

$371,380.03

$181,380.03

300-619

Denied

* These interest rates are intended as an example only – check with your lender for the actual rates. This example assumes a down payment of 5%.

higher the better). Beware Credit Repair Some companies claim to “repair” your credit score and report, often for a very high fee. At best, the company is charging you for something you can do yourself for free: writing a letter to the creditor bureaus disputing inaccurate information. At worst, the company is engaging in dishonest and/or illegal tactics. Credit repair companies frequently operate by flooding the credit bureaus with letters that dispute negative, but accurate, information. If the credit bureaus are unable to investigate the claims within 30 days, the information is removed. The company then shows you a cleaned-up report. This rarely works, though. Even if the credit bureaus are backlogged with disputes, they will eventually get to your claims and just reinsert the negative information when they verify that it is accurate. Another common tactic credit repair agencies use is to issue consumers a new identity, complete with a stolen Social Security number or tax identification number to use in place of a Social Security number. This is an illegal practice for which the consumer often ends up paying the price. Remember, there is no legal way to remove accurate and timely information from your credit report. Rapid Rescoring Rapid rescoring is a fee-based service that is offered by some mortgage lenders and brokers to help accelerate the credit report dispute process. Instead of having to wait for weeks, corrections may be made within 72 hours or less. Items that can generally be corrected or removed using rapid rescoring include erroneous late payments, accounts that should have aged off your report, accounts that are not yours, and incorrect balances. Rapid rescoring may also help you update your credit report quickly if you just paid off a debt. Beware rapid rescoring companies that market directly to consumers. They are probably scams. Rapid rescoring is never to be used to dispute information that is negative but correct (and less than seven years old), and any company that promises to do so is almost certainly not legitimate. VantageScore The VantageScore was created by Equifax, Experian, and TransUnion as an alternative to the FICO score. Your VantageScore consists of both a numerical score and letter grade. (Like with your FICO score, you have a VantageScore from each bureau.) Scores range from 300-850 in the newer scoring model, 501-990 in older versions (the

While your FICO score and VantageScore both only consider the information in your credit report, the categories and weights for each are somewhat different. The factors that are used to calculate your VantageScore are: • • • • • •

Recent credit (30%): The number of recently opened credit accounts and credit inquiries. Payment history (28%): Repayment behavior (satisfactory, delinquency, derogatory). Utilization (23%): Percentage of credit amount used/owed on accounts. Balances (9%): Amount of recently reported balances. Depth of credit (8%): Length of credit history and types of credit. Available credit (1%): Amount of credit available.

The same practices that can help you to have a good FICO score can also boost your VantageScore. Bankruptcy Risk Scores Bankruptcy risk scores have been developed by several companies. Instead of evaluating your general credit worthiness, your bankruptcy risk score is designed to predict the risk that you will file for bankruptcy. The specific calculation method is not public information, but it is hypothesized that the main factors considered are the same ones that your FICO score is based on, plus your spending habits. Internal Scores In lieu of or in addition to FICO score, many creditors use their own scoring model. They may look at factors that the FICO score does not consider, but generally, if you make your payments on time, keep your balances low, and practice other habits that are necessary to have a good FICO score, you will have a good score under other models too. Non-Traditional Credit Scores Since credit scores come directly from credit report data, what happens if you have never had any credit? You won’t have a credit score in most models. If you want to get a mortgage or car loan in the future, not having a credit score can be a serious impediment. However, there are some lenders that will accept a “non-traditional credit score.” Several companies have developed non-traditional scoring models, and the trend in the industry seems to be toward casting a wider net for data on which to generate scores.

exact same score a lender will see. Non-traditional scoring models take payment data from non-credit sources, which can include: • • • • •

Checking your credit score can be helpful if you are planning to get a mortgage or car loan soon and want to have an idea if you will get approved or qualify for the best interest rate. The surest way to make sure you are looking at a similar score to the lender is to simply ask them what score they use.

Landlords Utility companies Banks/credit unions Payday loan companies Rent-to-own businesses

When to Ignore Your Score While most people should take an active role in creating and maintaining a good credit score, not everyone needs to maintain a constant focus on it. You may not need to concentrate on your score if:

To have a good non-traditional score, it is extremely important that you pay your bills on time. Lenders typically will only consider your nontraditional credit score if you do not have a traditional credit score. Even then, there are some lenders that will not use it. If you do not currently have a credit score and would like to get a mortgage or car loan in the future, you may want to obtain a credit card or store card now and start building a traditional credit history. If you are unable to get approved for a regular card, you may want to get a co-signer or apply for a secured credit card. A secured credit card requires you to make a deposit, which the creditor will draw from if you do not make your payments. Secured credit cards may charge an annual fee, but they generally provide you with the option of converting your account to a “regular” credit card after a pre-agreed number of consecutive on-time payments are made.

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Obtaining Your Credit Score If you are denied credit or insurance or receive less favorable terms due to your credit score, the creditor or insurer is required to provide you with the score they used at no cost. Otherwise, if you want to see your score, you have to pay for it. You can purchase your Equifax, Experian and TransUnion FICO score from FICO. (See contact information on this page.) Visit the web sites of the credit bureaus listed on this page for information about purchasing credit scores developed by the bureau.

Contact Information • Equifax www.equifax.com 800.685.1111 • Experian www.experian.com 888.397.3742 • TransUnion www.transunion.com 800.888.4213 • FICO www.myfico.com 800.319.4433 • VantageScore www.vantagescore.com • Annual Credit Report Request Service www.annualcreditreport.com 877.322.8228

Keep in mind that there are a variety of services that sell credit scores. When you purchase your credit score, it is extremely important to pay attention to what score you are purchasing. Some scores that are made available to consumers to purchase are not actually used by lenders. Since it is the mostly widely used, it generally makes the most sense to purchase your FICO score. However, even then, keep in mind that you may not be seeing the © 2013 BALANCE / REV0513

our score is already excellent – The only Y advantage to having an 830 FICO score instead of an 810 is bragging rights. Both scores likely qualify for the exact same interest rate. You will not be using it – If you already have everything you need – a home, a car, credit cards – and won’t be looking for a job or insurance products in the future, a credit score has little meaning. You don’t want to start paying your bills late or taking on an excessive amount of debt, but there is no need to stay up at night worrying about your credit. You have more important financial issues to deal with – If you are saddled with overwhelming debt, don’t have money for essential expenses, have legal issues to contend with, etc., your credit score rates a distant second to focusing on your more pressing problems. Remember, you can always improve your score through responsible credit use in the future.

What’s Your Credit Score “Score”? Quiz Answer True or False to the following statements. 1. Checking my own credit report hurts my score.

¨ True ¨ False

2. My scores from all three bureaus must always be the same.

¨ True ¨ False

3. Payment history is the largest factor used to calculate my score.

¨ True ¨ False

4. For scoring purposes, information on my credit report that is five years old matters as much as information that is a year old.

¨ True ¨ False

5. My income is factored into my score.

¨ True ¨ False

6. I can get a lower interest rate with a score of 850 than a score of 810.

¨ True ¨ False

7. All applications for mortgage or auto loans within a 45-day period are considered as just one inquiry for scoring purposes.

¨ True ¨ False

8. Carrying a balance close to the credit limit will harm my score.

¨ True ¨ False

9. If I have never had any credit, I do not have a traditional credit score.

¨ True ¨ False

10. If I need to clear up errors on my credit report, using a credit repair company is the best method to do so.

¨ True ¨ False

Scoring Key: More than 8 correct – You understand the credit scoring process; now do what it takes to create and maintain good scores. 5-7 correct – You are clear on some important aspects of credit scoring, but learn more to make sure you know what it takes to create a great score. Less than 4 correct – Now that you know what you don’t know, learn the facts about credit scoring – misinformation can hurt you.

ON THE ROAD TO RICHES: THE BASICS OF SAVING AND INVESTING Would you like to be able to purchase a house in a few years? Travel around the world? Retire before you are 90? Unless you won the lottery, chances are that you need to save and invest to obtain many of the things you want. This workshop covers what you need to know to get started on the road to riches. Establish a Healthy Financial Foundation Budget The key to being able to save is to spend less than you earn. If your income is $1,700 a month and your expenses are $1,800, how will you able to put away $200 or $300 a month? To figure out if you are currently spending less than you are earning, use the budget worksheet on the next page to list what your current expenses and income are. To determine a monthly amount for periodic income and expenses, such as vacation, calculate the per year amount and divide it by 12. Monthly Income Source

Gross

Net

Job Spouseâ&#x20AC;&#x2122;s job Part-time job Commissions/bonuses Child support/alimony Retirement income Other Total

Monthly Expenses Expense

Current

Expense (cont.)

Proposed

Rent/mortgage

Donations

Second mortgage

Storage fees Beauty or barber

HOA dues

Movies or videos

Property taxes

Internet access

Homeowner’s insurance

Cable or satellite Dining out or snacks

Renter’s insurance

Sports or hobbies

Gas/electric (house)

Gym membership

Water/sewer/ garbage

Vacation or travel Books or music

Telephone

Clothing purchases

Groceries Household items

Laundry or dry cleaning

Health insurance

Pool/hot tub service

Co-pays (medical)

Gardening

Car payment #1

Alarm system Gifts or cards

Car payment #2

Pet care

Gasoline

Cell phone or pager

Repairs (house)

Banking fees

Repairs (cars)

Postage

Auto insurance

Cigarettes or alcohol

Auto registration

Savings

Tolls or parking

Debt payment

Public transportation

Debt payment

Daycare or babysitting

Debt payment

Alimony or child support

Other

Other Total

Tuition or lessons Student loan payment Taxes (payment plan) Life insurance Union dues

Current

Proposed

Once you have completed your budget, total up your expenses and subtract them from your income. If your expenses are less than your income, great! If not, look over your plan and think about what changes you can make to improve your cash flow. Can you bring your lunch to work instead of buy it? Nix the land-line and just use your cell-phone? Give up your tap dancing lessons? Be honest about what is truly a necessity and what can be reduced, postponed, or cut out completely.

it doesn’t.) Examine how much coverage your insurance provides and what the value of your possessions is. Is the coverage sufficient? If your electronics, clothing, furniture, and knick-knacks total $45,000, you don’t want a rental insurance policy that pays a maximum of $30,000. Another purpose of insurance is income replacement. Examples of this type of insurance include life insurance and disability insurance. If you or your partner (if applicable) were to die or become disabled and unable to work, how much money would your family need to be able to pay the bills? You may want to consult with a financial advisor or do research (more information on insurance is available at http://www.balancepro.net/ education/publications_planning.html) to determine your specific insurance needs.

Delete Debt In most cases, the interest charged on credit cards and personal loans exceeds the interest earned from investments. If you owe $10,000 on a credit card with a 20% annual percentage rate, it makes more financial sense to direct your extra cash toward that than a certificate of deposit with a 3% annual percentage yield. Once you pay off your debt, then you can dedicate your attention to investing. One caveat – you should always have an emergency fund containing at least three to six months worth of essential living expenses, even if you have debt. (This allows you to pay everyday expenses if you lose your job or unexpected expenses without needing to rely on credit.) If you have less in savings currently, at least a portion of your spare cash should go toward building an emergency fund.

Set Goals Setting goals is crucial to figuring out how much you need to save to get what you want. It is also a good motivator to save. Let’s be honest – going out to eat at a nice restaurant is more fun than putting $100 in your saving account. But if you know that money is going toward a fabulous vacation or a down payment on a house, it will be easier to tuck it away and pop a frozen pizza in the oven. Use the goal worksheet on the next page to list your goals. Financial goals should be specific and measurable. For example, a desire to be rich is not a goal, but a desire to have $300,000 saved in twenty years for retirement is. There are three basic types of goals: short-term (achieved in under a year), midterm (achieved in one to five years), and long-term (achieved in more than five years). Whether a goal is short-term, mid-term, or long-term can influence where you put your savings (discussed more later).

Have Enough Insurance Coverage Unexpected events, such as a severe illness, car accident, or house fire, can wipe out your savings in one fell swoop. That is why having the proper amount of insurance is extremely important. One of the purposes of insurance is to provide compensation if assets are destroyed or damaged. Examples of this type of insurance include auto insurance, homeowners insurance, and renters insurance. (Many renters think their landlord’s policy will cover them if something happens – usually

Savings Needed Per Month

Additional Savings Needed

Current Savings

Total Needed

Target Date

Financial Goals Chart

Short-term Goals

Mid-term Goals

Long-term Goals

The easiest way to determine how much you need to set aside each month is divide the current cost (minus anything you have already saved) by the number of months until your achievement date. So if you want a $1,200 laptop in 12 months, you should set aside $1,200/12 = $100 a month. However, doing the calculation this way ignores inflation (the gradual rise in the cost of goods and services over time) and the return that you earn on your savings. Inflation and return don’t have much of an influence on goals that will be achieved in the immediate future, but you may want to take them into consideration for longterm goals. A financial expert may be able help you come up with precise figures or you can use your best guess as to what the cost of the goal and rate of return will be. (Some vehicles, such as certificates of deposit, have a fixed rate of return. Others, such as stocks, vary. For the latter, one way to estimate the rate of return is to look at how the investment has performed in the past – past performance is not always a very good predictor of future performance, but unless you have a crystal ball, there is no way to know for sure what it will be). You can use the “How much should I save each month?” calculator available at www.balancepro.net/education/calculators.html to calculate, as the name implies, how much you should save each month figuring in the expected rate of return. COPYRIGHT © 2010 BALANCE

After you determine how much you need to save each month, you should add those figures to your budget. If they put you in the red, go back to the drawing board and consider if you can make any further reductions in expenses. If not, consider if any goals can be adjusted. Is there a cheaper alternative available (e.g., a local amusement park instead of Disney World)? Can you extend the timeframe? Are there any goals that are less important that can be dropped? Maybe you would really love to buy a $5,000 garden gnome to put in your front lawn, but having enough money for retirement is a bigger priority. Investment Classes Now that you have a goal plan, you need to determine where to put your savings. There are three basic types of investment classes. Stocks A share of stock represents a percentage of ownership in a corporation. In other words, if a company is divided into a million shares and you buy one share, you would own one millionth of that company. You can make money from receiving dividend payments (a payout to stockholders from the company’s earnings) and/or selling the stock for more than you bought it for. 4

Most stocks are common stocks. Having common stocks typically allows you to vote for the board of directors, which is responsible for managing the company. With common stocks, the dividend payments are not fixed, and the company is not required to pay them, although many do. The other type of stock is preferred. With preferred stocks, you have no voting rights, but regular dividend payments are usually guaranteed (although the amount may be less than what the common stockholders are paid).

Zero coupon bonds, unlike other bonds, pay no interest but are typically sold at a deep discount. They can be any of the types of bonds listed below and are usually long-term, with maturity dates of ten-plus years. Types of bonds include: • •

Stocks are often classified as one of the following: • •

• • • •

Blue-chip: Stocks issued by large companies with a solid financial history. Growth: Stocks issued by companies that exhibit strong sales and earnings growth. The companies typically direct earnings back into themselves instead of paying dividends. Income: Stocks issued by companies that generally pay high dividends and experience little growth. Speculative: Stocks issued by companies that do not have a solid financial history. These stocks carry more variability and risk than other stocks. Cyclical: Stocks issued by companies whose earnings mirror movements in the economy. Defensive: Stocks issued by companies that are not significantly affected by changes in the economy.

•

Bonds are usually safer than stocks since the bond issuer has a legal obligation to pay them, and as a result, the return is usually lower. However, they are not completely risk-free, as the issuer may choose to breach their obligation or be able to have it discharged through bankruptcy. (Also, if you sell a bond before the maturity date, there is a risk you won’t be able to get as much for it as you bought it for.) Overall, bonds issued by the government are generally less risky than bonds issued by corporations, especially bonds issued by the Treasury because they can always print more money to pay them back!

Historically, long-term stocks have provided the greatest return. However, there are no guarantees – one day your stock may be worth more than what you paid for it, the next, less. The price of a stock is typically influenced by the performance of the company and general economic conditions, but it can also be influenced by investors’ expectations and emotions, which are not always rational. Bonds While stocks are an ownership investment, bonds are a lending investment. You give the bond issuer money, and, in most cases, they pay you interest in return, just like you pay interest to a creditor. Generally you receive the principal (called the par value) at maturity of the bond and the interest (called the coupon interest rate) periodically (usually twice a year) while you are holding the bond. You make money both from interest payments and purchasing the bond at less than its par value (although bonds sometimes trade at or higher than their par value).

Corporate: Bonds that are issued by nongovernment companies. Corporate bonds can vary considerably in length, yield, and risk. Municipal: Bonds offered by the state or local government. In general, the interest received on municipal bonds is exempt from federal income tax, as well as state tax if you live in the state you purchased the bond from. Federal: Bonds issued by the federal government. The biggest issuer of federal bonds is the U.S. Department of the Treasury. Electronic Series EE and I bonds are sold at face value and can be purchased for as little as $25. EE bonds pay a fixed-rate of interest, while I bonds come with a variable rate. The interest earned is exempt from state tax. It is also exempt from federal tax if it used to pay for qualified highereducation expenses. Treasury bonds can be purchased directly from the government at www. treasurydirect.gov.

Cash Equivalents Cash equivalents are assets that can be readily converted into cash. They tend to be low-risk, with little or no danger that you will lose the money you deposit. Because they are safe, cash equivalents provide a low return, which may not even keep up with inflation. There are many types of cash equivalents: •

Savings and checking accounts: With savings and checking accounts, you deposit money

•

in a financial institution and receive interest or dividends in return. You can withdraw your money at any time. The interest rate is usually low or may even be non-existent for some checking accounts. Savings and checking accounts are insured, meaning you will still be able to access your money in the unlikely event your financial institution goes out of business. Certificates of deposit (CDs): With CDs, you also deposit your money in a financial institution, but you are required to leave it there for the term of the CD, or, in most cases, you will have to pay an early withdrawal penalty. CDs are insured and generally have a higher interest rate than savings or checking accounts. Money market deposit accounts: Money market deposit accounts are similar to savings accounts, but the interest rate is typically variable (and higher as well). They are insured and may come with limited check writing privileges. Money market mutual funds: Money market mutual funds are mutual funds that invest in short-term debt obligations, such as Treasury bills and CDs. While generally safe, money market mutual funds are typically not insured and provide no guarantee against loss. U.S. Treasury bills: Treasury bills are short-term debt obligations of the U.S. government.

most things will be more expensive in the future, and by investing in vehicles that provide a higher return, you do not have to contribute as much. And losing money is less of an issue because of the longer timeframe. Stocks may dip for a few months or even years, but over time, most of them rise. (However, remember that the long-term goals of today are the short-term goals of tomorrow - as you get closer and closer to your goals, it is a good idea to move some of your money to less risky vehicles.) Another factor to consider is your level of risk tolerance. Some people have absolutely no problem investing in the stock market. Others pace nervously and go on-line once a day to see what their stocks are trading at. It is rarely a good idea to have your entire investment portfolio in just stocks, bonds, or cash equivalents (because most people have short-, mid, and long-term goals), but the exact percentages may differ. For example, someone who is conservative may have 40% of his or her retirement fund in stocks, 40% in bonds, and 20% in cash equivalents, while someone who is aggressive may have 80% of his or her retirement fund in stocks and 10% in bonds and 10% in cash equivalents. Even if you are a more aggressive investor, it is beneficial to consider ways that you can minimize risk. One way to do this is to diversify. As mentioned above, a well-balanced portfolio should have a mixture of stocks, bonds, and cash equivalents. It is also a good idea to diversify within each type of investment class. For example, you can purchase stocks from manufacturing companies, technology-oriented companies, and financial services companies. A simple way to get diversity is to purchase shares in a mutual fund. In a mutual fund, money from several investors is pooled to buy different stocks, bonds, and/or cash equivalents. Index funds in particular are recommended by many financial experts – instead of having an advisor that picks what investments are included, index funds track a particular index, such the S&P 500. This keeps the costs, and therefore the fees you are charged, lower.

Asset Allocation When investing, there are two important risks that need to be considered: that you lose some or all of your principal (the money you invest, as opposed to earnings) and that your return is low or nonexistent. Historically, stocks have provided the highest return but the most risk of losing your investment – if a company goes out of business, files for bankruptcy, or otherwise performs poorly, your stocks could be worthless. Cash equivalents have the lowest risk of loss but also the lowest return. When determining what percentage of your savings will go into each type of investment class, it is helpful to consider the timeframe. For short-term goals, because you will be using the money soon, not losing your principal is a much bigger concern than return – even if the investment has a return of 10%, you are not going to earn very much in six months. Therefore, it is a good idea to put most or all of the savings for short-term goals in cash equivalents.

Tax-Advantaged Accounts If saving for retirement and/or higher education are among your goals, it is a good idea to utilize the taxadvantaged accounts that are available. After all, the less you have to pay in taxes, the more money that goes into your pocket.

For long-term goals and, to a lesser extent, mid-term goals, return is a definite concern. Due to inflation,

For retirement funds, options include:

Savings plans for education include:

•

401(k)/403(b): Both types of plans are offered by employers to their employees (the 401(k) by for-profit companies and 403(b) by non-profits). You decide what amount of your income to contribute each pay period and where to put it among the options offered by your employer. That money is deducted from your paycheck pre-tax, meaning you don’t have to pay state or federal income taxes on it. While your money is invested in the plan, you don’t have to pay taxes on the earnings either. You only have to pay taxes on the withdrawals you make. 401(k)s and 403(b)s are defined contribution plans – your contribution is defined, but your benefits are not. The value of the plan is dependent on how much is put in it and how well your investments perform. Traditional Individual Retirement Account (IRA): Like with 401(k)s and 403(b)s, you do not have to pay taxes on the contributions to or in-plan earnings on a Traditional IRA, only the withdrawals. However, IRAs are not tied to your employer – you can open one at a variety of financial institutions, such as credit unions, banks, and mutual fund companies. In order to contribute to an IRA, you or your spouse must have earned income. One of the benefits of an IRA is that your investment options are not limited to what your employer offers. However, the contribution limits are higher for employersponsored plans than IRAs. Roth IRAs: Unlike with 401(k)s and 403(b)s and Traditional IRAs, you do have to pay taxes on the contributions you make to a Roth IRA. However, earnings grow tax-free in the account, and you do not have to pay taxes on withdrawals. Many financial experts prefer Roth IRAs to Traditional IRAs, but which one is more beneficial is largely dependent on your tax bracket now versus your tax bracket in retirement.

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Research and Purchasing Getting advice from a professional and doing your own research can help you determine what specific investments to buy. The internet is a great place to get information, but pay attention to the credentials of the person giving advice. If you are interested in purchasing stocks from a particular company, you can read their annual report to see how profitable the company has been. There are many publications on the stock market as well, including the Wall Street Journal, Forbes, Fortune, and BusinessWeek. You do not necessarily need to purchase them – you may be able to find them at the library or view content online for free.

Plans for the self-employed: If you are self-employed, you can still contribute to a Traditional or Roth IRA. There are also retirement plans specifically for the self-employed and small business owners and employees, such as the Keogh plan, simplified employee pension plan (SEP plan), and savings incentive match plan for employees (SIMPLE plan). All allow you to make pre-tax contributions, and the earnings grow tax free. The SEP plan and SIMPLE plan generally have lower administrative costs and are easier to set up, but the Keogh plan may allow larger contributions.

Coverdell Education Savings Account (ESA): The Coverdell ESA works just like a Roth IRA – contributions aren’t tax-deductible, but the investment earnings accumulate tax-free, and qualified distributions are exempt from income tax. It can be used to pay for tuition, fees, books, and equipment for primary, secondary, and postsecondary education (kindergarten – graduate school). Contributions can only be made until the beneficiary turns 18 and must be used by the time he or she is 30. Coverdell ESAs can be opened at many financial institutions, and unlike with 529 plans (discussed more below), your investment options are virtually unlimited. As the plan’s owner, you choose what stocks, bonds, mutual funds, and/or other opportunities to invest in. 529 plan: The 529 plan is tax-advantaged savings vehicle that can be used for college and graduate school expenses. It comes in two basic varieties: the college savings plan and the prepaid tuition plan. College savings plans are investment accounts offered by individual states. Prepaid tuition plans allow you to buy all or part of a future public in-state education at today’s prices. Unlike with college savings plans, you can generally only invest in your state’s plan (if they have one). It may be possible to use the plan at a private or out-of-state public school, but the coverage will likely be less. With both college savings and prepaid tuition plans, you don’t have to pay taxes on the earnings or withdrawals as long as you use the funds for qualified education expenses. Contributions are not deductible on your federal income tax return, but they may be deductible on your state return if you use your state’s plan.

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If you are investing in a mutual fund, it is extremely important to pay attention to the fees the fund charges. The “load” is the commission charged by the broker or advisor selling you the shares. (There are many no-load funds available that do not have this fee.) The “expense ratio” shows the annual percentage of the fund’s assets that are used to pay for ongoing expenses. The higher the fees, the less money that goes to you. You may think that funds with higher fees perform better, but for the most part, this is not actually the case. You probably already have experience opening a checking and savings account, but you may not know where you can get stocks or bonds. Many credit unions and banks offer investment services. Brokerage firms are another option. There are full-service brokerages that will provide you with advice in addition to facilitating the purchase, and discount/on-line brokerages that just provide barebones service with no advice. As the name implies, discount brokers are typically cheaper, but often first-time investors would rather pay more to get advice from a professional than solely rely on their own research. In some cases, it is possible to buy the investment directly from the entity that is offering it. For example, as mentioned previously, you can buy Treasury bonds directly from the Department of the Treasury. There are also several companies that offer a direct stock purchase plan.

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Adjust your portfolio as needed: At least once a year, review your investment portfolio. Your goals and life circumstances may change, and what works today may not be appropriate tomorrow. Learn before investing: While taking advice from a professional is a good idea, conduct your own research before making any major financial decision. No one cares more about your money than you.

Tips for Saving and Investing •

As the old saying goes, a penny saved is a penny earned. And if you invest that penny today, you can have two pennies tomorrow.

Be realistic: Don’t expect to earn a million dollars in a year. There are people who get rich quickly, but they are the exception to the rule. If someone is offering an investment opportunity that “promises” returns well above normal, be suspicious. If it sounds too good to be true, it probably is.

Start now: No matter how much or little you have now, start today. The sooner you begin, the faster your money will work for you. If you started setting aside $2,000 a year now, assuming an annual return of 6%, in 10 years you will have $26,362. However, if you wait 5 years to start, you will only have $11,274. Make it automatic: If you make saving and investing an automatic process, you are less likely to neglect it. Having the ability to directly deposit some of your paycheck into your savings account is an option that most employers provide. Many brokerage services offer an automatic investment option, in which the funds are directly deducted from your account on a regular basis. Diversify: It has already been mentioned, but it is worth repeating – by investing in different vehicles, you reduce your risk. If you have stocks in 20 different companies, the likelihood that they all do poorly long term is fairly low.

Stanford Alumni Association Frances C. Arrillaga Alumni Center 326 Galvez Street Stanford, CA 94305-6105

alumni.stanford.edu/goto/seniors