Title: P.Y.F.
1P.Y.F. Participants Guide
2Table of Contents
- Welcome
- Pre-Test
- Pay Yourself First
- Saving for Purchases
- Emergency Savings
- Retirement Savings
- Daily Decisions Matter
- Savings Tips
- How Your Money Grows (Simple and Compound
Interest) - The Penny Doubled
- The Rule of 72
- A.P.Y.
- Time is On Your Side
- Savings vs. Investing
- Account Types
- How to Create a Savings Action Plan
- Pay Yourself First Action Plan
- Post-Test
- Glossary
3Welcome
- Welcome to the Pay Yourself First module! Saving
money is an important part of building your
financial future. This module will give you some
tips to help you get started. It will also show
you how your money can grow when you save and
give you some important information about saving
and investment products. - Objectives
- After completing this module, you will be able
to - Explain why it is important to save
- Determine goals for saving money
- Identify savings options
- Determine which savings options will help you
reach your savings goals - Recognize which investment options are right for
you - Participant Materials
- This Pay Yourself First Participant Guide
contains - Information to help you learn the material
- Tools and instructions to help you save
- Checklists and tip sheets
- A glossary of the terms used in this module
4Pre-TestTest your knowledge about financial
services
- Saving is important so that you can
- Have money for emergencies
- Achieve your financial goals
- Manage your money better
- Improve your standard of living
- a and b
- All of the above
- What should you consider when establishing goals
for saving money? Select all that apply. - The amount of money you want to save
- Timeframe of when you need to access the money
saved - Ways you can cut spending and save
- The annual percentage yield (APY) of different
savings products - All of the above
- Which of the following would be considered a need
rather than a want? Select all that apply. - Paying rent/mortgage
5Pay Yourself First
- What do you think it means to pay yourself
first? Paying yourself first means that when
you get a paycheck, tax refund, cash gift, or
other money you should put some of that money in
a savings account before you pay your bills. - Why would you want to save money, or pay yourself
first, before paying your bills? There are many
reasons to pay yourself first. You can save money
toward goals you have identified, improve your
standard of living, learn to manage money better,
and have money for emergencies. - What are some of the things you might want to
save money for? - Unexpected events (e.g., loss of a job, car
repair, or unexpected medical bills) - Down payment for a house, a car, or other large
purchase - Education
- Retirement
- Vacation
Saving for Purchases
You also might want to save for larger purchases,
like a car or new stove. The easiest way to do
this this is to divide the purchase cost by the
amount of time til purchase. For example, if you
need 900 for a new refrigerator and you want to
buy the fridge within six months, youll save
150 each month. When it comes to car loans,
consider paying yourself a monthly payment once
the vehicles loan is paid off. If you continue
making the payment to your savings account each
month, you'll have the money you need to handle
repairs and youll be building a down payment for
a new vehicle. In fact, you could purchase a
new car outright it you do this for five years
beyond the payoff.
A truly sustainable budget is one in which
spending is less than income that excess goes
to savings.
6Emergency Savings
According to the Consumer Federation of America,
the average family has approximately 2,000 of
unexpected expenses each year. Broken down into
a monthly savings that is 166 each month. The
major role of emergency savings is to protect
against interruptions in income (loss of job or
short term disability). Average length of
unemployment now exceeds 12 months. Would you
be able to cope? There is a tie between savings
and insurance. Savings is your first layer of
insurance and is used for smaller unexpected
occurrences. Insurance is for larger risks that
whos potential costs exceed our ability to pay.
(hospital, car, home, etc.) One way to protect
your savings is to evaluate the risks in your
life and put protections in place. Typically
its recommended that you save at least three
full months worth of income to protect yourself
from catastrophes. However, even if you cant do
that, there are some real benefits to having as
savings cushion. Look at these tables, which are
from a Consumer Federation Study in 2008, which
compare families with less than 500 emergency
fund with those who have more than 500.
Financial Benefits Financial Benefits Financial Benefits
Impact lt500 ES gt500 ES
Bill payment
Concern paying monthly bills 70 36
Difficulty paying mtge or rent 42 16
Checking management
Not met mo. minimums past year 18 13
Overdrawn account past year 52 22
Credit card management
Carry a balance 74 62
Pay mo. minimum or somewhat more 51 35
Paid fee in past year 35 26
High-cost loans
Payday 8 3
Car title 7 3
Pawnshop 8 0
Psychological Benefits Psychological Benefits Psychological Benefits
Impact lt500 ES gt500 ES
Worried about personal finances in past year 85 69
Worried a lot 53 21
For worriers
Lose sleep 64 42
Worse health 54 29
Less productive at work 42 23
Many people know they need Savings but dont
know how much they need. For emergency
savings, start with 500 and work up to 1,000.
From there work on increasing savings to at
least one months worth of income.
7Retirement Savings
- Saving for retirement is more important than
ever. Many underestimate the need for retirement
savings. Estimates provided by Fidelity Investors
in 2007 show that a healthy 65-yearold man has a
24 percent chance of living to at least age 90,
while a healthy 65-year-old woman has a 35
percent chance of living to age 90. Yet Fidelity
Research Institutes surveys show that
pre-retirees believe they need to make their
retirement savings stretch only until age 83, or
an 18-year retirement. That means that
pre-retirees' current estimates ofretirement
savings requirements are likely to fall short of
actual needs for one-fourth of men and one-third
of women. - To help you determine how much money youll need
for retirement, visit the Ballpark Estimator at
www.choosetosave.org. - Youll also want to take advantage of any
retirement plans offered through your work or
contribute to an IRA (Individual Retirement
Account). As a bonus, the IRS offers a savers
credit for people who participate in these
plans. Low income families can get up to ½ of
their contribution refunded at tax time. This
allows people to take advantage of their employer
match and still get much of their contribution
refunded to them. - All employer matched retirement FREE MONEY, so
be sure to take advantage if you can. - Retirement savings allows you to increase your
standard of living in retirement over those who
have only Social Security. With government
benefits adjustments, Social Security and
Medicare may be very different in the future.
Even Social Security representatives are telling
us to establish a financial plan for retirement
that includes more than just government benefits.
Daily Decisions Matter
- Many people spend all of the money they make. You
may believe you do not have enough money to start
saving but we usually can find the money to spend
on those things we want. Youve all tracked your
spending so you know where your money is going.
Nows the time to start considering strategies to
save. - Our daily decisions can have a huge impact on our
ability to save. For example, lets say you
spend 5 every workday on coffee. Thats 125 a
month and 1,200 a year. Based on average costs
in Virginia Beach, you could spend that same
amount of money on - one months rent
- 354 gallons of gas
- more than three car payments, or more than two
months of groceries and dining out - two months of child care
8Savings Tips
- Consider needs versus wants. Think about the
items you purchase on a regular basis. These add
up. Where can you save? Do you eat out at
restaurants a lot? Can you cut back on daily
expenses (e.g., coffee, candy, soda, or
cigarettes)? Do you have services you do not
really need (e.g., cable television)? - Use direct deposit or automatic transfer to
savings. When you get paid, put a portion in
savings through direct deposit or automatic
transfer. If you have a checking account, you
may sign up to have money moved into your savings
account every month. What you do not see you do
not miss! - Pay your bills on time. This saves the added
expense of - Late fees
- Extra finance charges
- Disconnection fees for utilities (e.g., phone or
electricity) - Fees to reestablish connection if your service is
disconnected - The cost of eviction
- Repossession
- Put some money into a savings account if you get
a raise or bonus from your employer. - Keep making the monthly payments to yourself once
you have paid off a loan. You can save or invest
the money for your future goals. - Save at least part of any cash gift you receive.
- Avoid debt that does not help build long-term
financial security, including loans for a
vacation, clothing, and dinners out in
restaurants. Examples of debt that helps build
long-term financial security include
9How Your Money Grows
- Making regular payments to yourself, even in
small amounts, can add up over time. The amount
your money grows depends on the interest earned
and the amount of time you leave it in the
account. - What you save or invest is called the principal.
What you earn is called interest. - Interest is
- The amount of money banks or credit unions pay
you for keeping money on deposit with them - Expressed as a percentage
- Calculated based on the amount of money in your
account - If you have 1,000 stashed away under your
mattress for a year, it will still be 1,000 at
the end of the year, provided that it has not
been lost or stolen. Your mattress is not paying
you interest. However, if you maintain a balance
of 1,000 in a savings account that earns .5
interest a year, you will have 1,005 (1,000
5 interest) at the end of the year. Thats
called simple interest. - Compounding interest earns you even more. When
the bank or credit union compounds the interest
in your account, you earn money on the previously
paid interest, in addition to the money in your
account. - In mathematical terms, you calculate each as
follows - Simple principal x interest rate x time
- Compound (principal interest ) x interest
rate
Lets say you deposit 100 into an account that
earns 7 simple interest. In year one, your
money will earn 7. In year two, another 7 and
so on until after five years, youve earned a
total of 35.With compound interest, your 100
would still earn 7 that first year. But in year
two, you would actually earn 7.49 because the
interest would be calculated on 107 instead of
the original 100. After five years of
compounding interest, youd have earned 40.26.
Compound Interest
Simple Interest
Year Principal Interest Ending Balance
1 100 7 107
2 100 7 114
3 100 7 121
4 100 7 128
5 100 7 135
Total Interest 35
Year Principal Interest Ending Balance
1 100 7 107
2 107 7.49 114.49
3 114.49 8.01 122.50
4 122.50 8.58 131.08
5 131.08 9.18 140.26
Total Interest 40.26
10The Penny Doubled
Which would you want, one penny doubled each day
for a month or 500? Youd want the penny doubled
because its 100 interest. At the end of one
month, youd actually have 5,368,709.12!
Day 1 0.01 Day 11 10.24 Day 21 10,485.76
Day 2 0.02 Day 12 20.48 Day 22 20,971.52
Day 3 0.04 Day 13 40.96 Day 23 41,943.04
Day 4 0.08 Day 14 81.92 Day 24 83,886.08
Day 5 0.16 Day 15 163.84 Day 25 167,772.16
Day 6 0.32 Day 16 327.68 Day 26 335,544.32
Day 7 0.64 Day 17 655.36 Day 27 671,088.64
Day 8 1.28 Day 18 1,310.72 Day 28 1,342,177.28
Day 9 2.56 Day 19 2,621.44 Day 29 2,684,354.56
Day 10 5.12 Day 20 5,242.88 Day 30 5,368,709.12
The Rule of 72
- The Rule of 72 is a formula that lets you
estimate how long it will take for your savings
to double in value. This calculation assumes that
the interest rate remains the same over time.
Here is how you calculate it - Divide 72 by the current interest rate to
estimate the number of years it will take to
double your initial savings amount. - You can also estimate the interest rate you would
need to earn to double your money within a set
number of years. Here is an example of how this
works.
50 4 interest 72 4 18 years
500 Double in twelve years 72 12 6
11A.P.Y.
- Another important concept you need to know about
is APY, or Annual Percentage Yield. It reflects
the amount of interest you will earn on a yearly
basis and is expressed as a percentage. - The APY includes the effect of compounding.
- The more often your money compounds, the higher
the APY and the more interest you will receive. - When comparing different accounts, you should
compare the APYs of the savings products, not the
interest rates. - Please note that the interest you earn is
considered income, and you may have to pay taxes
on it.
Time is On Your Side
- Time is truly on your side when it comes to
saving money. Who do you think will have more
money at retirement? -
- A girl invests 3,000 a year for 8 years starting
at age 19 and then stops investing (total
24,000) - A man waits until hes 27 and then invests 3,000
a year for 34 years (total 102,000) - When they turn 60, the girl will have 964,129
and the boy will have 810,073! The boy put in
78,000 more and ends up with more than 150,000
less! - Lets look at it a different way. Most
economists predict you will need one million
dollars for retirement. Thats based on an
annually salary of 55,000, retiring at 65 and
living until 85. The longer you wait to start
saving, the more it will take out of pocket.
Lets look at the chart. - Of course, these numbers depend on the rate of
interest - youre earning, but it gives you some idea of how
it works. - The lesson here Save early, save often!
Current Age Need to Save Monthly
25 158
30 263
35 442
40 754
45 1,317
50 2,412
55 4,881
60 12,931
12Savings vs. Investing
- There is a difference between savings and
investing. - Savings
- Short term
- Very little risk because the funds are insured
(FDIC and NCUA) - Used for emergencies and large purchases, like a
washer and dryer - Funds have high liquidity. That means that you
can easily access your money if you need it. - Your return (interest earned) will be lower
because your risk is low. - Investing
- Medium to long term
- Risk ranged based on the account type not
insured - Used for retirement and financial freedom
- Funds have low liquidity because you cannot
easily access your money - Your return (interest earned) will be higher
because your risk is high.
Time Frame Risk Objective Type Liquidity Return
Saving Short Very little Emergencies Large purchases Savings Account Money Market Very Liquid Low Usually safe
Investing Medium to long Low to high Retirement Financial Freedom Mutual Funds Stocks Real Estate Depends Low to high Not a guarantee
13Account Types
- Savings Account
- Pays interest on your balance
- May be required to maintain a minimum balance
- Lower minimum deposit usually required to open
this type of account. - Money Market
- Savings account with higher interest rate
(variable rate) - Need a certain amount of money to open one
- The more you have in it, the higher the interest
rate - Can access your money if you need it
- Certificate of Deposit (CD) / Share Certificate
(same thing but called differently by banks and
credit unions) - Short-term investment with a fixed rate
- Hold your money for a specific period of time
(usually 6 months to 5 years) - Money is locked-in so you cant access it without
paying a penalty - The longer the term, the higher the interest rate
- Mutual Funds
14How to Create a Savings Action Plan
- You need to consider three decision factors when
selecting the best savings and investment
options. - How much money do you want to accumulate over a
certain period of time? Once you determine the
amount you want to accumulate, you may be able to
use the Rule of 72 to determine the time and
interest rate needed to double your savings.
Remember, this formula only works with fixed
interest rates. - How long can you leave your money invested? If
you have some money that you will not need for
several years, you might consider investment
options, including stocks, bonds, or mutual
funds. On the other hand, if you think you will
need access to the money, it might be best to
keep it in a savings account. - How do you feel about risking your money? If you
are not comfortable with risk and cannot afford
to lose the money, consider depositing your money
in an insured financial institution. You will
need to shop around for the account that best
meets your needs.
15Pay Yourself First Action Plan
- The top half of the plan gives you space to
record factors that may affect the steps you take
to save, and the savings or investment products
you use to save. The bottom half of the plan
gives you space to record the actions you plan to
take now, a month from now, and a year from now
in order to reach your savings goals. - Decision Factors
- How much do I want to accumulate over a certain
period of time? - _________________________________________________
__________________________________________________
__________________________________________________
__________________________________________________
__________________________________________________
_____________________________________________ - How long can I leave my money invested?
- _________________________________________________
__________________________________________________
__________________________________________________
__________________________________________________
__________________________________________________
_____________________________________________ - How do I feel about risking my money?
- _________________________________________________
__________________________________________________
__________________________________________________
__________________________________________________
__________________________________________________
_____________________________________________ - Action Plan
- What will I do now to save toward my goals?
- _________________________________________________
__________________________________________________
__________________________________________________
__________________________________________________
__________________________________________________
_____________________________________________ - What will I do by the end of the month to save
toward my goals? - _________________________________________________
__________________________________________________
__________________________________________________
__________________________________________________
__________________________________________________
_____________________________________________
16Post-Test
- What is the major difference between saving and
investing? - Most savings products are federally insured,
while investment products are not - Savings products have a risk of loss and
investment products do not - Investment products do not have as high a
potential for growth as savings products - Savings and investment products are the same
- You can save money by paying your bills on time
because you avoid paying - Late fees
- Extra finance charges
- Disconnection and reconnection fees
- Cost of eviction, repossession, and bill
collections - All of the above
- Select all that apply. The Rule of 72 helps you
determine (select all that apply) - How long it will take for your savings to double
in value with a fixed interest rate - The interest rate you need for your money to
double within a set time period - How long it will take for your savings to double
in value with a variable or adjustable interest
rate
17Glossary
- Annual Percentage Yield (APY) the amount of
interest you will earn on a yearly basis and is
expressed as a percentage - Bonds A debt instrument issued for a period of
more than one year with the purpose of raising
capital by borrowing. - Certificate of Deposit / Share Certificate A
certificate stating that the named party has a
specified sum on deposit, usually for a given
period of time at a fixed rate of interest. Banks
issue Certificates of Deposit and redit unions
issue Share Certificates. - Compound Interest (principal interest ) x
interest rate - Diversification A risk management technique that
mixes a wide variety of investments within a
portfolio - Interest The amount of money banks or credit
unions pay you for keeping money on deposit with
them expressed as a percentage - Individual Retirement Account (IRA) A
tax-deferred retirement account for an individual
that permits individuals to set aside money each
year, with earnings tax-deferred until
withdrawals begin at age 59 1/2 or later. - Liquidity The ability of an asset to be
converted into cash quickly - Money Market Account A savings account that
offers the competitive rate of interest in
exchange for larger-than-normal deposits. - Mutual Fund An investment program funded by
shareholders that trades in diversified holdings
and is professionally managed