P.Y.F. Participant’s Guide

1. P.Y.F. Participant’s Guide

2. Table 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

3. Welcome 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

4. Pre-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 • Buying new clothes on impulse • Eating out at restaurants regularly • Getting the maximum/largest plan for your cell phone/cable/etc. • Which of the following will help you save money? Select all that apply. • Pay your bills on time to avoid late fees/extra charges • Consider opening a checking account rather than using a check-cashing store • Make impulse purchases • Save your change at the end of each day • APY means: • The amount of interest you pay on a loan • The annual interest rate you will earn on your savings or other deposit account • The minimum percent of your income you must save each year to keep your savings account • To be careful you are getting the correct amount of interest on your savings account

5. Pay 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, you’ll save $150 each month. When it comes to car loans, consider paying yourself a monthly payment once the vehicle’s 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 you’ll 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.

6. Emergency 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 who’s 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 it’s recommended that you save at least three full month’s worth of income to protect yourself from catastrophes. However, even if you can’t 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. Many people know they need Savings but don’t 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 month’s worth of income.

7. Retirement 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 you’ll need for retirement, visit the Ballpark Estimator at www.choosetosave.org. You’ll 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. You’ve all tracked your spending so you know where your money is going. Now’s the time to start considering strategies to save. Our daily decisions can have a huge impact on our ability to save. For example, let’s say you spend $5 every workday on coffee. That’s $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 month’s 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

8. Savings 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: • Paying for college education (for you or your child) • Buying or remodeling a house • Buying a car for work transportation Pay off high-interest credit cards or other loans as soon as you can. Save your change at the end of the day and deposit it weekly or monthly. Save as much of your tax refund as possible. Choose to receive your tax refund via direct deposit. You can split it between a maximum of three different accounts (e.g., checking and/or savings accounts). You can also choose to use part of your refund to purchase a U.S. Savings Bond. Join a retirement plan (i.e., a 401(k) or 403(b) plan) if your employer offers one and deducts the money from your paycheck! Most employers will match up to $.50 of each dollar you contribute. The matched amount is free money! Reinvest the dividends of any stocks you own to purchase more stocks. Some companies offer an easy way to do this called a Dividend Reinvestment Program (DRIP). This process grows your investment faster, similar to compounding.

9. How 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. That’s called simple interest. Compoundinginterest 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 % Let’s 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, you’ve 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, you’d have earned $40.26. Compound Interest Simple Interest

10. The Penny Doubled Which would you want, one penny doubled each day for a month or $500? You’d want the penny doubled because it’s 100% interest. At the end of one month, you’d actually have $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%

11. A.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 he’s 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! Let’s look at it a different way. Most economists predict you will need one million dollars for retirement. That’s 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. Let’s look at the chart. Of course, these numbers depend on the rate of interest you’re earning, but it gives you some idea of how it works. The lesson here ~ Save early, save often!

12. Savings 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.

13. Account 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 can’t access it without paying a penalty • The longer the term, the higher the interest rate Mutual Funds • Buy little pieces of a whole lot of different companies • A great way to invest in the stock market • You own shares of companies you couldn’t afford to own on your own if you had to buy individual shares by yourself • Your investment is diversified (in lots of different companies). Diversification – never put all your eggs in one basket. If one goes bad, others are safe. • You don’t have to be an expert at picking stock – the manager of the fund is the expert Stocks • Stocks represent ownership in a company • Companies sell shares (also called stock) to raise money • Stocks make you money when: • they pay you dividends (part of the profits) • they appreciate (go up in value) • Buy low / sell high • If they depreciate, you can lose money (but only if you sell that stock) • Bear (bad) Market vs. Bull (good) Market IRA / 401(k) • Individual Retirement Account and Employer Benefit • Long term savings (usually for retirement) • Different types have different requirements Bonds • When you buy this investment product, you are loaning money to a corporation or to the government for a certain period of time, called a term.

14. How 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.

15. Pay 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? ______________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________ What will I do by the end of the year to save toward my goals? ______________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

16. Post-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 • What are three benefits of paying yourself first? • Improving your standard of living • Learning to manage money better • Having money for emergencies • All of the above • Which of the following strategies will help you choose the best investments for you? Select all that apply. • Make choices based on a friend or family member’s recommendations • Limit the number of savings and investment options you choose to reduce your risk of loss • Select savings and investment options according to your risk tolerance • Consider how long you plan to keep your money in the investment

17. Glossary 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 Principal: What you save or invest. Rule of 72: formula that lets you estimate how long it will take for your savings to double in value. Savings Account: A bank account that earns interest Simple Interest: principal x interest rate % x time Stocks: An instrument that signifies an ownership position (called equity) in a corporation, and represents a claim on its proportional share in the corporation's assets and profits. 401(k) Plan: A retirement savings plan established by an employer in which employees set aside a percentage of pay in an account that earns interest.