Savings Fitness
A Guide to Your Money and Your
Financial Future
PPT Developed by Karissa Berndt
USU Family Finance Student
Financial Planning for Women
March 2007
Today’s Program
 Provides a general overview of saving &
investing
 Focus on retirement but principles apply to
all goals
 Details are in the Savings Fitness booklet
 PPT & links available at www.usu.edu/fpw
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Program Objectives
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Identify your goals
Distinguish between savings and investing
Develop net worth statement & savings plan
Learn to manage debt
Understand risk-return relationship
Begin or increase saving/investing
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How to manage financial
challenges and afford a secure
retirement?
 Write your goals on a 3”x5” card
 Sort the cards into two stacks:
 Goals in the next 5 years or less
 Goals in 5 years or more
 Sort the cards in order of priority
 Make retirement a priority!
 Write on each card what you need to do to accomplish that
goal
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Beginning Your Savings Fitness Plan
 Current financial resources:
 Net worth: the total value of what you own
(assets) minus what you owe (liabilities)
 Assets
 Possessions, vehicles, home, bank accounts, investments, etc.
 Liabilities
 Remaining mortgage on your home, any loans/debts, etc.
 Subtract your liabilities from your assets.
 Goal: a positive net worth, which grows each year
 Review your net worth annually (at tax time)
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Saving vs. Investing
 Short term goals
 < 5 years
 No risk of loss of
principal
 No or low real return
after taxes & inflation
 Steady but slow
growth
 Long term goals
 5 years or more
 Trade potential short
term loss for long term
gains
 Positive real return
after subtracting taxes
& inflation
 Volatility
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Estimate How Much You Need to
Invest for Retirement
 Worksheets & software programs can help
you estimate how much you need to invest.
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kiplinger.com (click on “Retirement”)
moneymag.com (click on “Retirement”)
usnews.com (click on “Retirement Calculator”)
asec.org (click on “Ballpark Estimate Worksheet”)
 See FPW website for PPT on Ballpark Estimate
 nasd.com (click on “Investor Services,” then “Financial
Calculators”)
 Planning for a Secure Retirement
 http://www.ces.purdue.edu/retirement/
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How Much Retirement Income
Will I Need?
 Need to replace 70 to 90 percent of preretirement income
 Lower the income, the higher the % that
needs to be replaced
 It depends on the kind of retirement you
want to enjoy
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How Long Will I Live In
Retirement?
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Average male life expectancy: age 78
Average female life expectancy: age 82
Consider your health and family history
Expect to live longer than previous
generations!
 Planning for a Secure Retirement
 http://www.ces.purdue.edu/retirement/
 Module 1b Life Expectancy Calculators
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What Savings Do I Already Have?
 Social Security retirement benefits
 A pension that provides a fixed amount of
retirement income each month
 Nest egg  the desired total income/year 
(Social Security  any pension income)
 Nest egg examples- Retirement plan accounts at
work, IRAs, annuities, and personal savings
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What Adjustments Must Be Made
For Inflation?
 The cost of retirement will go up every year
due to inflation
 The average annual inflation rate is 3.1%
 In 1980 the inflation rate was 13.5%
 In 1998 it reached a low of 1.6%
 Assume a higher, rather than a lower, rate of
inflation
 It’s safer to plan on 4% than 3.1%
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One Simple Trick…
Spend Less Money Than You Earn!
 Start with a “spending plan” or budget
 Income
 Add up monthly income: wages, average tips or bonuses,
alimony payments, etc.
 Expenses
 Add up monthly expenses: mortgage or rent, car payments,
food bills, entertainment, etc.
 Include savings as an expense!
 Subtract income from expenses
 Consult USU Family Life Center, 797-7224
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Spending Plans Cont.
 What if expenses exceed income?
 Cut Expenses (nickel & dime vs. BIG expenses)
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clipping grocery coupons
bargain hunting (thrift stores, etc.)
changing phone or cable to a cheaper plan
Real savings: housing & transportation!
 Increase Income
 work a part-time second job
 turn a hobby into income
 jointly decide that another family member will work
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Adopt Savings “Rules”
 Americans who follow “rules” save more*
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Pay yourself first
Put savings/investing on auto pilot
Save your tax refund
Save unexpected money (i.e., windfall, gifts)
Save all change
Save $ you ‘saved’ on grocery & gas (receipts)
Other ideas?
*Rha, Montalto,& Hanna (2007). The Effect of Self-Control Mechanisms on
Household Saving Behavior. Financial Counseling and Planning, 17(2), 3-16.
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Avoid Debt & Credit Problems
 How much debt is too much debt?
 [monthly debts (credit card payments, car loan
payments, student loan payments, etc.)  mortgage] 
by the money you bring home each month.
 The result is your “debt ratio.”
 Keep this ratio at 10% or less
 Total mortgage and non-mortgage debt should
be no more than 36% of your take-home pay.
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What’s the Difference Between
“Good Debt” and “Bad Debt”?
 Good debt - provides a financial pay off
 buying or remodeling a home (within reason!)
 investing in education
 advancing your own career skills
 Bad debt - borrowing for things that do not
provide financial benefits, or that don’t last as long
as the loan
 Depreciating assets: vehicles
 vacations, clothing, furniture, dining out
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Handle Credit Cards Wisely
 Use only 1 or 2 cards, not the usual eight or nine
 Don’t charge big-ticket items.
 Save or find less expensive loan alternatives
 Shop for the best interest rates, annual fees,
service fees, and grace periods
 Pay off the card each month,
 If you cannot pay in full, pay more than minimum
 Still have problems? Leave the cards at home
 USU FLC 797-7224
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How to Climb Out of Debt
 Work with your creditors directly to try and
work out payment arrangements
 Request lower APR on credit card
 USU Family Life Center Housing &
Financial Counseling
 can help you set up a plan to work with your
creditors and reduce your debts
 PowerPay Debt Analysis: https://powerpay.org/
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Investing for Retirement
 Once you’ve reduced unnecessary debt and
created a spending plan, you’re ready to
begin investing for retirement.
 Participate in your employer’s retirement
plan
 Invest in an Individual Retirement Account
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Where to Save/Invest?
 Cash Equivalents - very little risk; very low return
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Savings accounts
Money market mutual funds
Certificates of deposit
U.S. Treasury bills
 Suitable for short term goals only
 Your money won’t grow
 Taxes & inflation negate any growth!
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Bonds
 Corporate or Government Bonds
 You loan money to a U.S. company or a
government body in return for its promise to
pay back what you loaned with interest
 Small % of your long term investments
 Conservative
 Low growth potential
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Stocks
 You own a part of a U.S. or international
company
 High potential for growth in the long run
 Short term volatility
 Must be willing to accept the ups & downs
along the road to inflation-beating growth
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Mutual Funds
 Pools your money with money of other
investors and invests it.
 A stock mutual fund, for example, invests in
stocks on behalf of fund’s shareholders.
 Easier to invest and to diversify.
 Ideal for your Individual Retirement
Account (IRA)
 See FPW PowerPoints on website
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Where to Put Your Money
 For goals that are at least 5 years in the future:
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stocks
bonds
real estate
foreign investments
mutual funds
 Not insured by the federal government - there is the risk
that you could lose some of your money
 The longer you have until retirement, the more risk you
can afford.
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Why Take Risk At All?
 The greater the risk, the greater the potential return
 a diversified portfolio of stocks & bonds will earn
significantly more than a savings account.
 No/low risk = no growth
 Historic Average Annual Returns
 U.S. Treasury Bills: 3.8%
 Government Bonds: 5.3%
 Large-Company Stocks: 11.2%
 Inflation averages 3.1%
 Taxes reduce investment returns
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Reducing Investment Risk
 Diversification
 Distributing your money among several
investments, rather than investing in individual
companies.
 You can do this by investing in:
 mutual funds
 index mutual funds
 Diversification will greatly decrease your risk
of losing money.
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Why Diversify?
 At any given time one investment might do better
than another.
 The factors that can cause one investment to do
poorly may actually cause another to do well.
 By diversifying into different types of assets, you
are more likely to reduce risk, and actually
improve return, than by putting all of your money
into one investment.
 “Don’t put all your eggs in one basket!”
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Reducing Investment Risk Cont.
 Asset Allocation - investing among different
categories of investments (FPW PPT)
 Put some money in cash, some in bonds, some
in stocks, and some in other investments
 The choices you make about what % to have in
these major categories defines your investment
strategy.
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Employer-Based Retirement
Plans
 Does your employer provide a retirement
plan?
 If so…grab it! Employer-based plans are the
most effective way to invest for your future.
 You’ll enjoy tax benefits.
 Two types of employer-based plans :
 defined benefit
 defined contribution
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Defined Benefit Plans
 Pay a lump sum upon retirement or a guaranteed
monthly benefit.
 The payout is typically based on a set formula
 such as: (# of years you have worked for the employer)
 (a percentage of your highest earnings)
 Usually the employer funds the plan--commonly
called a pension plan.
 Most are insured by the federal government.
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Defined Contribution Plans
 401(k) plans are the most common type
 Does not guarantee a specified amount for
retirement
 The money you have available to help fund your
retirement depends on:
 how long you participate in the plan
 how much you invest
 how well the investments perform
 More common than traditional pension plans.
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Vesting Rules
 Money that you put in a retirement plan and earnings on
those contributions, always belongs to you.
 Employees don’t always have immediate access to the
money their employer invests in their fund.
 Once you are “vested” you own all of your employer’s
contribution.
 Some plans vest in stages, others after fixed period of
employment.
 Know your employer’s vesting rules.
 Don’t leave before you are vested!
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What If You Can’t Join An EmployerBased Plan?
 If possible, take a job with a plan
 Encourage your employer to offer a plan
 Invest in an IRA (see FPW PPTs)
 Build your personal savings
 Consider an annuity (April 11 FPW)
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What If You Are Self-Employed?
 SEP (Simplified employee pension plan)
 SIMPLE IRA
 IRA
 Annuities
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Coping With Financial Crisis
 Establish an Emergency Fund
 This can lessen the need to dip into retirement savings for a
financial emergency
 Insure Yourself
 Having adequate insurance will protect your financial assets
 Insurance coverage:
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Health
Disability
Homeowners or Renters (PPT on FPW website)
Automobile
Umbrella liability
Life (if someone else depends on your income)
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Monitor Your Progress
 Financial planning is not a one-time process, so
make sure to do the following:
 Periodically review your spending plan
 Monitor the performance of your investments
 make adjustments as necessary
 Contribute more toward retirement as you earn more
 Update your insurance to reflect changes in income or
personal circumstances
 Keep your finances in order
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April 11 FPW
 Making Your Money Last for a Lifetime:
Why You Need to Know About Annuities
 Check FPW web http://www.usu.edu/fpw/
for related PowerPoint presentations
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Asset allocation
IRA picks 2005; Mutual Funds 2006
What is an IRA?
Ballpark E$timate
Taking the mystery out of retirement planning
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Questions?