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Love Your Money

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People are willing to do a lot for someone they love such as try new things, change their style, and even relocate.  However, what are they willing to do for their money?  Sometimes it can be misplaced, torn up, abandoned, left unprotected, and even thrown away on insignificant things.  What if you treated your money as special as you would treat someone you love?  Things you may do are…

Make Time For It

When you love someone, you may hang out more and more and structure your day around him or her.  How much time do you take for your finances though?  Try carving out some time in your day or week to:

Just like relationships, your money can flourish if you put in the time to get to know it and make a point to include it in your everyday living.

Show It What It’s Worth

You may buy flowers or gifts, go out to a nice dinner, and even spoil each other to outwardly show your love and communicate your significant others’ worth to you.  However, the cumulative cost of junk food, drinks at the bar, bank fees, and other spending that will seem insignificant further down the road when you’re going to purchase a new car, have a child, or retire.  Instead, show money its worth through:

  • Smart shopping (i.e. sales, coupons, and discounts)
  • Memorable spending (i.e. experiences in place of material goods)2
  • Mindful prioritization (i.e. saving for a coffee maker later instead of a cup of coffee now)

Prioritize It

As relationships progress, your significant other becomes a bigger and more important part of your life.  This may lead to changes in how you structure your day, the traditions you create, and the sacrifices you make for the betterment of the relationship.  Likewise, your financial priorities change throughout life and become more and more necessary in order for you to accomplish your financial goals.  Some current wants may need to be cut back in to make room for saving up for more special wants (i.e. vacation) and future needs (i.e. house payment).  Steps to prioritizing your spending to enhance your financial relationship:

  1. Brainstorm financial goals
  2. Make your goals SMART3
    1. Specific (what why and how)
    2. Measurable (set dollar amounts)
    3. Attainable (realistic)
    4. Relevant (fits with bigger picture and your other goals)
    5. Timely (set dates)
  3. Calculate how to achieve your goals
  4. Tweak current budget and spending accordingly
  5. Find an accountability partner

Protect It

We want to do everything to protect the one we love both physically as well as emotionally from any pain.  Sometimes, life happens and we do the best we can to build back up and heal.  There are many ways to protect your money such as having an emergency savings to cover unexpected expenses and prevent debt or outrageous interest costs as well as consistently monitoring for identity theft and bank fraud.  Emergency savings should have 3-6 months’ worth of money in a relatively easily-accessible account to cover such things as medical bills, car repairs, or a loss of job.  You can monitor your credit through pulling a credit report at least every 4 months (https://www.annualcreditreport.com) and can protect from bank fraud by review your bank statements and utilizing credit card EMV technology when you can4.

Be Patient With It

Rushing into things can sometimes end up bad and sometimes the best things in life take time and hard work.  Your money probably won’t grow overnight (barring lottery winnings and surprise inheritance), so you’ll need to be patient with it and continue to nurture it.  Interest rates are most beneficial over time and frequent changes in investments may not pay off.  The market changes every minute, but despite dips and turns, a lot of investments pay off if you are patient and wait out the lows.

Commit

So you’ve spent some time together, you’ve gotten to know him or her more, and you’ve decided that he or she is worth prioritizing.  The next natural step is to decide whether you want to stay together in the future and beyond.  Rather than staying focused on the present, you may make a commitment for the long-haul.  Similarly, this may be something beneficial to do with your finances.  Picture your life with it in the future and what you want that to look like.  You’ve mastered saving for emergencies and upcoming trips, now what about for retirement or future children’s educational expenses?  These decisions come with more of a commitment due to the limitations on their spending, but can be truly beneficial in the future should you follow through on the commitment.  Time is your greatest ally in the realm of saving and investing.

Resources

  1. http://www.k-state.edu/pfc/planning/Financial%20Goals%20Worksheet%20-%20Specific.pdf
  2. http://www.forbes.com/sites/hbsworkingknowledge/2013/08/05/want-to-buy-happiness-purchase-an-experience/#34522db1704d
  3. http://freefrombroke.com/guide-setting-smart-goals-finances/
  4. http://blogs.k-state.edu/pfc/2015/10/05/credit-cards-are-changing-are-you-ready/

Christyne Stephenson
Peer Counselor III
Powercat Financial Counseling
www.k-state.edu/pfc

Invest in Your Future

Investing may seem like a foreign concept, however, you invest in yourself every day. By investing your time studying, you hope to achieve a better grade than say spending an evening in The Ville. Simply being here at K-State is an investment. By spending thousands of dollars today, you hope to have a higher salary than you would with a high school diploma. Much like these forms of investing, financial investing occurs with the hope that if one puts a little money away today, there will be more money in the future. The financial markets can sound like an intimidating, scary, and complex world, but with a better understanding of some of the underlying terminology, you can gain a better grasp of how they operate and one day be able to invest in yourself financially.

Financial Market

A financial market is any marketplace where buyers and sellers trade assets such as stocks, bonds, commodities, and derivatives. In today’s world most of these transactions take place online and an individual can get involved by setting up an account with an online brokerage firm, such as E*Trade, Schwab, or Scottrade.

Stocks, Bonds, and What??

Stocks, bonds, and derivatives are all financial instruments, but they all come with various advantages and disadvantages. Stocks are a financial asset that give you partial ownership of a corporation. When you purchase stock in a company, you are entitled to some of their earnings which come in the form of dividends, however companies are not required to pay dividends. Stocks are extremely volatile and their prices fluctuate often as the market fluctuates. While historically stocks have performed well, the return is not guaranteed. These factors make stocks extremely risky, however the return on your investment is approximately 5% greater than the return for bonds.

Bonds are a debt instrument, thus when you purchase a bond, you are lending money to the government, a municipality, or a corporation. When you buy a bond, or give out a loan, you make your return by earning interest. Bonds are less risky than stocks for several reasons. Unlike stocks, when you purchase a bond the issuer promises to pay back the face value, or the amount you purchased the bond for. The amount of interest earned is also backed by a promise from the issuer and the interest rate is often fixed. Historically the bond market is less vulnerable to changes in market price.

There are hundreds of financial instruments out there including derivatives, options, futures, CDOs, and swaps. These assets are more complex than stocks and bonds. For more information on any of these financial instruments, you can go to www.investopedia.com.

Market Indexes

In the news you may have heard phrases such as “the Dow drops 600 points” or “the S&P 500 soars.” The Dow Jones Industrial Average and the S&P 500 are both examples of stock market indexes. A stock market index simply measures the value of a section of the stock market. The Dow and the S&P 500 are two of the most widely analyzed indexes. The Dow Jones index includes 30 of the largest and most influential companies in America. Since it includes some of the most well-known companies in America, the Dow usually corresponds to changes in the entire marketplace, though it may not be on the same scale. The S&P 500 is made up of 500 of the most widely traded stocks in the U.S., and it represents approximately 70% of the total value of the U.S. stock markets. Since it is more diverse, it generally gives a good indication of the overall movement in the U.S. marketplace. Points for these indexes are simply a whole number in the index value used to more easily measure the increase or decrease in the indexes.

Portfolio

A financial portfolio includes all of the investments you have, whether that includes stocks, bonds, or other financial assets. In order to minimize risk, your portfolio should be diversified. It should include different types of financial assets, all with varying risks and maturities. For example, a diversified portfolio may include riskier investments such as junk bonds or stock in a new company as well as government bonds and stock in a well-established company. It is also important to invest across market segments (technology, energy, etc.) rather than put all of your investments in one industry. Risk is important to reduce, however, the lower the risk, the lower the return. Vanguard has created some model portfolio allocations (https://personal.vanguard.com/us/insights/saving-investing/model-portfolio-allocations). These allocations show varying types of portfolios and the historical risk and return associated with each. Many advisors recommend investing in riskier assets when you’re young, such as stocks, and investing in safer assets as you near retirement, such as bonds.

What now?

The best way to invest smart is by understanding the markets and being knowledgeable about the financial world. Paying attention to the financial news today, even if it is just looking at an article a week, will help you gain a better understanding for when you’re ready to invest. The Wall Street Journal, Google Finance/Yahoo Finance, and other credible news sources are all excellent ways to stay up-to-date in what the market is doing. Investopedia is also a great source for understanding different aspects of the financial world. As with most things, practice makes perfect. Luckily, there are several free stock market simulators out there to help you gain a better understanding of how it works without risking your own money! Investopedia Stock Simulator, Virtual Stock Exchange, and Wall Street Survivor are some of the most popular simulators out there. By expanding your financial knowledge and seeing how the market operates, you will be able to make smarter financial decisions and be prepared to invest in your future.

Sources:

http://www.vdmtrading.com/2010/05/top-6-best-stock-market-simulators.html
www.investopedia.com

Jillian Taylor
Peer Counselor I
Powercat Financial Counseling
www.k-state.edu/pfc

The Power of Compounding

Albert Einstein once said that compounding interest is the most powerful force in the universe. Luckily, you don’t have to be as smart as Albert Einstein to understand this simple, yet very powerful concept.

The wonder of compounding can substantially grow your money over time.  The simple idea is that the investor is generating earnings on an asset’s reinvested earnings. In order to work, you will need initial investment, re-investment of earnings, and time. The earlier you start, the more you are able to accelerate the income potential of your original investment. Metaphorically,  you can think of compounding interest as a snowball rolling downhill:  it is going to get bigger over time as it accumulates more snow along the way.

Example:

Let’s say that you have $10,000 today and you can put it in a savings account that pays 5%. For simplicity purposes, the interest is compounded annually. This means that in a year, you will have $10,500 ($10,000*5%). Now, let’s assume that rather than withdrawing your interest gain of $500, you keep it in there for another year. If you continue to earn the same 5% rate, your investment will grow to $11,025 ($10,500*5%). As you can see, by reinvesting your earnings of $500 with your principal of $10,000 at 5% interest rate, you will be able to generate an additional $25 that you otherwise wouldn’t have if you invested just the principal of $10,000 at 5% in year two. In year three, you will have $11,576 ($11,025*5%). Without compounding interest, at the end of the year three, you would have $11,500 which is $76 ($11,576-$11,500) less than with compounding interest. This might not sound like a lot at the beginning, but it will make a big difference as time passes in the long run.

The Rewards of Starting Saving Early

Let’s consider a hypothetical situation of twin sisters Jessica and Kim. Jessica and Kim just graduated from college at age 25 and they were able to get very good jobs that offered them a $5,000 signing bonus.

Jessica starts saving now

Jessica decided she was going to put $5,000 towards her savings account right away at age 25. The savings account offered Jessica 5% annual interest rate. After 35 years, when Jessica is 60 years old, she will have $27,580.08 ($5,000*[1+5%]^35) in her savings account.

Kim starts saving 10 years later

On the other side, Kim spent her signing bonus when she started working at age 25. After 10 years, when Jennifer was 35, she started worrying about her retirement and decided to put $5,000 towards her savings account at 5% annual interest rate. After 25 years, when Kim is 60 years old, she will have $16,125.50 ($5,000*[1+5%]^25).

Lesson Learned

Jessica is able to make $11,454.58 ($27,580.08-$16,125.50) more than Kim just by starting 10 years earlier. Both Jessica and Kim were able to generate funds by not doing much rather than just letting their money grow with compounding interest. This is a very simple example, but you can imagine how much money you would be able to generate if you have a higher initial investment to start with or if you are putting away a monthly portion of your paycheck towards your savings account that is using compounding interest. If you allow enough time, the power of compounding can do wonders for your financial goals!

Elvis Hodzic
Graduate Assistant
Powercat Financial Counseling
www.k-state.edu/pfc

IRAs: What They Are and What They Can Do For You

What is an IRA?

An IRA is an individual retirement account in which you can contribute up to $5,500 per year (2014), with an additional $1000 when you are 50 years and older, to save for your retirement. Most banks, mutual fund companies, and brokerage firms offer IRAs.  You must have earned income in order to contribute, and you can start withdrawing at age 59½.  There are two types of IRAs:

Traditional IRA:

  • Money goes in before taxes
  • Taxed on withdrawals
  • Must start withdrawing specified amounts at age 70½
  • 10% early withdrawal fee in most cases

Roth IRA:

  • Money goes in after taxes
  • Money isn’t taxed again, not even on the interest accrued or at withdrawal – allows your money to grow tax free
  • Not required to withdraw money at a specific age
  • Can withdraw early with no penalty for a first-time home purchase (up to $10,000) or in the event you become disabled

Some logic to consider about these is that when you first graduate and start out at a new job, generally you will be in a lower tax bracket than you will be as you reach retirement.  This being the case, it may be better to go with a Roth IRA so that you are taxed at a lower rate than you would be if you paid taxes upon withdrawal as with a traditional IRA.  On the other hand, if you don’t open an IRA until you have been working for several years and you are in a higher tax bracket, you may want a traditional IRA instead, since you will most likely drop to a lower tax bracket by the time you withdraw funds—this would happen if you were no longer earning income.  Try to choose the one that is the most taxably efficient for you depending on your situation and your plans.  Historically, tax rates tend to increase over time; however, there is always a possibility that the rates will be lower when you withdraw the funds, so this is another factor to consider as well.

Why Save Now?

You might be thinking, “I have student loans I need to pay off for the next 10 years, I can’t afford to save now,” or, “I’m only in my early 20’s, I have plenty of time to save for retirement.”  While these may be true, the reality is that life costs money.  Saving early, even if it is a minimal amount, will pay off.  If you are thinking that you want to retire at age 65 to 67, you have to consider how much you will realistically need to live on for 20-30 years after you retire.  You should also consider that you may not be the only one you need to provide for during that time: you may have a family to support as well.  Time is of the essence when it comes to saving for retirement.  If you start early, you will save yourself much stress later on.  If your employer offers you a retirement plan, take full advantage of it.  That alone, however, may not be enough to support you in retirement; this is why it is important to consider other avenues of saving such as IRAs, a savings account through your bank, or even investment portfolios.

Even if you have student loans or any other debt you are paying—such as a mortgage or car loan—it is still important to be saving.  Think of it as paying yourself.  You want to “pay yourself first”—you are investing in your future!  A good rule of thumb for saving is to set aside 10% of each paycheck.  Depending on your situation, you may want to save less than that in order to pay your bills, but if you are able to save more than that, you should.  There may come a time in your life when you aren’t able to save much at all for whatever reason, and you want to be able to have a cushion for those times.

The following is an example from PracticalMoneySkills.com of how postponing savings can hurt you:

The longer you delay saving, the harder it is to catch up…if you saved $100 a month at 8% interest, after 20 years your account would be worth $57,266. But wait only two years to begin saving and that balance would shrink to only $46,865 – over $10,000 less. A five-year delay would reduce the balance to only $33,978.

The Magic that is Compound Interest

Compound interest is a very powerful tool.  To illustrate, let’s say you are able to find a savings account that offered 8% interest on your money—this, unfortunately, is not a realistic bank account rate currently; however, if you shop around in the investment arena, you should be able to find higher rates of return.  If you started putting $100 per month into the account, you would have $450,000 by age 65.  If you put in $200 per month, you would have $900,000 in the same amount of time; and if you increased the amount to $300, you would have $1,000,000!  How cool is that?  This is how IRAs work.

This site also has many other calculators that you might find useful.

To learn more about compound interest, visit: http://www.practicalmoneyskills.com/personalfinance/experts/practicalmoneymatters/columns/compounding_110708.php

Saving Tips

If it is hard for you to save, whether it is something you easily forget, or it is just difficult for you to physically transfer money into savings, one simple solution is to have a portion of your paycheck go directly into savings.  When setting up a direct deposit through your job, you can specify how much you want to put into a separate savings account, whether this be a percentage or a dollar amount.  This way you won’t “miss” the money; you will be accumulating funds without even noticing that the money isn’t in your checking account.  You can also set up an automatic transfers from your checking to your saving account by talking with your bank.

Resources

Rachel Vogler
Peer Counselor II
Powercat Financial Counseling
www.k-state.edu/pfc

How To Save Money As A College Student

1.    Create a Budget

Before you start saving money, make sure you have enough to save. Start by creating a budget and see where your money is going. This will help you cut on unnecessary spending and allow you to contribute more to your savings.  Details on the process and a downloadable spending plan worksheet can found on our site at http://www.k-state.edu/pfc/budgeting/.

2.    Utilize Student Discounts

Take advantage of the perks of being a college student. When you go out to Carmike Seth Childs’ to watch a movie with your friends, show your student ID.  If you would like to save a lot more, be a little patient and wait for the new movie you really want to watch to be shown at the by UPC in the Union.

Use the CampusSpecial coupon book that’s being distributed to students, you’ll save plenty over the semester when you go out to eat.  Many restaurants offer perks for showing your student ID – just ask!

3.    Avoid ATM Fees

Brick and mortar banks are facing stiff competition from online banks. If your bank is only located in your home town and there isn’t a single ATM in Manhattan, then you may be paying annoying ATM fees when you have to withdraw money. Well, there’s a solution out there! Most online banks do not charge ATM fees and if you do get charged by the ATM you withdraw from your online bank will fully reimburse you! Some brick and mortar banks charge monthly maintenance fees and this isn’t the case for most online banks. They are growing in popularity and if you would like to save on ATM fees and account charges this might be something to consider. Remember to make sure that the online bank you choose is FDIC insured!

ATM fees can also be avoided by getting cash back with your debit card at the store.  Simply run it as debit and respond to the question with how much cash back you would like.

4.    Grow Your Savings Further

If you have money left over after taking care of all your expenses, then you can consider building your wealth.  Choosing the type of account depends on the individual and the financial goals in mind. Below are a few accounts to consider. 

Basic Savings Account

Offers low interest rates and allows a limited number of free withdrawals a month depending on the bank. It is very easy to access, especially if you use your current bank. The interest that you could earn ranges from 0.01-0.9%. In other words, this is an account to put money aside for rainy days and emergencies, not your entire life savings! 

Certificate of Deposit (CD)

You can earn a little more money by putting your money away for a set amount of time ranging from a month to 5 years. The certificate entitles you to receive a fixed amount in interest payments. Interest on CDs range from 0.15-2.35% depending on the length of time and amount of deposit.  They can easily be set up at any commercial bank.  Be aware that there are fees for withdrawing the money prior to the agreed upon time.

Money Market Account

MMAs offer a higher interest rate (0.05-1.02%) than a savings account and you can write checks against your deposit. However, you have to maintain a higher minimum balance compared to a savings account, hence the higher interest rate. Again, if you decide to open up this account, make sure the account is FDIC insured. 

Mutual Funds

If you would like to earn greater returns on the money you have left over after putting some aside in a safe savings account or MMA, then this is another vehicle to consider. Most of us don’t have millions of dollars to invest like Warren Buffett or Carl Icahn, but this fund allows the ordinary individual to be able to afford and hold a piece of the same fund that a billionaire is invested in. It is a pool of funds invested in stocks, bonds and other money market instruments. Their purpose is to beat the market and manage volatility by pooling money and diversifying investments. They are more risky compared to savings accounts, CDs and MMAs and they are more expensive since they are actively managed, but they have the potential for a higher yield.

Online Brokerage Account

If you would like to build your wealth, then you should have a long-term strategy – a brokerage account is one way to get there. You can create your own portfolio and allocate your funds into stocks, bonds and other funds however you please. The allocation depends upon your risk tolerance. When you are young, you can afford to lose more money, so it’s okay to have an aggressive portfolio (invested in more equities than bonds) as long as you understand the risks. When you reach your thirties, it’s recommended to reallocate your portfolio and lower the amount you have invested in equities and when you are close to retirement, you should have more in bonds than equities since bonds are safer and offer fixed, stable payments to the bondholder. Setting up an account is simple, but make sure to shop around first. Some accounts don’t require minimum deposits and others offer cheap trading costs. Learn about investing strategies before you put your money in the market!  Visit finance pages such as Google Finance, Yahoo Finance, Morning Star, Bank Rate, and Investopedia.

Gerald Mashange
Peer Counselor II
Powercat Financial Counseling
www.k-state.edu/pfc

Mutual Funds

What is a Mutual Fund?

A mutual fund is a pool of investors in a “basket” of stocks and bonds. In other words, instead of you investing in one stock or bond, you combine your money with the money of several others to invest in many stocks and bonds. Mutual funds work like stocks in that the money you invest goes into the portfolio, and you receive shares of interest in the fund. There is a professional fund manager who is in charge of investing the fund. Some businesses use mutual funds as an investment medium for their employees’ retirement accounts, but you may also want to consider investing your own personal IRA (Individual Retirement Account) in a mutual fund.

Benefits

One of the benefits of mutual funds is that because the sum of money is so large, it makes the cost of purchasing and selling stocks much cheaper than you investing alone. It also means that the fund manager can invest in many more stocks and bonds than you can on your own. Another benefit of investing in a mutual fund is that someone else is managing the investments for you. Yes, this is a potential risk, but ideally you would choose a fund company that has a good reputation and track record and will have a manager in charge of the fund who has experience in investing and has been successful at it.

How to Get a Mutual Fund

You can purchase a mutual fund in several ways:

1) Directly through the fund company. Vanguard, PIMCO, and Fidelity are just a few of the many fund companies.

2) From a “supermarket.” This is basically purchasing funds through a third-party company. They are likely to charge you for purchasing funds, so be aware of all of the possible fees before investing with one of these companies.

3) Through a broker or financial planner who is qualified to sell investments. The benefits of going through a broker or a financial planner are that they are professionals who know about the market and the funds, and it is probably the most cost-effective way to go. Brokers will charge you for their services and possibly additional sales charges. Financial planners may do the same, but probably the least expensive thing to do would be to find a financial planner who charges by the hour instead of commission. They can probably find some less expensive, no-load funds for you (which are defined below).

Load Fees

It is important to be aware of load fees. Load fees are what brokers and financial planners charge you in order to make a commission on your investment. They will either charge you at the beginning—front-end load—or at redemption or sale of the fund—back-end load. Funds without loads are called no-load funds. In addition to these stated or understood fees, some brokers will try to tack on 12b-1 fees which is basically an extra but unnecessary expense to your investment. It is perfectly legal for them to charge you these fees, but is also perfectly unnecessary for you to pay the extra fee as the investor, so avoid them if you can. It might not be a stated fee so you may need to ask about it.

Checking out Fund Companies, Brokers, and Funds

It is crucial to do some research before diving in and investing in anything, whether it is a stock, bond, or mutual fund. You want to choose a fund company that has had consistent success in its performance and has a good reputation. The same goes for brokers. It is important to do a broker check beforehand, which you can do at http://brokercheck.finra.org/Search/Search.aspx.

To check out the performance of mutual funds as well as other types of investments, www.morningstar.com is a helpful site. As with any investment, make sure you do your research BEFORE investing your money. You should always know what you are getting into ahead of time.

http://guides.wsj.com/personal-finance/investing/how-to-buy-a-mutual-fund/

Rachel Vogler
Peer Counselor I
Powercat Financial Counseling
www.k-state.edu/pfc

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