Methods For Saving And Investing Money

Having a savings that you can depend upon during rocky times is an important step towards financial security. However, saving money is difficult for most people. Naturally, there may be some tough hurdles when committing to put $50 aside every month. For instance, if you’re up to your eyeballs in credit card debt, its tempting to use that $50 dollars to make a minimum payment or two. Or maybe while watching late night television, an infomercial comes on for an indestructible knife set for a limited-time price of $39.99. After spending most of the month’s savings, its easy to feel like there’s no point in saving $10. No matter how hard you try, it always seems like there’s a better way to use that $50 than to save it for use years later.

As long as that $50 is sitting there as a chunk of money, there will be the temptation to spend it on something that costs about $50. There is away to avoid this viscous cycle. If that money were to be broken down into smaller amounts, the impulse to spend it would subside.

So, if you were to save about a dollar or two day, how easy is it to put that money aside and forget about? It would be very easy. Here’s how to make saving money easier. Don’t put couple dollar bills aside everyday. Instead, keep all of your change from every transaction every day. At the end of every day, deposit that change into a bank account. This is where you have to be diligent in order for the strategy to work. Don’t spend that change on highway tolls, soda, or junk food. Use dollar bills instead. Toss the change in the cup holder in your car and leave it there until you get to the bank.

If you’re being consistent, you will being adding 1, 2, or sometimes 3 dollars into your account per day. How much are you going to miss that change? Chances are, you won’t miss it at all. At the end of the month you could have $50 dollars sitting in your bank account! If not, $30 or $40 is still great, because you won’t feel like you took $30 or $40 from your paycheck. Over a years time, you could save $600. Ten years from now, that’s $6,000.

Want more help saving your change? Bank of America has a great program called “Keep the Change”. In case you haven’t seen the commercials on television, here’s how it works. If you take your Keep the Change debit card into the store and use it to spend $9.75, Bank of America will round the charge amount up to the nearest dollar and take $10 out of your account. $9.75 will cover your purchase, the remaining $.25 will be sent to a savings account for you. Now you can save your change even when you don’t use cash. What’s even better is that for the first 3 months you are enrolled in Keep the Change, Bank of America will match the amount you save 100%, meaning your savings power gets doubled.

So now that you’ve begun saving, how do you start investing with $50 dollars per month. Do you have to wait a few years? Not at all…

Now the question is, what to do with that money. You could leave it in a savings account. Certainly, you should leave some of your money in a savings account. However, most savings accounts earn next to nothing in interest. Mutual funds might be a better bet return-wise, but it can be difficult getting into those without larger amounts of cash. If you want to make your savings start working for you right now, there are a couple of investment tools tailor-made for the small investor.

Sharebuilder is a internet stock brokerage for small investors. Here investors can set-up an account and buy stocks with very little money. How are they able to do this? Sharebuilder was the first to offer its clients an innovative stock purchasing feature. Instead of purchasing shares of stock for $20, $50, or $100 each, Sharebuilder allows account holders to buy parts of a share. For instance, if you see the Google’s stock is taking off, but $300 per share is way to much for you, you can decide you only want to buy $30 of Google’s stock. Now you own 1/10 of a share of Google. If Google’s share price goes up to $320 your partial share goes up 1/10 of that amount which puts you share value at $32.

Your shares will trade just like any others. If Google has a stock split, so will your shares. If a dividend is announced, your stock will get it’s fair share proportionate to the amount of shares you own. Sharebuilder even offers dividend reinvestment which is a great way for your portfolio to build upon itself. Many billing plans are offered to fit any trading style. The plans are mostly built around how often you plan on trading. Click this link to open an account right now. Sharebulder.com

A second investment option for your savings is the Forex market. While this market is not known as well as the stock market, there is still great earning potential here– as well as room for the little guy. The Forex market is where foreign currencies are exchanged. Every day economic data is being released (budget deficit, Gross Domestic Product, unemployment, etc.) Not only is this information being released in the U.S., but other countries are releasing their data as well. The better a country’s economy is doing the better their currency versus a poor performing economy.

Similar to buying a stock or mutual fund, a currency investor picks a currency they wish to buy, for instance the U.S. dollar. If the U.S. dollar were to be valued at 120 Japanese Yen in the morning when you entered the trade and then go up to 121 Japanese Yen by the afternoon, than you’ve just made 1 Japanese Yen. The broker will automatically convert that back into U.S. dollars when you exit the trade ( 1 Yen = .008 U.S. dollars). So to sum this up, your trade on which you spent only one dollar just made you $.008. Imagine if you spent $50. That would be $.40 or nearly a 1% return in a matter of hours.

It doesn’t stop there, however. Almost every forex broker offers clients leveraged margin accounts. With these accounts, the brokerage may offer you 50 to 1 buying power (sometime even 200 or 400 to 1). This means, if you invest $1, the brokerage will lend you their money for the life of the trade to make the amount invested equal $100. That means, your profit from the previous scenario would be $40.00 or a return of 80% Leverage is the biggest advantage of the Forex Market.

Just like the stock market, many Forex brokers set minimum open balances in the thousands of dollars. But easy-forex.com is a brokerage that understands that small investors need a chance to get in the game as well. Here, the minimum opening balance is just $25

The Forex Market is unfamiliar to many, so here’s a quick recap:

The currency trading (FOREX) market is the biggest and fastest growing market on earth. Its daily turnover is more than 2.5 trillion dollars. The participants in this market are banks, organizations, investors and private individuals, just like you. (click here to read full market background by Easy-Forex™).

Markets are places to trade goods, and the same goes with FOREX. The Forex goods are the currencies of various countries. You buy Euro, paying with US dollars, or you sell Japanese Yens for Canadian dollars. That’s all. The profit potential comes from the fluctuations (changes) in the currency exchange market. The nice thing about the FOREX market, is that regular daily fluctuations, say – around 1%, are multiplied by 100! (in general, Easy-Forex™ offers trading ratios from 1:50 to 1:200). You cannot lose more than your “margin” (your initial investment). You may profit unlimited amounts, but you never lose more than what you initially risked. However, risk only what you can afford and is not vital for your well-being.

Here’s how to get started. Register (Easy-Forex™ offers the simplest and quickest registration process, no obligation); deposit your first trading “margin” amount (credit cards are welcome, only by Easy-Forex™); start trading. You can monitor your trading online, from anywhere, anytime. You have full control to monitor status, check scenarios, change some terms in the deal, or close it. If you want to get on-line training, Register here (no obligation), Easy-Forex™ would be glad to guide you, every step of the way.

By now you’ve certainly realized there are very easy ways to start your journey to financial security. There no better feeling than knowing that if your main income were to suddenly stop, you would have a cushion to fall back on. You don’t need to wait for an inheritance, or a bonus, or the lottery. You can start right now. Go for it!

Choosing savings account for a baby

A savings account for your baby can start as soon as the child is born. This is an excellent investment for your child. Finding the right banking institution for the bundle of joy, however, will prove difficult. Taking these careful precautions during your search is the best solution. Opening a savings account is all about looking into the bank itself and the benefits it provides.

Location matters and it’s very wise for parents to invest in a bank or credit union close to their home. Online banking is one thing, but taking your child to the place where your money is stored is a whole different experience. The child will appreciate the bank as he or she gets older even if the child doesn’t care now.

There are many types of accounts you can choose from. Beyond traditional savings accounts there are online savings accounts, certificates of deposit (CD), money marketing accounts and state savings plans. Ask banks for special accounts that cater to saving money for babies or children.

Banks have a way of adding interest and fees to every savings account. As a parent it’s important to look over that information. What’s the point of saving when the account is paying more fees and not adding enough interest to make up for the loss? Search through the interest rates of each account option to find the best one. Ask the bank ways to avoid fees. Look over their options and choose one that’s convenient for you. Read the fine print of interest and fees and ask questions about it before committing to any decision.

There are requirements parents will have to meet before opening an account for your baby. Look over those requirements. Most ask for a minimum age, driver license, initial deposit amount (must equal or be more than the minimum opening account balance) and social security numbers of both the child and parent. Parents can get around the minimum age requirement if the parent is willing to be a co-signer. As a co-signer the child’s name will be first; the parent’s name will be under it. That way the child will have an account but you will have control of it (such as making deposits and withdrawals). The name can be removed when the child is 18.

Here are some things to consider:
o Credit unions have fewer restrictions than a bank.
o Online savings accounts pay higher interest rates than a standard savings account.
o While online savings accounts have its benefits they also have its restrictions–more so than the traditional bank.
o Savings accounts opened in a commercial bank are insured by the FDIC. If something happens to the bank you will be compensated up to $250,000.

How To Save A College Fund For Your Child

We want the best for our children and getting them into college is at the top of that list. Providing this can seem like a terribly daunting task. We may be afraid that we are unable to save the money, or we may not be sure how to go about it. With the tips below, saving for your child’s college fund may seem a much more manageable task.

The first hurdle to overcome is the uncertainty about the cost of college. This money probably won’t be needed for eighteen years and college expenses may be much higher by then. The scariest part is not being sure how much higher. A good way to estimate that is to look at the cost of college now and do a little research to see how it has changed over the last ten and twenty years.

It may be tempting to put the college fund first and neglect other things like your own retirement savings, but this is not necessary. There are more opportunities for your child to get money for school than for you to have money for retirement. It is important to balance your needs also.

Don’t feel you have to save enough money for the entire cost of college. There are already grants and scholarships to take up the bulk of the cost. Save what you can, and it will still be an invaluable help when it comes to living expenses and extra costs.

Start earlier. The sooner in your child’s life you begin to save, the less financial hardship there is during each year for you to put aside the money.

There are tax benefits for parents when saving for college funds. This means the government may, in a sense, help you pay for it.

Each state offers a 529 savings plan especially for this purpose. The money would be in your name, not your child’s. Only you have would access to the money, but anyone could put money in. If one child didn’t want to use the money for college, the same money could be used for another of your children. There is no age limit in regards to when the money must be used. Most importantly, it doesn’t matter how much money you earn.

There are also pre-paid college plans that allow you to pay today’s college tuition prices, and your child will be guaranteed paid tuition and school costs when they are ready to go. The only downside to this plan is that it can be limiting. If your child decides to go to another school, some of the value may be lost in the transition. It will also not cover any living expenses.

So don’t feel that a college fund for your child is an unattainable dream. It is not a luxury afforded only to rich parents, but it is an invaluable gift you can give your children. Start saving today, and whatever accumulates will provide meals, shelter, clothes, and peace of mind for your child.

Benefitting From Negative Interest Rates

Now is not a great time to be a saver.  In fact, it’s a down-right lousy time.  Rates on everything from high-yield savings accounts to CDs are way down.  In the meantime inflation is up (though still moderate by historical standards), by even the federal government’s dubious accounting.  Mix that together and what you get is negative real interest rates.  I’m going to explain exactly what that means to you and your finances.

My use of the term ‘negative real interest rates’ refers to the phenomenon when the return from completely safe investments is lower than the Consumer Price Index (CPI) – commonly known as ‘inflation.’

So you know exactly where I’m coming from, let me specify a couple of the elements.  I consider ‘completely safe’ to be FDIC insured or US government backed.  For our simplified purposes, let’s take that to mean a high-yield savings account.

While the term ‘inflation’ isn’t technically correct in this context, it’s close enough.  Inflation for our purposes is the increase in year-over-year consumer prices.

Here’s where the numbers are for these elements right now:

  • CPI 2007: 4.1%
  • Typical high-yield savings account represented by ING Direct: 3.4% APY

If you keep your money in this savings account, after inflation, your real return is a negative 0.7%.

Strategies

A couple of thoughts on how to deal with the situation:

  1. Consider saving using TIPS.  Treasury Inflation Protected Securities are essentially savings bonds that guarantee a real rate of return after inflation.  There are all kinds of things to consider when thinking about TIPS (like the tax implications), but for some situations they work.
  2. Pay down debt.  I know this may seem counterintuitive but consider paying off high interest debt (think credit cards) at an accelerated rate instead of saving more money.  Sure you need an emergency fund, but if it just gets smaller in real terms, you’re losing.
  3. Shift savings/investments into retirement accounts.  If you save and invest outside a retirement account, now might be a good time to bump up the amount you put into that tax-advantaged retirement account if possible.  Your investments inside those accounts will likely be slanted toward a more aggressive allocation.
  4. Don’t try to ‘make up the difference’ by seeking out unnecessary risk.  So your super-safe savings are returning a negative real rate.  Don’t lose sight of what those funds are for and why they’re in a safe place to begin with.

That’s just what I could come up with.  Anybody want to chime in with other suggestions?  I’m interested to know how other people deal with negative real interest rates in practice.

New Job? Start Saving Money Now!

Congratulations – you have a job! Your first full or part-time job can be exciting, overwhelming and scary…all at the same time. The biggest benefit is of course having a real paycheck! Before you run out and spend that entire first paycheck, there are a few wise financial “first moves” you should consider.

1) Decide to save. Saving is just making the decision that instead of spending all the money you have, you put some aside for later use. You can save some money and keep it at home, or put it in a savings account at a local bank or credit union. There’s no denying that saving is a discipline. If you remember how saving will benefit you, it will be easier to make it a financial priority. Start small, with just even $10 a paycheck or a little bit of money from a bonus or gift. If you get paid twice a month, then by saving $10 from each paycheck you’ll have saved $240 by the end of the year. If you keep to that for 5 years you’ll have $1,200!

2) Make time work for you. Being young and just starting out you have one huge factor working in your favor when it comes to money: time. If you make the decision to save now for your future you’ll have to save a lot less of your income because you can make that income work for you and earn money that will grow at a much greater rate than if you began saving even just 10 or 15 years from now.

For example, if you began saving $100 a month at age 25 by the time you turn 65 you’ll have earned over $630,000. But if you waited until you were 45 to begin saving $100 monthly you’ll only have accumulated a little less than $76,000. That’s a $554,000 difference!

The younger you begin saving and investing, the more you’ll benefit from the magic of “compounding.” What’s compounding? Simply put, compounding is when your money begins to earn money on its own.

Let’s say you invest $100 in an account that earns you 5% interest. Interest is the money that the bank is going to pay you because you invested your money with them. So at the end of the first year you’ll have your $100 PLUS your $5 interest. Year 2 you’ll start off with $105. Now you’re earning interest on your original $100 and the $5 interest you earned. When you begin to see interest compound on a larger scale the money can really add up.

Once you start building up some savings, look around and compare what type of interest rates you can get for investing your money. You might want to consider starting out with investments such as CDs, bonds, and money market accounts that offer a fixed-rate of interest.

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3) Create some goals. Write down 1-2 money-related goals for the next 5 years. Having a goal gives you something tangible to work toward and can help you stay disciplined when it’s tempting to spend instead of save. Maybe your goal is to take a fun vacation with friends, or buy a car, pay off your student loans, or buy a home. When you have a concrete goal, or set of goals, in mind it’s easier to create a plan for reaching that goal and be motivated to stick to it.

You’ll increase your chance of actually reaching your goal if you break it down into smaller, more manageable steps. For example, if your goal is to buy a car, decide when you’d like to be able to buy a car. Write that date down (i.e. month and year). What kind of car would you like to buy? Write that down and begin doing some research online or through magazines like “Consumer Reports” at your local library, or even talking to your local dealerships to see what kind of monthly car payment you’ll be looking at. Shop around for car insurance (which you’ll be required to have before you can drive that new car off the lot). Determine where you can get the best deal. As you cross off each step and save while you work toward your goal, reward yourself. Sometimes just seeing the progress you’re making can feel like a reward in itself.

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4) Sign up for your employer’s 401(k) savings plan. Sure, something called a 401(k) plan doesn’t sound very sexy, but did you know it’s one of the fastest and easiest ways to save for your retirement?

When you sign up for your company’s 401(k) plan you’re allowing them to take a certain amount of money out of your paycheck and invest it in a retirement plan account (such as a mutual fund) to earn interest for your retirement. Often companies will match a portion of your contribution – meaning that, for example, they will put $.50 in your account for every $1 you contribute. Not all employers offer matching funds, but if your company does then when you sign up for your account, you’re actually getting free money toward your own retirement!

By opening a 401(k) account your savings are automatically deducted from your paycheck, which makes saving for retirement more convenient for you…if you don’t see it, you can’t spend it! Not to mention, the amount that you contribute is taken out of your paycheck before taxes. That means that your overall taxable income is reduced, meaning that you get to take home more of your paycheck.

5) Direct deposit to savings. Sure, we all say that we want to save money. But when it comes right down to it, it’s hard to make the choice to save instead of spend. That’s where having direct deposit comes in handy. You can have your bank withdraw a pre-set amount of money each paycheck and deposit it directly into an account of your choice. So if it’s hard to make that decision on your own, by opening a savings account or IRA (individual retirement account), and having even a very small amount deposited from your paycheck on a regular basis you’re beginning to create a solid savings fund that you can use to invest later.

6) Budget, Budget, Budget. Ugh. The dreaded “b” word. Unfortunately the idea of budgeting has gotten a bad rap. Instead of picturing a budget like a pair of handcuffs it can help to realize that creating and sticking to a budget can actually give you financial freedom. How? Well, budgets give you an accurate “snapshot” of how you’re doing financially. When you’re able to see how much income you actually have coming in and what your financial obligations, or debts are, you can figure out where you can create savings for your future goals.

7) Get health insurance. Having adequate health insurance can be one of the wisest financial moves you make. Why? Well if you know anyone who’s taken a trip to the emergency room lately they can tell you that health care costs can add up. And if you don’t have any insurance, those fees are going to come straight out of your bank account. A major accident or illness could even push you into bankruptcy. If your job offers health insurance, sign up because group coverage is almost always cheaper than buying an individual plan. If you don’t have employer-sponsored health insurance, you can still buy individual health insurance.

10 Tips To Grow Your Savings

The summer can be a good time to review your finances and think about how to begin taking small steps toward reaching your financial goals. One way to build your money confidence is to look over your budget or your current finances and see if you can carve out some savings – even just $10 or $25 a month is a great place to start!

Regardless of your age, how much or how little you already have saved, or how little you feel like you can save, it’s never too late to start saving for your future. Every little bit – at every stage – can add up to a significant amount.

By applying savings toward your first financial priority you’re going to:

  1. build your confidence about managing your finances, and
  2. invest to help create a more secure financial future.

Following is a suggested list of 10 smart places to consider applying your savings. Take a minute to think about your financial goals, to see where you could begin creating some savings, and then consider one or more of the following options for how to make your savings work for you:

  • Pay down your debt. Did you know that paying off your credit card debt is one of the smartest financial decisions you can make? Most people would jump at the change to invest in something that pays an interest rate of 18, 19 or 21%. When you pay off your credit card debt it’s like paying yourself back that much interest by not having to pay it to your creditors. So why not direct some savings toward paying down one or more of your credit cards? You could try tackling the credit card that carries the highest interest rate, and then when you have paid off that card, start making headway on paying off the next credit card you own that has a balance. Or maybe you want to boost your confidence by paying off another card that has a lower balance first, closing that account, and then working toward paying off another card.
  • Fund a college savings plan. Use some savings to open, or increase funding to, a college savings account for yourself, a child or relative. There are a variety of accounts such as 529 plans, UGMA and UTMA accounts that enable you to save for college and lower your taxable income at the same time. Learn more about your options to save for a college education.
  • Begin saving for retirement. Open an Individual Retirement Account (IRA) or another retirement savings account. By law you can invest $3,000 tax-free in an IRA each year to use for your retirement, and an additional $500/year if you are 50 years or older. Regardless of how close you are to retirement, it’s never too late to begin saving. Use our online retirement calculator to determine your retirement income needs and to see how your retirement savings can begin adding up to give you the kind of secure retirement you have always wanted!
  • Increase your retirement savings. See if your employer allows additional employee contributions to your 401(k) retirement savings plan.
  • Save automatically for emergencies. Check to see if your employer, credit union or bank offers an automatic savings plan. It can be much easier to begin saving on a regular basis if you make it automatic. You might be surprised to see how much you can begin saving when you authorize your bank or credit union to automatically withdraw a set amount from your paycheck and direct it to a savings account. If you’re already having some money automatically deposited into a savings account, consider increasing that amount. You can use those savings as your emergency fund – an account where you keep enough money to cover 3-6 months’ worth of expenses in the event of an emergency. Having an emergency fund can give you peace of mind if the unexpected happens and can prevent you from having to put everyday or one-time expenses on your credit card during an already difficult time.
  • Examine your insurance. Review your insurance coverage (i.e. life insurance, health insurance, car insurance, long-term care or disability insurance, homeowners’ insurance, etc.) and consider whether coverage is adequate for your current life situation. If not, decide what you need to do about it and create a plan for socking away some savings to afford the increased coverage costs.
  • Check your PMI. If you are a homeowner and you have at least 20% equity in your home (meaning that you have paid down at least 20% of your home’s appraised value), then you no longer need to maintain private mortgage insurance. If you took out a loan for more than 80% of your home’s value (which was appraised when you purchased the home), your lender required PMI. In that case, you have been paying PMI since you began paying on your mortgage. Lenders are required to drop your PMI requirement automatically when you reach 80% equity, but sometimes that doesn’t happen. Check with your lender to see if you are currently paying PMI and if you still need to. If not, cancel it and have that amount automatically redirected to a savings account instead of spending it.
  • Lower your mortgage principal. If you are a homeowner, consider making one extra mortgage payment a year. You can do that by writing one additional check a year to your lender and writing “to principal” in the memo portion of the check so your bank will know you want to apply the entire amount to your principal. Or you can change to paying your mortgage biweekly. That doesn’t mean you pay the full amount twice a month – it means that you just split your normal monthly payment in half. By making payments biweekly instead of monthly you will automatically make one additional payment a year which can take nearly seven years off your mortgage – and save you the interest you would have paid on that amount as well!
  • Create a down payment fund. If you’re not currently a homeowner, consider starting a savings account to accumulate a down payment to purchase a home. Visit our “Home Buying 101” section to learn more about the process of buying a home and how to make the dream of homeownership a reality for you.
  • Create a “fun” fund. Why not put take some savings and create a personal “fun” fund to pay for those little extras like visiting an amusement park, going on vacation, going out to eat, buying birthday gifts, etc.? If you have kids or others that will share in the fun, let them in on your plan. By creating a designated fund for those expenses you can budget ahead of time to know how much you can realistically afford to spend, pay cash instead of using a credit or charge card — and not be surprised by unanticipated credit card bills.

Taking just one manageable step can inspire you to take the next step, until you begin to see how a small amount of savings can make a big difference in the long-run!

 

What's The Difference Between Saving And Investing?

Saving means to put some money aside for later use. When your kids are little, you encourage them to put some of their birthday money in their piggy bank. When they get older you may open a savings account for them to deposit some of the money they earn from jobs. It’s the same way for adults. Saving means taking some money and putting it aside for later – maybe saving for holiday gifts or for vacation or for longer-term goals like paying for college, buying a house or saving for retirement. You can save your money at home or you can save money and deposit it in a savings account with a local bank. Investing means taking money that you have saved and using it to buy or participate in a business venture that offers the possibility of profit, or interest. You could invest by taking some of your savings and purchasing a savings bond, buying stock, or depositing money in a certificate of deposit (CD).

To plan ahead for your future, it’s a good idea to making saving a priority. Even if it’s saving just $10 from each paycheck or a little bit of money you get from occasional work or an unexpected check and putting it in a savings account, every little bit counts. Want to know how? Say you save just $20 a month, or $10 from each paycheck (if you get paid twice a month). At the end of one year, you will have saved $240. If you continue saving that same amount for 5 years you will have saved $1,200! Once you begin saving you’ll want to make that money work for you by investing it wisely. Why? Because when you invest money you have the opportunity to earn something called interest.

What is interest?
Interest is a fee. It’s the amount of money you either earn on an investment or the money you owe on a loan. When banks or other financial institutions give you credit, such as when you borrow money to buy a home or a car, they’ll charge you interest, or a percentage of the amount of money you borrow, for using their money. On the other hand, you can also make money by earning interest when you invest your money. Examples of investments where you can earn interest include depositing money in an interest-bearing checking or savings accounts, bonds, Treasury bills or bonds, certificates of deposit, money market funds, stock or bond mutual funds, or individual stocks.

Earning interest on savings
Over the past few years, Oscar has managed to put a little bit of money aside from paychecks, odd jobs, and gifts to save $1,000. Recently he learned that he could deposit money in a savings account at his local bank. He heard that his money would be protected by law and that he would earn interest for opening an account. He deposited his $1,000 in a savings account at ABC bank in an account that earned 3% interest annually. At the end of the year Oscar had earned $33 just for opening the account and leaving his money untouched.
Earning interest on an investment

Laura and Roberto received cash gifts from relatives for their wedding and combined it with some personal savings to accumulate $7,500 in savings. They weren’t ready to settle down right away but knew that they wanted to buy a home in 3 or 4 years. They met with a personal financial advisor and decided to invest $7,500 in a stock mutual fund. The funds’ interest varied each year, but after 4 years they had earned approximately 7% interest annually and saw their original $7,500 investment increase to approximately $9,800.

Paying interest on a loan
Carla and Jose just moved to a new apartment. They could barely afford the monthly rent, but they needed furniture. They charged furniture using a three-year finance plan at a local department store. They ended up charging nearly $5,200 in furniture at an interest rate of 14%. By signing a long-term loan at such a relatively high interest rate they’re actually going to end up paying an additional $1,032 for the furniture. A better idea would have been to get a lower cost personal loan through their bank or company’s credit union, to have borrowed money from family members, or to shop for lower cost, gently used furniture they could afford to pay for in cash.

The biggest loan that most people ever take on is a home mortgage. Say for example that you sign a 30 year fixed rate home mortgage for $50,000 at 10% interest. Your monthly payment will be $439. That means that for 30 years you’ll pay $439 per month for your home loan. Over the life of the loan that 10% interest that you’re paying will add up so that by the time you’ve paid the loan off 30 years later you’ve actually paid the bank $157,965 – more than 3 times the amount you borrowed to buy the home!

Although that sounds like a lot, it’s just meant to demonstrate that interest adds up. One way to is to make even just one additional mortgage payment toward principal on your loan each year. By making that one additional payment toward your principal you can cut the life of your loan by 9 years and save over $38,000 in interest!

What difference does the interest rate make?
Even a small difference in interest rates can make a big difference in how much you’ll owe or you’ll earn. The key is when it comes to debt you want a low interest rate and when it comes to saving and investing you want a high interest rate. In other words, you want to pay the least amount, or find the lowest interest rate when it comes to borrowing money and you want to earn the most, or look for the highest interest rate you can get, when you invest your money. How do you find the highest rate? Ask the loan officer at your local bank how much interest you’ll be charged. If you’re depositing money in a savings account or investing money in instruments like stocks, bonds, or mutual funds, ask how much interest you’ll earn. Take that information and call or drop in to other banks and ask them the same questions. Compare what interest rate you’re offered.

Small differences in the interest rates charged on debt can add up. For example, if you’re buying a home and you’re offered an $85,000 mortgage at 9% your monthly mortgage payment is $684. The same mortgage at 7% would lower your monthly payment to $566. Even though 2% doesn’t seem like a big difference in interest, it adds up to savings of over $120 a month.

The same holds for credit cards. Check what interest rate you’re being charged on your card(s). For example, if you used a calculator on www.cardweb.com, you might see that:

  • Let’s say you’re carrying $1,250 in debt on a credit card charging a 12% interest rate. If you stopped using the card today (meaning you didn’t charge anything else), and began paying the debt off at $50/month it would take you 29 months to pay off the debt entirely. After 29 months, in addition to the $1,250 you originally owed you would have also paid $178.89 in interest, for a total of $1,428.89.
  • Let’s raise the interest rate on your card to 18%. If you owed the same $1,250 on the card and paid the same $50/month, it would take you 31 months to pay off the card completely and you would have paid an additional $121 in interest, for a total of $298.74 in interest. In total you would have paid the credit card company $1,548.74 for making $1,250 in charges.

Shop around. Before you open an interest-bearing savings account for your savings, or invest your money or take out a loan, ask specifically what interest rate you’ll be earning or paying. Compare interest rates that you’re offered by various banks in the area.

You’ve worked hard for your money and by saving and wisely investing, you can make it work for you. Knowing how much interest you’ll be charged for a loan, or how much interest you can make on an investment, is an important part of managing your money.

Will I get the same interest rate everywhere I go?
No. Banks and financial institutions set their own interest rates. Car dealerships, check cashing stores, department stores, credit unions…the interest rates they offer for purchases vary. It’s important that you compare interest rates when you want to borrow money, earn money by depositing money in a savings account, or when investing money. Call area banks and ask a loan officer what interest rates they charge for their various loans or what interest rate they offer for their savings accounts or for their various investment options. You can use the Internet to do some research as well.

Remember that investing your money is really about you loaning your money to someone else. When you’re comparing different investment options, such as bonds, stocks, mutual funds, and CDs, you’ll want to see how much interest they either guarantee to pay out, for example, on Treasury bills, bonds, or CDs or how much interest they’ve paid out in the past (stocks, mutual funds) that might be an indicator of how much interest they’ll pay out in the future. Remember that investments such as stocks do NOT guarantee how much they will appreciate, or grow in value. You are not guaranteed to make money when you invest in stocks. You can only know how much money investors have made in the past by owning the stock.

Whatever investment you choose, the higher the interest rate offered, the more money you’ll earn on the money you invest. A note of caution: typically the higher the interest rate the greater the risk.

Remember that under law, you cannot be discriminated against when applying for a loan. That means that not only can you not be denied a loan on the basis of race, sex, religion, or national origin, but you also can’t be charged a higher interest rate.

What is a subprime loan?
“Subprime” loans carry a higher than average interest rate and typically charge more fees than traditional loans. You can get a subprime loan when applying, for example, for a home mortgage or a car loan.

If you have a less than perfect credit history (such as paying bills late, filling for bankruptcy or being foreclosed on, carrying a high level of debt or having an unstable employment history) you may be offered a subprime loan. How will you know if it’s a subprime loan? The loan may:

  • Carry a higher interest rate than the standard interest rate offered by the bank or financial institution you’re working with
  • Have a lower loan limit, meaning that you may not be able to borrow as much money as you would like, or as much money as you could if you had better credit. How much difference does the higher interest rate on a subprime loan make? Consider the example of two brothers – Greg and Ray.
  • Greg manages an auto parts store. He has been putting aside 5% of every paycheck into a savings account monthly since he started work and pays his bills on time. When Greg goes to apply for a home loan he qualifies for an $110,000 mortgage at 7%. His monthly mortgage payment will be $732.
  • Ray is a claims adjuster. He frequently pays the minimum amount due on his credit cards, periodically forgets to pay his utility bills on time, and has accumulated a high amount of credit card debt. Because he has a poor credit history he qualifies for the same $110,000 mortgage but at 12% interest. That means that Ray will pay $1,132 a month FOR THE SAME MORTGAGE AS GREG. That means that Ray is going to pay about $400 more A MONTH than the same mortgage as Greg simply because he doesn’t qualify for a loan with a lower interest rate.

If you have poor credit, like Ray, you may only qualify for a subprime loan. However, if you have good credit you should not feel pushed into a subprime loan, especially if you suspect it’s simply due to your race or gender. The Equal Credit Opportunity Act (ECOA) prohibits credit discrimination on the basis of sex, race, marital status, religion, national origin, age, or receipt of public assistance. If you are denied a loan, or offered a loan that charges a higher interest rate than is advertised, you have the right to find out why.

To make sure that you’re getting the best, most fair loan you qualify for:

  • Shop around. Check for at least three different options when borrowing money. Call banks, credit unions, look online, or talk to a nonprofit counseling agency to make sure you’re getting a loan with the lowest possible interest rate with the loan terms you want.
  • Get the entire contract in writing and read it. Know exactly what you’re paying for. Be on the lookout for additional costs such as life insurance, warranties, and ask about anything else that is added into the contract that you’re not sure of.
  • Ask questions. If there is anything you don’t understand in the loan documents you’re signing, ask until you are clear on the terms and conditions of your loan.
  • Don’t ever feel pressured to sign anything you don’t understand or aren’t comfortable with.
  • Don’t agree to anything over the phone or by someone making door-to-door sales calls. Ask them to leave or mail information to your home for you to review instead.
  • If you do begin to turn your financial habits around to improve your credit (i.e. paying your bills on time, reducing the number of credit cards you use, etc.) talk to your lender about refinancing your loan. The bank may lower the interest rate on your loan, which will save you money.

How can I make interest rates work for me?
Again, the key is to make sure that you’re earning the most interest possible on money you’re saving and investing and that you’re paying the least interest possible on money you’re borrowing.

Before you deposit your savings in a savings account or before you invest your savings, you’ll want to call around or do some online research to find out which bank or financial institutions will you offer the highest interest rate on savings accounts or on various investment options such as certificates of deposit (CDs), bonds, stocks, or mutual funds.

When you’re borrowing money, do a periodic interest rate check-up. Pick a date, maybe once a year, and take a look at the interest rate you’re paying on your credit cards, loans, or mortgages. You should be able to find the interest rate easily by looking at a recent statement. If you’re not sure, call your bank or credit card company and ask them to look up your account. They should be able to tell you, over the phone, what interest rate you’re being charged. Do a little research to compare it with current rates offered by other cards and banks.

You may be able to save a substantial amount of money by refinancing your home mortgage, auto loan, even your student loan. The general rule of thumb is that you should consider refinancing if your current interest rate (the interest rate you’re paying on a loan) is more than 2 points HIGHER than the current rate being offered. So, for example, if you have a 30-year fixed rate mortgage at 9.75% and the current interest rate is 7% you should think about refinancing. But you’ll also want to consider a few things in addition to the interest rate being offered like application fees and closing costs. You’ll want to add up the total cost of refinancing before signing papers to refinance your loan.

In many cases you can also transfer your credit card balance to another card offering a lower interest rate. Or call your current company and ask if they’ll lower your rate if you’ve been a good customer. Again, before transferring your debt to another credit card, check to find out what fees you’ll be charged for the transfer and check the interest rate you’re being offered on the new card and that it’s not a “teaser” rate – meaning that it will only be good for a short period of time (i.e. 30 or 90 days) and then will increase significantly without you realizing it.

Save To Invest

Saving and investing. Those two words can dredge up fear and frustration in the hearts of even the most well-educated, competent adults. Why? The list of reasons is long. See if any of these ring true for your situation?

“It takes more time and expertise than I have to figure out where to invest,”
“My paycheck barely covers my current expenses, how can I possibly think about saving?”
“A budget is too restrictive. I’ll earn more money later in my career and I’ll invest then.”
Whatever the excuse, there’s no way of getting around the fact that saving and investing are the two keys critical to your future financial security.

It used to be that people worked hard at their careers for 40+ years, put a little money aside, and then retired comfortably off their savings, Social Security and maybe a pension at the age of 65. No longer. Today Americans live longer, need more money to maintain their lifestyle as they age, and yet save less than any other industrialized country. On top of all that, fewer people these days have fixed-amount pensions to count on. The reality is that you’ll need to make your hard-earned savings work for you by investing that money wisely, with both your short and long-term financial goals in mind.

Saving and investing will give you the upper hand when faced with unexpected problems. It can cushion the emotional and economic blow of a divorce or accident. It will enable you to take advantage of opportunities you may otherwise have missed out on, like actually taking that second honeymoon instead of just talking about it. In a word, saving and investing gives you options.

Benefits Of Having A Savings Account

The financial goal of most working professionals is to build a substantial net worth in order to retire comfortably and enjoy the finer things of life. The truth is that with proper money management most working professionals could actually retire quite young. The real factors that come into play are how much do you earn and what standard of living do you want to enjoy both during your working career and in retirement.

If you are an average wage earner, but live beyond your means, then of course it will be very difficult if not impossible to retire comfortably. However, if you choose to live below your means, then building a substantial net worth may not be as difficult as might thing. Let’s break down some numbers.

The average worker in America makes $40,000/year. If you are earning that each year, and your wage grows with inflation at 3% per year, you will earn over $1 million in 20 years. Now, if you climb the career ladder and begin receiving raises at some point that eclipse 3%, then your earnings will increase substantially more. The reality is that most average American professionals will earn more than $2 million in a 30 year career. Now with proper savings and investing habits, that amount should be plenty to retire comfortably! In this article, we will address the number 1 most important step everyone needs to make in order to begin developing a substantial net worth—building an emergency savings plan.

Why’s and How’s of Emergency Savings Account

First of all, this is not exciting. And that is why so many people have a hard time doing it. The idea of becoming a millionaire and building a substantial net worth is exciting, but the practical steps that must be taken are not so exciting. Cutting back on discretionary spending, paying off debt, and building emergency savings are not necessarily the most exciting things to do, but they are essential if you desire to build a large net worth.

An emergency savings account is recognized by most personal finance experts as essential. The reason is simple. The number one enemy of financial success is debt—especially credit card debt. Most people finance unexpected expenses with credit cards, and this behavior oftentimes becomes a very unhealthy cycle. The average American household with a credit card carries a credit card debt of $15,000! Credit card debt is the primary enemy of building net worth.

An emergency savings account prevents a person from accumulating credit card debt. By building a cushion of at least $1,000 in a savings account, then when unexpected expenses arise such as emergency doctor visits, car trouble, or random household expenses, you will not have to accumulate more debt on a credit card. Instead, you can pay out of your savings. Then, as you dip into your savings for an emergency, simply replenish the account as you are able to until it is back up $1,000. This is cushion of savings is an essential first step toward financial independence.

Next Step After $1K Emergency Fund Is In Place

Once you have built up your initial savings, then your attention should be directed toward paying off bad debts including credit cards, credit lines, car loans, etc. These debts also weigh on net worth substantially over time. Finally, after bad debts are paid off, then you are ready to take the next step of savings which is to build 3-6 months of savings in case of job loss or other large unexpected expenses. Then, when all of these steps are taken, then you are ready to enter into the “exciting” aspects of building net worth which involve aggressive investing in various assets and possibly learning how to trade with a forex course, but this debt-free, savings based foundation must be laid first.

What's A Good Student Savings Account?

When it comes to financial matters, students are often focusing on not spending all of their student loans all at once and not going too far into their overdraft limits. Not many have the time, resources or even the inclination to think about saving money.

However, it can be really useful for students to start thinking about saving and preparing for the future, especially those in their last year of study. To help you prepare for the time when you leave university to face the ‘real’ world, here are some very useful money saving tips.

Get a good savings account

As well as getting a good student current account, students may also want to think about getting a savings account with a good interest rate. You may not think that you have the spare cash to put in a savings account, but have you considered the money you get at Christmas, on birthdays and from part-time jobs? All of this money could be earning you more money in a savings account.

A student savings account has many benefits, as well as earning you interest on spare cash. For example, it allows you to:

  • Budget and manage your money better
  • Save for things you really want to buy, without digging into your overdraft
  • Have a spare cash fund for emergencies

Consider a cash ISA

Students may also want to consider getting a cash ISA. The main benefit of these savings accounts is that they offer you tax-free interest on your savings, meaning the government doesn’t take a percentage of the interest in tax. Many cash ISAs are instant access too, making them ideal for students.