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1 Savings Within the following brochure, you will find informationn related to saving money both for the long and short term. There are many things to consider when constructing a savings plan. For example, Should I be a saver? In order to answer this question, evaluatee your personal liabilities and the cost of holding such liabilities. For example, do you have a significant amount of credit card, or other high interestt debt? If so, paying down that debt all at once or over time might be prudent. That first question differs for everyone, but should be considered carefully. Also consider, What are my long term goals? Will I be going to school in the future, will I buy a home or renovate a home in the near future, or will I need to purchase a car? These questions will frame how you save your money, as short and long term goals rely on different saving methods. Within this brochure, we attempt to educate readers on different methods and tools of saving. We being with the most important tenet of savings: compound growth. We then discuss short term savings and compare and contrast different types off short term savings accounts. Next, we address long term savings and saving for emergencies. Finally, we present resources and tips for saving money and tracking spending.

2 The Main Tenet of Saving: Compounding Compounding of Interest In addition to building wealth, there is an even more powerful force at work when you save: compounding of interest. It means that the interest you earn on your savings in this period will also earn interest, in the next period. Let s look at an example. If you add $1000 every year to your account and your account earns 2%, you have earned $20 of interest at the end of the first year. In the second year, interest earned is $40.40, which is $40 on the $2000 you have added to the account at 2%, plus an additional 40 cents of interest earned on the 20$ of interest earned in year 1. In the third year, the extra interest earned from compounding is $1.21 and in year 10 it is an extra $ Account Balance Savings Added Interest Account Balance Year Beginning of Year to Account Earned (2%) End of Year 1 $0.00 $1, $20.00 ($1000 * 0.02) $1, $1, $1, $40.40 ($2020 * 0.02) $2, $2, $1, $61.21 ($ * 0.02) $3, $3, $1, $82.43 ($ * 0.02) $4, $4, $1, $ ($ * 0.02) $5, $5, $1, $ ($ * 0.02) $6, $6, $1, $ ($ * 0.02) $7, $7, $1, $ ($ * 0.02) $8, $8, $1, $ ($ * 0.02) $9, $9, $1, $ ($ * 0.02) $11, Interest Rates The higher the interest rate, the faster the savings grow. The table below shows how fast $1000 added to an account per year grows at various interest rates: Interest Balance Interest Balance Interest Balance Interest Balance Year (2%) End of Year (5%) End of Year (7%) End of Year (10%) End of Year 1 $20.00 $1, $50.00 $1, $70.00 $1, $ $1, $40.40 $2, $ $2, $ $2, $ $2, $61.21 $3, $ $3, $ $3, $ $3, $82.43 $4, $ $4, $ $4, $ $5, $ $5, $ $5, $ $6, $ $6, $ $6, $ $7, $ $7, $ $8, $ $7, $ $8, $ $9, $ $10, $ $8, $ $10, $ $10, $1, $12, $ $9, $ $11, $ $12, $1, $14, $ $11, $ $13, $ $14, $1, $17,531.17

3 Compounding Frequency In addition to the interest rate, the compounding frequency has a large impact on the compounding effect. In the above example, we assumed an annual compounding frequency, meaning that interest (and interest upon interest) is earned once per year. However, semiannual, quarterly and higher compounding frequencies are sometimes available. To see the difference, notice the interest earned in our 2% example, but with higher compounding frequencies: Interest earned at 2% with Different Compounding Frequencies Compounding Frequency Year Annually Semiannually Quarterly Monthly 1 $20.00 $20.10 $20.15 $ $40.40 $40.60 $40.71 $ $61.21 $61.52 $61.68 $ $82.43 $82.86 $83.07 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ In the following sections, we discuss saving for short-term and long-term goals, saving for emergencies, and also provide an overview of the tools and software apps out there today to help you save.

4 Short Term Saving The Boston Security Analysts Society Financial Literacy: SAVINGS Not Spending = Saving As we have said above, the best way to save money is not to spend it. First, ask yourself - do you really need that new leather recliner chair? Can the kitchen upgrade wait a while longer? In this section, we talk about saving for short-term goals such as purchasing new appliances and electronics, furniture, cars, as well as home renovations and vacations, for example. Why Not Pay with the Credit or Store Card? If you do decide to go ahead with a major purchase, you might wonder if you should just charge it to the credit card or that store card that rewards you with all those extra deals? There are two main reasons not to do that: 1) Carrying a balance on the credit card incurs hefty interest payments interest rates on these cards can be as high as 25%. Higher Credit Score = Lower Interest Payments. 2) Increasing the balance on your credit card or opening a new credit card can lower your credit score. A lower credit score will increase the amount of interest you are charged on a loan. See the table below for the difference in the interest rate charged (on a mortgage), based on the credit score: Credit Score APR % % % % % % Source: as of 4/22/2014 Read more about credit cards and their impact on credit scores here: Another reason to stay away from store cards is that their main purpose is to entice you into buying more by offering you "special deals". What About Those 0 Money Down, 0% Interest Deals? Some stores offer no money down, 0% interest financing options over a period of several years on purchases such as furniture or electronics. At the end of the period, the entire purchase amount has to be paid off in order not to incur interest. If you will save up the money for the amount due during the 0 interest period, then this might be a good deal for you. However, if you will not have the amount saved when it s due and incur interest, waiting and saving up for the

5 purchase would have been the better option. That way, you also won t have to worry about keeping track of the payment due date. Extra Warranties or Service Plans Extra warranties/service plans are offered on many goods ranging from electronics to household goods and cars. However, products seldom break during the time window that these plans offer to cover any repairs. In addition, a manufacturer s warranty might already cover the product. In some cases, credit cards extend warranties to product purchases and also provide insurance on car rentals. Read more on this topic here: Saving for a Car A rule of thumb is that a new car loses between 10-30% of its value during the first year of ownership. Given this fact, buying a pre-owned car instead of a new car might be a viable alternative. Insurance premiums on pre-owned vehicles are lower as well. Financing options for cars include leases and car loans. Leasing a car only makes financial sense if the lease payments can be deducted from your taxes as a business expense. Otherwise, obtaining a car loan is the more cost effective financing option. With a lease, you are not building up any equity/ownership in the vehicle and at the end of the lease period, will receive nothing for the car. A car obtained via loan can be sold for its resale value. Saving for the down payment on a car loan is a short-term goal and the higher the down payment, the lower the loan interest rate will be.

6 Instruments For Saving The Boston Security Analysts Society Financial Literacy: SAVINGS The reason we split savings goals into short-term and long-term goals has to do with the liquidity of savings instruments. For short-term goals, we require a relatively liquid savings vehicle meaning that money can be withdrawn in short order and without losses. Following is a list of savings vehicles that are considered relatively liquid: 1. Savings Accounts Savings accounts are offered by banks and credit unions and allow you to easily deposit and withdraw money as you wish. Your money is insured by the government (FDIC), up to $250,000, per bank and therefore savings accounts are considered safe investment vehicles. a. Advantages: low balance required to open and maintain account, deposit/withdraw money frequently, insured, easy to link to checking account b. Disadvantages: low interest rate, monthly fees (might exceed all interest earned) 2. Money Market Accounts/High Yield Savings Accounts Money Market and High Yield Savings accounts are offered by banks, credit unions and brokerages. They have features similar to savings accounts and offer slightly higher interest rates due to higher minimum balance requirements,. They might also restrict the number of withdrawals you can make per month. a. Advantages: slightly higher interest rate than savings account, insured by government b. Disadvantages: higher balance required to maintain account without incurring fees, withdrawals might be limited to 6/month 3. Certificate of Deposits (CDs) Certificate of Deposits (CDs) are short-term bonds that offer fixed rates of return. Traditional CDs pay a fixed return over the length of the CD and do not allow you to withdraw funds, while newer products, such as Step Rate CDs, increase the return over time and include an option to withdraw funds at certain times. CD investment periods can be as short as three months or as long as 58 months. a. Advantages: higher interest rate than savings or money market accounts, insured b. Disadvantages: funds withdrawal not possible or very limited, minimum investment usually $1, Brokerage Accounts Many brokerage firms now also offer banking services, like check writing/online bill pay and debit cards thereby a brokerage account can be an alternative to having a traditional bank account. Brokerage firms are regulated less stringently than banks and having an account with them can carry slightly greater risk than with a traditional bank. Some of them do not have any brick and mortar branches and make use of traditional bank s ATM networks by reimbursing transaction fees. a. Advantages: less fees, higher interest rate than savings accounts b. Disadvantages: funds may not be insured, brokerage firms are less stringently regulated than banks

7 Match Time Horizon of Goal to Savings Vehicle As you are evaluating which vehicle to choose to save for your short-term goal, consider the time horizon of your purchase. If you are saving for a purchase in three years, a CD providing a higher interest rate is a good option, even if it ties up your money for a while. For a shorter time horizon, let s say to buy that new laptop in a few months, a savings account would be appropriate. Additional Information on Topics covered in this Section: Credit Score Calculator: Information on What Makes Up the FICO Score (Credit Score):

8 Long Term Savings The Boston Security Analysts Society Financial Literacy: SAVINGS There are many long-term financial goals that an individual may have, such as retirement, education and purchasing a house. With a longer time horizon, there are multiple investment vehicles to help accomplish one s goals (k) Pre-tax earnings up to $17,500 are deducted from regular paychecks with no income limit to contribute. Contributions are pre-tax and earnings are tax-deferred until retirement. In many cases, employers will match a portion of employee contributions. If a participant requires liquidity, some plans allow the participant to borrow up to 50% of the account for up to five years. Interest on borrowings is paid into the account. Generally, if participants take distributions prior to age 59 ½., a 10% penalty is assessed by the IRS and taxes must be paid on the distribution. Participants are required to take distributions at age 70 ½. Investment options are limited to whatever the plan sponsor selects. 2. Traditional IRA Pre-tax earnings up to $5,500 are funded into an account subject to certain income limits if investor is covered by an employer retirement plan. Contributions are pre-tax and earnings are tax-deferred until retirement. Investors have control over investment options and may invest in mutual funds, individual stocks and individual bonds. Generally, if investors take distributions prior to age 59 ½., a 10% penalty is assessed by the IRS and taxes must be paid on the distribution. Investors are required to take distributions at age 70½. 3. Roth IRA After-tax contribution up to $5,500 is funded into an account subject to certain income limits if investor is covered by an employer retirement plan. Contributions are no tax deductible but earnings grow tax-free. After age 59 ½, tax-free withdrawals may be made. Investors are not required to take mandatory distributions. Investors have control over investment options and may invest in mutual funds, individual stocks and individual bonds. While withdrawals may be taken anytime, investors are required to pay taxes at ordinary income rates on earnings in excess of contributions prior to age 59 ½. 4. Roth 401(k) A Roth 401(k) is similar to a traditional 401(k) with the same contribution limit, age requirements, potential for company match and the ability to take loans, but after tax earnings are contributed to this employer sponsored retirement savings account. Unlike a traditional 401(k), withdrawals for retirement are tax free.

9 Broadly, over a long time horizon, investors with lower marginal tax rates at the time of contribution and higher tax rates at time of withdrawal may benefit from saving in this vehicle compared with a traditional 401(k). Tax free investment income also is a plus. A five year holding period is an additional requirement to avoid tax on withdrawals, and investment options are limited to the choices in the plan. 5. myra In late 2014, the U.S. Department of the Treasury plans to introduce a new retirement savings account designed to get more people to save for retirement, especially those who don t have access to an employer sponsored plan. After tax basis contributions as low as $5 per pay period are made through automatic payroll deductions. The account features a small minimum initial investment and no fees. A single investment option will earn the same variable interest rates as federal government employees in the Government Securities Investment Fund. Once an account reaches $15,000, it will be converted to a private sector Roth IRA Plan 529 plans are vehicles operated by states or eligible educational institutions designed to help families set aside funds with contribution limits in many plans in excess of $200,000 for college costs, and include prepaid tuition and college savings plans. Similar to a Roth 401(k) or Roth IRA, after tax earnings may be contributed to the plans. Lump sum or automatic contributions may be set up. Withdrawals and any investment earnings may be tax free if they are used for the designated beneficiary s qualified higher education expenses, including tuition, room and board. 529 plans may have limits on investment strategy changes; the plans may be counted in some way against financial aid; and unqualified distributions may be assessed a 10% penalty and taxed on investment income.

10 Saving for Emergencies The Boston Security Analysts Society Financial Literacy: SAVINGS Having a rainy day fund to cover unexpected emergencies, such as unexpected medical expenses or job loss, is recommended. The purpose of the fund is to avoid having to take out a loan or being forced to sell investments to cover expenses in an emergency. As such, funds set aside for emergencies need to be invested in liquid accounts, where they are easily accessible, like money market or savings accounts. A rule of thumb for the size of an emergency fund is to be able to cover basic living expenses for at least three months. This includes mortgage payments or rent, food, utility bills, transportation, insurance payments and other debts. Additional Information on Topics covered in this Section:

11 Resources and Tips for Saving There are many online resources available to those willing to do a little research on saving money. Google Saving money, and 520,000,000 results appear. There are websites, apps, books, magazines, brochures, seminars, and thousands of other ways to learn about saving money. Below, we present some resources for you to save money; however, regardless of the apparent ease of any of these resources, they all take some work and some discipline. Again, if it was easy to save money, everyone would do it! A little research will prove a few things about money-saving resources and comprehensive financial saving tools: they re getting more advanced and they re getting easier to use. Many are automatic - every time you spend, a certain percentage is placed in a savings account, while many others track and categorize your purchases. Mint.com was one of the first popular sites / applications for individuals to track their spending and saving online. Now, there are hundreds of applications and, similar to mint.com, many are free. Everyone s first goal in evaluating financial applications should be to find one that links all of your accounts securely - spending, saving, investment, and retirement. This provides individuals with a comprehensive view of a portfolio and an effective way to determine how one s assets are truly allocated. By linking spending accounts, expenses can be categorized and analyzed in one location. This is essential for determining where one s money is going and where expenses can be cut back. As a first step to developing a savings plan, start by reading through blogs and other comprehensive resources. This will be both educational and inspirational. It will get you in the mood to save money and make you want to take control of your finances. Next, sign up for a free service such as Flexscore, which takes some of your financial information and provides you with an overall score, similar to an overall financial credit score. Flexscore also provides you with a roadmap for improving your score, such as using lower interest rate credit cards, taking out life insurance, etc. At this point, you will have an idea of your overall financial health. Next, consider signing up (and paying) for a service such as Personal Capital, which is a comprehensive financial management tool that links your investment accounts in one place. With your investments in one place, you will also want to put all of your spending accounts (checking, debit, credit cards) together. As mentioned before, Mint.com offers an easy way to do this for free. You will see exactly how you re spending your money. Finally, automate, automate, automate. Set a budget on mint.com or an app such as Level, and then figure out a way to stick to it without thinking. This will prove to be the best way to save money over the long term. We need to be able to save without thinking about saving constantly. Saved Plus allows users to designate an amount to save every time they spend. For example, you can set your savings amount to 5%, and 5% of any purchase will be transferred to a savings account. So if you spend $100 on dinner, $5 is stashed away automatically. This is a similar concept to Keep the Change, Bank of America s automatically savings plan. With Keep the Change, debit card purchases are rounded up to the nearest dollar and the incremental amounts are transferred to a savings account. Other banks such as Wells Fargo offer similar programs. Keep in mind, if you have credit card debt or have very low savings account balances, this might not be the best program for you. You are

12 better off paying down expensive credit card debt than increasing your spending. For additional insight on saving-by-spending tools, read this helpful article. At this point, you have an idea of your financial health, you have your investments and spending in one place, and you have set up a plan to budget, track, and automatically save money. Now, use tools such as SmartyPig to set savings goals and learn different ways to attain those goals. Finally, sit back and relax because you re on track to a healthy financial future! Blogs and Other Comprehensive Resources: Tools and Resources to Track Your Spending: Automatic Savings Plans: Spending:

13 Investing / Financial Planning Tool: Comprehensive Financial Overview: (expensive option) New Banking Concepts: Sources and Additional Reading:

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