the everyday guide to saving HandsOnAdvice.com

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1 the everyday guide to saving HandsOnAdvice.com

2 Finding ways to save can be a challenge. While we all have good intentions, it can often seem like there s little left after paying the bills, mortgage and other obligations. But the important thing to remember is that saving a little over time can really add up. Whether you re saving for a down payment on a house, your dream vacation, retirement or just for a rainy day, no amount is too small. Consider this simply setting aside $50 every month, you will save an extra $600 a year. MidWestOne s Bank Your Change program is a good example of an automatic savings tool that will help make saving easier. Every time you make a purchase with your MidWestOne Check Card, the amount is rounded up to the next whole dollar and the difference is automatically deposited into your savings account. In this booklet you ll find a collection of our favorite savings tips from the Hands On Financial Advice website. These simple and actionable articles are designed to help make it easier for you and your family to save. Happy reading! Hands On Financial Advice Team HandsOnAdvice.com To sign up for the Bank Your Change program, stop by your local MidWestOne branch or visit BankYourChangeEnrollmentForm-Mailing.pdf. Developed by HandsOnAdvice.com

3 table of contents Saving - a little goes a long way 3 5 practical tips to help you save 4 Take advantage of the power of compound interest 5 How to save money on back-to-school shopping 6 Pay off debt now or save for the future 7 Do you know what you spend? 8-9 Getting into habit of saving 10 6 tips for college savings 11 HandsOnAdvice.com

4 saving - a little goes a long way Finding ways to save can be a challenge especially in today s economic climate. While all of us have good intentions, it can often seem like there s little left after paying the bills, mortgage and other obligations. But the important thing to remember is that saving a little over time can really add up. Whether you re saving for a down payment on a house, your dream vacation, retirement or just for a rainy day, no amount is too small. Consider this simply setting aside $50 every month, you will save an extra $600 a year. Here are some proven strategies to help you prepare for the future. Take advantage of automatic transfers. Work with your financial institution to have a portion of your pay automatically deposited to your savings account. Automatically transferring this money has two key advantages: 1. It happens automatically so you don t have to worry about it. 2. By moving it directly into your savings account you won t be tempted to spend it first. Save your change. Collecting your spare change can result in some large savings. Identify a spot to collect your spare change and begin to diligently collect your coins. You ll be surprised when you add it all up at the end of the year. Also, some banks now offer automatic savings programs that make it even easier to save. For example, MidWestOne s, Bank Your Change program is an automatic savings program for your check card. Every time you make a purchase with your MidWestOne Check Card, the amount is rounded up to the next whole dollar and the difference is automatically deposited into your savings account. Save your next raise. Got a raise congratulations! Now, instead of spending the extra money, save it instead. Take the difference in pay and automatically transfer it into your savings account every month. The main reason why this technique works so well is that you re already adjusted to your old income. Remember the power of compound interest. When saving for retirement, compound interest is especially important. Compound interest refers to interest you earn not only on the money you originally invested, but also on any interest the investment has already earned. Consider this if you save $100 per month starting at age 20 (with an interest rate of 8 percent) your savings will total nearly $530,000 at age 65. Save your tax refund. If you re expecting a tax refund this year, make it a goal to save it. Why? Tax filing season presents a unique opportunity each year for us to save more than we normally would. So whether you deposit it directly into your savings account, or make a larger contribution into your 401(k) saving your tax refund can have a big impact on your overall savings. HandsOnAdvice.com 3

5 5 practical tips to help you save For many people, saving is a lot like being on a diet. You have to commit yourself to making a change in your life, be willing to give some things up and stay away from all the bad food or in this case bad spending. Despite this, it doesn t have to be difficult to save. In fact, there are many practical and simple things you can do to enhance your ability to save. We ve put together some tips: Tip #1: Determine your savings persona. Are you someone who has a natural propensity to save? Or do your fingers begin to tingle when you see extra dollars in your bank account? Once you ve established how you save best, develop a strategy that will work for you, instead of working against you. For example, if you are someone who has a hard time sticking to a budget, carry cash instead of plastic. For example, take out your monthly budgeted amount for groceries on the 1st and then pay with cash until the end of the month or until the money runs out. This will force you to stay within your boundaries. Tip #2: Take advantage of savings tools. Identify products that your bank offers that make it easier for you to save, such as rewards programs or an automatic savings program like MidWestOne s Bank Your Change program, which rounds up your purchases to the next whole dollar with the difference automatically going into a savings account. If possible, work with your bank to set up an automatic transfer into your savings account when you are paid. Some employers even allow you to split your check and allocate a portion of it into savings immediately. This means you won t even see the money and hence probably not even miss it! Tip #3: Set a goal. Establish a savings goal that will give you something concrete to look forward to when you are tucking away your dollars. Perhaps it s a new car? Or a fancy vacation? Depending on your savings style you may even want to set up separate savings accounts for these different goals. Tip #4: Eliminate the unnecessary small spending. For example, by making coffee at home instead of buying your cup of joe from the local coffee shop every morning you could save as much as $840 per year (based on a $3.50 cup of coffee and 20 working days/month). Other things to consider are eating leftovers instead of going out for lunch every day, reading the news online instead of paying for a newspaper subscription and setting up online bill pay to save on mailing costs. Tip #5: Avoid carrying debt at all cost. The amount of interest that can accrue on credit card debt can quickly get out of control and land you in a vicious cycle. Make it your goal to pay off your credit card every month. Saving for your future doesn t have to be a painful process. With a few simple tweaks to your routine you can begin setting aside funds in no time. HandsOnAdvice.com 4

6 take advantage of the power of compound interest You ve probably heard it before: It s never too early to start saving for retirement. In the back of your mind you know it s important to save for the future, yet it probably seems counterintuitive to start saving for retirement at the beginning of your career. Maybe you are waiting another year or two, for your next raise, until you find a new job or until you pay down your debts but you should know that the longer you wait to start saving, the more you are missing out on the power of compound interest. What is compound interest? Compound interest refers to interest you earn not only on the money you originally invested, but also on any interest the investment has already earned. Let s take a closer look at the power of compound interest and how it can help boost your retirement savings: Time is money literally. To take full advantage of compound interest, you ll want to start early. Waiting one year (or five years) to start saving will be costly. When it comes to compound interest, time is incredibly valuable. Consider this: If you save $100 per month starting at age 20 (with an interest rate of 8 percent) your savings will total nearly $530,000 at age 65. What if you waited 10 years? If you save $100 per month starting at age 30 (assuming the same interest rate of 8 percent) your savings will total nearly $230,000 at age 65. That is a difference of $300,000! And if you waited another 10 years and started saving $100 per month at age 40, your savings will only grow to approximately $95,000. As you can see, the power of compound interest and the value of time is astonishing! Decide how much to save. When it comes to compound interest, time is the most critical factor. But it s also important to save regularly. In the examples above, you saved $100 per month. In reality, the amount that you should save per month is based on your income, your spending habits, your retirement goals and what your budget will allow. The amount of money you ll need in retirement is also impacted by inflation, your life expectancy and your lifestyle. If saving is not a part of your monthly budget, start by making it a priority. Starting to save even a little money today is better than waiting until next month (or not saving at all). Decide where to save your money. When you ve figured out how much to save, you ll need to decide where to save your money. The sample calculations above assumed that you earned an interest rate of 8 percent each year. You may save your money in a tax-sheltered savings plan, such as a 401(k) or 403(b). Other options that may be available include the traditional individual retirement account (IRA) and the newer Roth IRA. Each type of retirement account has different tax implications and eligibility requirements, so you ll want to consult a tax advisor to discuss what is best for you. Get in the habit of saving each month. Automatic deductions make saving easy. Your employer may be able to automatically deduct a portion of your paycheck to contribute to a tax-sheltered savings plan. Your bank can also help you set up an automatic transfer to automatically move money from your checking account to your savings account each month so you don t have to think twice about it! Be patient and watch your money grow! Keep in mind that all of the calculations provided above are based on the fact that you did not touch your money while it was growing. You may be penalized for dipping into some types of retirement savings early. Plan to sit back, be patient and watch your money grow 15, 20, 30 and 40 years down the road, you ll be glad you did! HandsOnAdvice.com 5

7 how to save money on back-to-school shopping To your kids, shopping for new clothes, gear and school supplies may be the only good thing about going back to school, but that doesn t mean you have to spend a fortune every year. Start your back-to-school shopping with a game plan to save money and make your life easier. Here are 9 tips to help you get started. Make a list. Use the list of recommended supplies from your child s school as a starting point. If you don t have a list yet, check with parents at your school who have older kids. Sit down with your child to go over the list together and organize items according to importance. You ll be teaching your child how to get organized, set priorities, manage money and start saving for items your budget won t allow. Reuse items from last year. Once your list is complete, take some time to search your home office for items you already have. If you dig deep enough in your closets, you may find plenty of school supplies left over from last year. Take an inventory of the supplies you have on hand and plan to reuse items that are still in good condition. Check those items off your list. Determine your budget. Decide how much you plan to spend for back-to-school shopping this year. As you do your shopping, keep a record of your purchases and be aware of how these purchases fit into your overall budget. Stick to the list. Don t waste time and money on unlisted items. Also, hold off on buying trendier gear such as lunch boxes and pencil cases. Kids may love the extra supplies they see in the store, but once they start school and see that their friends are all using something else, those extras will probably go unused. Comparison shop. Scour the weekly ads to find the best prices on supplies and back-to-school basics. Keep a list of these prices with you so you can easily compare prices and find the best value. Shop end-of-summer sales. Kids wear some clothes, such as short-sleeve polo shirts, all year long, so hit the big summer sales and snap up discounted items that can be worn well into fall. Buy basics in bulk. Basic items such as paper, pencils, glue sticks and notebooks are often sold in bulk at discounted prices. Consider going in with a group of other parents to split the cost and divide up the items. Or, if you have items left over, set up a supply shelf or storage container at home that can be used all year to avoid late-night shopping trips to buy notebook paper when your child runs out. Plus, you ll know where to find unused items when it comes time to shop for supplies next year. Search for quality used items. You may be able to find great deals on clothing items, backpacks and other supplies at consignment stores or garage sales. Taking time to find quality used items can pay off when you find the items you need at a fraction of the price. Involve your children in the process. Parents and mentors can use the back-to-school shopping experience as an opportunity to explain the difference between wants and needs. For example, your child may want to purchase a box of pencils featuring his or her favorite cartoon character or superhero, but at $3 per package, the pencils are a luxury compared to a standard box of pencils that may cost $0.50. Discuss the difference between wants and needs and explain how this has an impact on your family s back-to-school shopping budget. HandsOnAdvice.com 6

8 pay off debt now or save for the future? At one point or another, families all across the country will ask themselves: shall we pay off debt or save for the future? The answer to this question boils down to simple math. Let s say, for example, that you have saved $10,000 and deposited the money in a CD or money market fund at your bank. Given the current low-rate savings environment, you are probably earning around 1% to 1.25% of interest on your investment. That means that over a 12-month period you would earn $120 to $130 dollars in interest. On the other hand, let s assume you are carrying a total of $10,000 of unsecured credit card debt. Your interest rate for this type of debt is more than likely in the double digits. If we assume that the debt carries a 15% interest rate (which is average) you would accrue around $1,500 in interest on an annual basis. Understand the consequences of either paying debt first or saving first. For example, if you opt to save and consistently only make the minimum payment on your debt you will make very little progress on actually paying anything off. This can quickly turn into a vicious cycle that can have drastic consequences. Don t make it an emotional decision by tricking yourself into saving just so you have a larger bank account. Study your situation. Make an educated decision. If you elect to focus on your debt payments, don t completely ignore your savings. It s important to have at least a little bit of money stashed away for emergencies. Always opt to participate in your company s retirement plan, especially if your employer matches funds. Not doing so means that you are leaving free money on the table. Looking at the numbers in this scenario, it quickly becomes clear what to focus on. If you opted to save and only pay the minimum payment on your credit card debt, you would not make enough money to offset your debt. Instead you should have focused on paying off the debt first. Personal finance decisions are rarely so simple that there is a quick and easy answer for everyone. Take the time to analyze your situation and determine what s best for you and your family. It will be well worth it in the long run. Despite this simple analysis, many people ignore the math and instead opt for a false sense of security that can result from having a large savings account. Keep the following things in mind when you re asking yourself the best way to move forward: Analyze your debt closely and determine where your dollars are best utilized. Go through the process of calculating your annual interest on all your debts and then determine how to best move forward. For example, it makes sense for many to focus on paying off your high-interest debt, such as credit cards, before repaying cheaper money like car loans or mortgages. HandsOnAdvice.com 7

9 do you know what you spend? Chances are, you probably know what you spend on your mortgage or rent, car payments and utilities. Most people know what they spend on the big items, but have no clue what they spend on the little things. Here s the thing. When people learn how much they actually spend on the little things, they are often amazed and even shocked. You probably will be too. That s why it s interesting, fun - and smart - to keep track of your daily spending. Keeping track of your daily spending gives you a clear picture of where your money goes, shows you lots of ways you can save money, and will make you a smarter consumer. For example, let s say you spend an average of $4.50 a day on coffee and soda pop - which is typical in today s world. It doesn t seem like you re spending a whole lot every time you buy a coffee or pop, but when you add it all up, it would be about $135 every month! Knowing this, you could decide to cut your spending on coffee and pop down to $1.50 per day. That would save you approximately $90 every month. If you put that $90 a month into savings, you d end up with $1080 in a year. That could mean a great vacation, a beautiful TV, lots of new clothes, or even better, a nice savings fund for better financial security. Now that you see how insightful keeping track of your spending can be, let s look at different ways to do it. The Low-Tech Approach Keeping track of your expenses isn t a lot of work. It s actually very simple. One easy way to do it is to carry a small notebook with you. Every time you spend even a tiny amount, write it down in the notebook, with a short description of what you spent the money on. Then, each week or month, add up your spending. One good approach is to create categories for your spending. Here are a few examples: Food Snacks (coffee and pop!) Gas Parking Entertainment Home Utilities Cell Phone Automobile Health & Beauty Clothing Of course, you can create your own categories since everyone spends their money differently. But the important thing is to see where your money is going, and be aware of which categories you feel you re spending too much on. The High-Tech Approach In today s world of smart phones, laptops and ipads, you have a tremendous variety of apps and other software to help you keep track of your spending. Many smart phone apps, for example, let you enter every expense, in whatever category you choose, and then add it all up for you automatically. Many of them even create pie charts and graphs to show how your money is being spent. Even better, since you probably have your smart phone with you at all times, it s very easy and convenient to enter your spending. HandsOnAdvice.com 8

10 If you prefer to use your laptop or tablet, they re great tools too. Many people prefer to use laptops or tablets because of the bigger screens, which let you view the graphs, charts, and spending totals a bit easier. Keep in mind, though, that you ll need to write down all your expenses as you make them, so that you can enter them in your laptop or tablet at a later time. Either way, the high tech approach is interesting and engaging. It lets you see your spending in a whole new light, analyze it better, and maintain your complete history of spending. After you enter your average monthly expenses, then you can look over the categories that are discretionary spending (coffee and pop!), and find the areas where you d like to spend less. Then begin changing your spending habits to better reflect where you really want your money to go. Continue to keep track of your daily spending to make sure you re making the changes you want. By following this simple process, you ll be happier about how you re spending your money, and you ll have a much better, more sensible understanding of your finances. The Ultimate Goal - Creating a Budget Once you have a clear picture of how you spend your money, you can create one of the most important financial tools of all - a budget. The best approach to creating your budget is to start with your monthly income. Then set up your categories for expenses - including fixed monthly expenses like mortgage and car payments, and variable monthly expenses such as coffee and pop! Other important categories, which you may not think of as expenses, should include savings, college funds, and investments. The number one goal is to make sure your expenses do not exceed your income. HandsOnAdvice.com 9

11 getting into the habit of saving Like many things in life, setting money aside as savings is a habit that needs to be developed. It doesn t take a miracle to save money. But if you want to see your nest egg grow, you need to do what you can to encourage a habit of saving especially as a young adult! 5. Pay yourself first. The first bill you pay each month should be to yourself. Before you pay your monthly expenses, go shopping or use your income for anything else, automatically set aside a portion of your income to save. This habit, developed early, can help you build a tremendous nest egg over the years. We ve put together some simple tips to help you start saving, and stick to it. 1. Determine exactly where your money is going. For the next days keep track of every single dime you spend. Use a little pocket journal to jot down notes as you go, as if you were keeping track of expenses on a business trip. This will give you an exact snapshot of where your money is going and make you astutely aware of what you are spending. 2. Create a budget. Use the insight you gained from your money-tracking experience to create a budget. Determine what your income is and what your short and long-term expenses are. Based on this information you ll be able to determine how much you can reasonably save on a monthly basis. (For more information about setting up a budget, check out our article How to set up a budget for your family and stick to it.) 3. Establish an emergency fund. If you haven t already, start setting aside money for an emergency fund. Financial emergencies can come in the form of a job loss, significant medical expenses, home or auto repairs or something you ve never dreamed of. Having an emergency fund will help you weather these challenges. Make it a goal to build up cash reserves to cover between 3 and 6 months worth of living expenses for your emergency fund. 6. Participate in your employer s retirement plan. Start contributing money to your company s employer-sponsored retirement plan immediately. Whether it s a 401(k) or an IRA, starting to save for your retirement early will have a dramatic impact down the road. If you can t participate at the maximum limit, start where you can and commit to increasing your investment 1 percent each year until you reach the maximum. 7. Take time to understand your benefits. It s astonishing how little people understand about their benefits package. Make sure you fully understand your retirement plan, flex spending accounts and other benefits. These things add up when you use them over time to save on taxes and opportunity costs. Don t give yourself a choice when it comes to savings. Commit to these simple savings tactics and you ll hardly notice that you re saving for your future. 4. Automate your savings. Work with your bank to set up automatic transfers on a bi-weekly or monthly basis into your savings account. Automating this process will ensure that you save on a consistent basis and aren t tempted to spend the money on something else. HandsOnAdvice.com 10

12 6 tips for college savings Saving for your children s college education can be a daunting and challenging prospect. After all kids grow up fast, and college is expensive. Your children s college tuition could be one of the largest expenditures you ever make. And, if you have more than one child, the commitment is even greater. Fortunately, families who want to save for future college expenses now have more options than ever before. You can choose from traditional investment options such as savings accounts, taxable investment accounts, annuities and bonds and powerful new tools, such as Section 529 college savings programs and education savings accounts. One of the first steps to successful college savings is to create a plan. Here are a few tips to get you started: 4. Set up a 529 state-sponsored savings plan, Coverdell ESA or other similar savings account. These types of plans offer attractive potential for federal tax-deferred earnings growth and federal tax-free qualified withdrawals. With a 529 plan, for example, you can contribute up to $13,000 (or $26,000 if you and your spouse give and file jointly) each year without owing federal gift taxes, provided you haven t made other financial gifts to the plan beneficiary in the same year. In addition, you can elect to make a lump-sum contribution of up to $65,000 ($130,000 for married couples filing jointly) in the first year of a five-year period, provided you don t give the beneficiary additional taxable gifts during the five-year period. These types of plans also make it very easy for grandparents or other supportive family members to contribute to savings.* 1. Don t wait too long to get started. Given a choice, it is better to start saving for college when your child is five instead of 18. Try and think about it this way: Every dollar you save could mean one less dollar you have to borrow. This will save you additional money in interest payments. 2. Take a good look at your budget. If you don t have a budget yet, now s the time to start. A budget will show you how much you are currently spending and how much you can carve out for savings based on that. 3. Establish a system for saving that is automatic. Instead of waiting for a time when you have a little more money, an automatic system will help you stay consistent and amass more savings. Talk to your financial professional about how to have money automatically deducted and deposited into a college savings account. 5. Save the extras. When you or your partner receive an unexpected bonus, commission or tax refund, make it a habit to put it toward your children s college education. 6. Encourage your child to take Advanced Placement (AP) tests while they are in high school. When your student takes and scores high enough on an AP test they can get college credit for free. Meet with your high school advisors to learn more about this option. You ll be most successful saving money for your children s college education if you take a proactive approach. Nonetheless, this doesn t mean it will happen magically. Saving for your child s education means making sacrifices. Whether it s putting off a purchase or living more frugally, you and your family will need to make sacrifices along the way. *Prior to investing investors should consider whether the investor s or designated beneficiary s home state offers any state tax or other benefits that are only available for investments in such state s qualified tuition program. Withdrawals used for qualified expenses are federally tax-free. Tax treatment at the state level may vary. Please consult with your tax advisor before investing. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate to you, consult your financial advisor prior to investing. Securities and Insurance products offered through LPL Financial and its affiliates member FINRA/SIPC. MidWestOne Bank is not a registered broker/dealer and is not affiliated with LPL Financial. Not FDIC Insured No Bank Guarantee May Lose Value Not a Deposit Not Insured by any Federal Government Agency HandsOnAdvice.com 11