Unit
3
Finding Money to Invest
1. This chapter provides a wide array of
concrete ideas on reducing spending and increasing savings. What are the intangible attributes, or human
resources, needed to complement these strategies? (See page 3-1)
Gaining knowledge of money saving strategies is an important step. But that knowledge is worth little without the following:
· Desire to reduce spending and increase savings.
· Self-discipline to follow through and use the strategies learned.
· Wise decision making to keep your household on track.
· Good planning to select and implement the strategies most useful for your household.
2. An
established, sound savings program is a prerequisite for an investment
plan. What are the characteristics of a
sound savings program? (See page 3-1)
A sound savings program that prepares you to invest should include the following:
· Having an emergency fund equal to 3 to 6 months of expenses.
· Saving on a planned, regular schedule.
· Identifying SMART future financial goals that include a future date when needed and the anticipated cost.
· Saving to purchase big-ticket items instead of buying on credit.
· Saving to make a large down payment on items that must be purchased on credit.
· Saving at least 10% of disposable income, or take-home pay.
· Knowing a realistic estimate of the amount needed to save for retirement.
3. Explain the difference between needs and wants. How do they motivate savings? (See page 3-2)
Needs represent the essentials of daily life and are needed to maintain our personal and financial lives. We may think we need goods or services that are truly just wants; in reality we could do without those expenditures. Differentiating between needs and wants is a difficult, and sometimes frustrating, task for most of us. If a want is truly important, then that desire should motivate us to save for that expense, or to reduce other needs and wants. Knowing which need(s) or want(s) you are saving for is an important step for the household as you reduce or give up some purchases to build your savings for the future.
4. Name
four major goals, or objectives, that should guide your development of a
financial plan to provide for immediate and long-term security. (See page 3-2)
Four major financial needs should guide your financial decisions today and for the future.
Consider a combination of personal savings and investments, insurance purchases, and
employee benefits to meet these needs. Ignoring them in your financial plan, could spell
disaster, or shattered dreams. Your plan should enable you to provide for the following:
· Emergencies
· Loss of income due to death, divorce, disability or unemployment. (The latter may
require you to spend money to keep your skills marketable.)
· Specific family goals (e.g., education, vacation, etc.)
· Retirement (remember the benefits of starting early)
5. List 10
effective strategies to increase savings.
(See pages 3-3 through 3-6)
Ten commonly used strategies to reduce spending and increase savings include:
· Pay yourself first.
· Save bonus money, or money that was not expected, such as tax refunds, gift money, overtime pay, rebates, or refunds.
· Deposit in a savings account or money market mutual fund the money “saved” by shopping with coupons.
· After an installment loan is repaid, continue making the loan payments to yourself.
· Collect your loose change daily and periodically take it to the bank for deposit.
· Pack your lunch and save the amount that would have been spent eating out.
· Buy items on sale and save the difference in the original and sale prices.
· Plan a “Nothing” or “Cut Back” week or month—cut out all unnecessary spending and save the amount that would have been spent on eating out, entertainment, or other “wanted” but not necessarily “needed” expenses.
· Avoid interest and other charges for using credit; pay off credit cards monthly. If you have accounts with high interest charges, “save” by paying them off as quickly as possible.
· Break expensive habits, or even reduce the frequency of purchase, to yield dollars to invest.
6. Summarize
the six steps to breaking money habits.
Knowing the steps is important, but putting them into practice takes
motivation and commitment. As you list
the steps, consider one or more habits that you and members of your household
might be able to break, or modify. How you would use the savings? (See pages 3-6 through 3-11)
The six steps to breaking money habits include:
Step 1: Identify the habit(s), determine frequency, and calculate total monthly and annual costs. Is the satisfaction gained truly worth the cost, or could the money be more effectively used for another savings or investment goal?
Step 2: Make a decision to change and brainstorm creative, more cost effective alternatives for replacing this good or service. Remember that even a reduction in the expense is a start toward your savings goal.
Step 3: Act immediately, within 24 hours if possible, to change or adjust your spending. Record your goal and focus on the benefit to motivate your action.
Step 4: Share your plan with friends, family, and co-workers who can offer support and motivation. Adopting new behaviors are not easy. With other members of the household, select a “bank” and decorate it with pictures of the goal. The decision not to spend won’t seem so bad if everyone can focus on the benefit from the savings goal.
Step 5: Stick with your plan to change; it takes about 30 days for a new behavior to become a habit. Remember that changing your attitude may be just as important as changing the behavior. Continue to focus on the benefits from these new goals and why saving for them is so important.
Step 6: Celebrate your success. Enjoy your accomplishment and continue to look for additional strategies to reduce or eliminate unnecessary expenses.
7. Compare and contrast a comparison shopper and an overspender. (See page 3-11)
Control separates the comparison shopper from the overspender. Overspenders tend to pay more than necessary for items purchased; they don’t comparison shop to control purchase prices. Because overspenders don’t control their spending, they often spend more than they earn. Comparison shoppers control spending by getting the most for their dollar, which, in the long run, can lead to greater savings from reduced repair and replacement costs. By controlling spending and spending less per item, comparison shoppers can save and invest more.
8. Assets
owed to you or your relatives might be available to you by searching primary
sources. List common lost assets and
the primary source that might be able to help you locate and claim the assets.
(See pages 3-11, 3-12, and 3-13)
For lost, forgotten or abandoned State unclaimed property office
financial accounts, security deposits,
or investments CapitaLink at www.ifast.com and www.missingmoney.com
Uncollected pension benefits Pension Benefit Guaranty Corp. (PBGC)
Missing Participant Program
1200 K Street
Washington, DC 20005
Unclaimed tax refunds Internal Revenue Service (IRS)
www.irs.gov or 1-800-829-1040
Lost insurance policies American Council of Life Insurance
Missing Policy Service
1001 Pennsylvania Avenue, NW
Washington, DC 20004-2599
9. What consumer caveats should you consider before hiring an asset finder? (See page 3-12)
Asset finders offer the service of finding lost property for you. If you are contacted by an asset finder, it may indicate that you have unclaimed assets that the company has already discovered. Before hiring someone, check with possible unclaimed property offices yourself. Should you choose to hire an asset finder, pay no more than 10% of the assets recovered and be sure to check out the firm with the Better Business Bureau before contracting for services.
10. List and explain three strategies for stretching your money. (See pages 3-13 and
3-14)
Adopt these three strategies as habits to help you stretch your money further:
· Unless it is truly a once-in-a-lifetime opportunity (and how many of those really come around?), adopt the two-week rule. During that time, two things could happen. You might find an even better deal for the same item, or you might decide you simply don’t want it as much as you initially thought. Either way, you’ve had some time to comparison shop and learn more about the item before making the purchase.
· The old adage “waste not, want not” still applies today. To implement this approach, remember to (1) postpone replacing items until necessary; (2) conserve the products and services you buy to avoid waste; and (3) maintain and care for the products you buy to extend their useful life. In other words, use only what you need and take care of it, until you need a replacement. This applies to inexpensive purchases (e.g., school supplies or shoes) as well as expensive purchases (e.g., household furnishings and automobiles).
· Clip coupons and take advantage of money-saving opportunities. The savings can substantially add up, and still allow you to treat yourself. For example, if the goal is to reduce the amount spent for eating out, consider using coupons or “buy one get one free” offers to reduce the cost, but still treat yourself.