For Nest Eggs and Rainy Days

Now that we’ve learned a little about debt and credit, it’s time to look at the happier side of finances: savings! It just feels better to know you have money saved for a rainy day. And that’s what we’re going for as we build our financial literacy…greater peace of mind!


There are many reasons for saving money. Some are more short-term, others quite long-term. We’re not going to look at retirement savings right now (that’s next week), but there are so many other purposes for saved money. First and foremost, it’s part of an emergency preparedness plan. Having money put away will help us through job losses, financial troubles, unexpected medical expenses, and the more common (albeit BIG!) challenges of life. For example, how many months could you live off your savings if you lost your income? That's an important thing to consider!

In addition to emergency savings, there are other items to consider for long-term (non-retirement) goals. Education, replacing cars, going on missions. These are all important and worthy expenses that, if planned for, can keep us out of debt.

But where do you put that money while you're saving it? An excellent question! I am not qualified to give you financial advice, but in this week's post, we’re going to learn about the mechanics of some of the options out there.

But first, two general principles. Some investments are considered safe: they are zero or low-risk options. Others have high risk. Generally, the lower the risk, the lower the potential return. Investments also vary in terms of their “liquidity” – how fast you can get your money back in your pocket when you need it. If the money you are putting away is for emergencies, you’ll want to keep it fairly liquid. If you won’t need it for a while, you can stick it somewhere longer (and that generally gives you the potential for higher returns as well).

Still reading? Good job! Keeping those two principles in mind, let’s take a look at some of the options out there:


• Savings Accounts (very liquid, low risk): This is probably better than putting it under your mattress! Interest rates are not terrific right now, but it's better than nothing! And you can access your money at pretty much any time. The other advantage of using a bank is its being FDIC-insured (double-check that your bank is!). Being FDIC-insured means that even if the bank fails, you are guaranteed to get back your money up to a certain amount (currently for each depositor, $250,000 per insured bank). Check out the FDIC's website here (and read your FDIC Bill of Rights here!). Depending on how much money you have, you may want to spread your accounts over different banks to maximize how much you're insured for. And don't rule out Internet banks either (think something like ING)! They often offer slightly higher interest rates than your typical brick-and-mortar establishment.

• CDs (semi-liquid, low risk): CDs earn a little more interest because you're letting your money go for a little longer. Usually, the longer the period, the higher the interest you’ll be earning. Unfortunately, there are penalties for taking the money out early. Typically, the shortest period is going to be for six months, so if you need to keep your savings accessible (for example, to live off of in case of job loss), but you can set up a "ladder" of CDs so that one is coming due each month with the amount you think you'll need. Shop around with local banks (and online banks, too!) to get the best rates. And the good news? These are also FDIC-insured!

• Bank Money Market Accounts (fairly liquid, low risk): These are also available through your local banks and generally earn higher interest rates while still being very low-risk (and also FDIC-insured). They are very much like checking accounts, though usually have tighter restrictions on minimum balances and frequency of withdrawals. (Note: There are also some mutual funds known as money market mutual funds. See below.)

• Bonds (less liquid, lower risk): A bond is like an IOU from a government or a company. When you buy a bond, you’re essentially loaning them some of your money, and they are promising to pay a specified amount back to you at a specified future date. Bond terms can range from a few months to 30 years. Refer to independent bond-rating agencies to check the chance that a bond will default. FYI, there are many types of bonds. See below for additional links.

• Stocks (can be highly liquid, but higher risk): Owning stock basically means you own part of a company. If the company does well, the value of the stock goes up. The opposite is also true: if the company does poorly, you will lose some or all of the value. You may receive periodic dividends on stock you own. These are a higher risk than the above options because the company has no obligation to give you a payout. If they do poorly, you just lose your money (as opposed to a bond where they still have to pay you back).

• Mutual Funds (less liquid, medium risk): A mutual fund is a collection of stocks and bonds. When you buy into a mutual fund, you are pooling your money with other investors, and a professional manager is choosing the stocks and bonds to invest in. The advantage of mutual funds is that you don’t have to have as much expertise to choose which stocks you want to invest in. Another advantage is that you are automatically more diversified because your money has been spread over several different investments. Mutual funds charge some kind of management fee (ask about “load”), but they are also known for generating decent returns. There are many, many different kinds depending on what you want to achieve.

Want to learn more? There are SO MANY websites out there. Each of them have different opinions on how to use these instruments, so first concentrate on the basics and mechanics of each type of investment (and ignore the sidebar ads!). As you do, you will get a feel for your preferences and opinions, and that’s the best place to start. If you want to go further, explore more of the content on these sites or contact a financial planner you trust. You CAN do this!

GENERAL INFO:
http://www.investopedia.com/university/beginner/beginner5.asp

STOCKS:
http://money.howstuffworks.com/personal-finance/financial-planning/stock.htm
http://beginnersinvest.about.com/od/stocksoptionswarrants/a/what-is-stock.htm

BONDS: 
http://www.investopedia.com/university/bonds/bonds4.asp
http://bonds.about.com/od/bonds101/a/whatisabond.htm
http://www.investinginbonds.com/learnmore.asp?catid=46&id=7 (glossary)
http://www.fool.com/bonds/bonds02.htm

MUTUAL FUNDS:
http://money.cnn.com/magazines/moneymag/money101/lesson6/index2.htm
http://mutualfunds.about.com/od/mutualfundbasics/a/mutualfund.htm

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Here's our trivia question for the week: What's the full name for a CD? (Hint: It's not compact disc!) Stay tuned for the answer later this week!

Trivia Answer: What is FICO?

FICO stands for the Fair Isaac Corporation, formerly, Fair Isaac and Company.  The company was founded in 1956 by an engineer, Bill Fair, and a mathmatician, Earl Isaac. In the 1980s, they developed a software program for rating credit risk. The system was adopted by the three main credit bureaus: Experian, TransUnion, and Equifax. The FICO score ranges between 300 and 850.

For another quick look at credit, check out MSN's five-minute guide to credit scores.

Keep up the good work!

Two Sides of the Same Coin: Credit and Debt

Part of developing financial literacy and achieving financial security is understanding debt -- and its partner in crime, credit. They are two sides to the same coin. We use credit to buy homes, pay for education, and other larger important expenses, so we want to have a good credit score to enable us to do so manageably. The irony is that our credit scores are, in part, a reflection of how much debt we have had and been able to manage well over time (you actually have to have some history of debt in order to demonstrate your ability to handle it and thus give you a good credit score). However, we have been counseled to get out of debt and stay out of debt, and we know that consumer debt is especially dangerous. So how do we manage it? Knowledge is power, so let's learn about it!

I'll be honest with you: there's no way to effectively summarize some of this without leaving out important information, so I'm going to direct you to some great resources instead. Choose the topics you are most interested in or needful of, click, and read on!

How Credit Reports Work and What Changes Your Score 

How to Get Your Free Annual Credit Report (please DO read this one!)

New Rules for Credit Card Companies

Provident Living's Discussion of Debt

Provident Living Debt-Elimination Calculator

Amortization Schedules (how much interest you're paying on your mortage and when)

A collection of calculators for debt, home equity/mortgage, school loans, etc. (*Disclaimer for this link: this is a respectable site, but it is commercial, so please use their useful calculators, but don't feel you have to look around!)

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Here's a trivia question for the week: When we talk about credit ratings, we hear "FICO" spoken of a lot. What does FICO stand for?

Building a Firm Foundation

With financial literacy, it's easiest to start with the money you see every day. How confident are you in managing your daily, weekly, and monthly expenses?  You may not track it down to the penny, but do you know where your money is coming from and where it is going? Click here to see a simple worksheet from the Provident Living website to help you chart it out. We have been counseled to live within our means and spend less than we make. Elder Wirthlin said,

"All too often a family's spending is governed more by their yearning than by their earning. They somehow believe that their life will be better if they surround themselves with an abundance of things. All too often all they are left with is avoidable anxiety and distress.”
"Earthly Debts, Heavenly Debts," Ensign, May 2004, 42

If you are like me, the desire to live within your means and avoid that distress isn't the hard part, it's keeping up with it all! It takes time and energy to track your finances. To simplify, some people try going cash-based. You can't spend more than you have at the grocery store if all you have is cash! If that's not your style, try software programs like Quicken or Excel to track incoming and outgoing expenses. This takes set-up and monitoring time, but can give you the visual and detailed information you need.

Last but not least, you might go online. (But make sure you have good security on your personal computer and Internet set-up!) Several of you asked about this in our Q&A box during December. Signing up for an online account with your bank allows you to see your balances quickly and track debits, etc. If you're using online billpay, you can link the accounts together for monitoring. Another option is a site like http://www.mint.com/. I reference this one because it has a good reputation and several layers of security. I have not personally used mint.com, but I asked a credible source who has (and she's not getting any kickback for this!). She explains how she uses it and some of the features it offers:

Mint.com is a web-based, Clark Howard-approved, budgeting and cash flow monitoring system. It contains easy-to-use features ranging from budget setting and monitoring, cash flow tracking, savings goal setting and monitoring, investment tracking, debt tracking, as well as basic weekly and monthly totals.


I find it more user-friendly than Quicken or Excel. It allows you to determine which accounts (bank accounts, credit cards, investment accounts, mortgages, etc.) to track by inputting account numbers and online information. Sounds unsecured and unsafe, but each step is password protected. Mint will reach to your accounts to download your financial data based on the information that you have set up. Set up time depends on the number of accounts you want it to update. Estimate about 30 minutes to setup 5 accounts (e.g. savings, checking, credit card, mortgage, investment).

Each time you log in, it will give you an update on all your accounts, automatically download transactions, and even code them based on your budget categories. The program is complete with charts, graphs and a monthly tracking chart that shows your expenditures in your budget categories overlaid with the day of the month (i.e., gives you a visual to see if your grocery budget is only half spent when you are half way through the month). I find the visuals easy to understand, and the website easy to navigate.

Mint.com will send you emails when you have an alert on your account, if you have gone over budget in a category, as well as a weekly summary of your expenditures.

I access Mint several times per week to tweak budget categories (depending on whether I bought groceries, home supplies, clothes, etc. at Target or Walmart) and to check overall budget expenditures.

Bottom line, do what it takes to get familiar with your general financial picture. And don't forget... no matter how you do it, just think of that great reward! Greater peace and confidence. That will make the time and effort all worth it.

Getting Started with Financial Literacy

The new year has begun and our new focus area is in full swing! It's time to get started on financial literacy!

At the Relief Society meeting this last Thursday, we had two excellent presentations to start us off. Thank you, Kelli and Blake! One of the ideas that I took away from the evening was that financial literacy (and preparedness) is not something that just springs into being. It's a process -- and it's worth it! You may feel overwhelmed by how much you have to learn, but DON'T BE! As the saying goes, "How do you eat an elephant? Just one bite at a time." It's about prioritizing and doing a little at a time. Let's take a look at some of the areas you can consider:

• Tithing/Fast Offerings
• Getting Out of Debt
• Budgeting
• Building Up Emergency Funds
• Understanding and Allocating Retirement Savings
• Having Long-term savings (towards education, mission, larger expenses)
• Catastrophe Planning (insurance, etc.)
• Estate Planning

Which area do you think is the most important for you right now? Do you need to learn about it? Improve at it? This week, think about some of your potential learning areas, but choose just ONE to start with. Set a specific goal for 2011 and put it into action! Just think about the greater peace you will feel as you become more knowledgeable and confident!

For some great reading to get you started, check out the Church's pamphlet One for the Money. And be sure to study the handouts from Thursday. (If you need copies, feel free to email me and I can send them along to you.) Happy reading, and here's to becoming more financially literate!

Financial Literacy: It's Worth It!

We encourage you wherever you may live in the world to prepare for adversity by looking to the condition of your finances. We urge you to be modest in your expenditures; discipline yourselves in your purchases to avoid debt. . . . If you have paid your debts and have a financial reserve, even though it be small, you and your family will feel more secure and enjoy greater peace in your hearts.

—The First Presidency, All Is Safely Gathered In: Family Finances, Feb. 2007, 1

Greater peace in your hearts. If that's not worth it, I don't know what is! For the next two months we're going to be focusing on financial literacy, and I hope you'll stay with me. I know it's a bit less engaging, but I promise you'll learn things that will help you feel more confident, and yes, more at peace!

Stay tuned!