PersonalSavings B

BUS 103
Personal Savings
Copyright Washington State Department of Financial Institutions.
Disclaimer
This course is developed for educational purposes and non-commercial use. It should not be construed as endorsement
for any financial products or services. It in no way intends to convey legal, real estate, employee benefits, tax, insurance,
or financial planning advice. It is a simple overview to educate those who are new to these subjects. Consultation with a
professional is recommended for individual advice. These topics are complicated, dynamic, and constantly changing.
Please check for current regulations, rules and laws.
Personal Savings
Table of Contents
Table of Contents ............................................................................................................................................. 2
About this course for instructors ................................................................................................................... 5
About this course for students ....................................................................................................................... 5
Unit 0: Introduction .......................................................................................................................................... 6
Overview of Financial Life .......................................................................................................................... 6
Steps to Secure your Financial Future .................................................................................................... 10
(1) Set goals ............................................................................................................................................ 10
(2) Create a spending planand stick to it ............................................................................................. 10
(3) Create wealth by paying yourself first. ............................................................................................... 11
(4) Grow your wealth by investing intelligently. ....................................................................................... 13
(5) Conserve wealth with good credit habits. .......................................................................................... 13
(6) Protect your wealth. ........................................................................................................................... 15
Activities ..................................................................................................................................................... 17
Activity 0: Financial Behavior Evaluation................................................................................................. 17
Activity 1: Needs and Wants ................................................................................................................... 17
Activity 2: Spending Plan ......................................................................................................................... 17
Activity 3: Financial Goals ....................................................................................................................... 18
The Time Value of Money.......................................................................................................................... 19
(1) Future value What my savings will be worth in the future .............................................................. 19
(2) Present Value What I set aside today for a future goal .................................................................. 21
(3) Future value of an annuity Value of saving every year ................................................................... 23
(4) Future value of an annuity Savings needed for future goal ............................................................ 24
Planning For Uncertainty .......................................................................................................................... 26
Resources................................................................................................................................................... 28
Unit 1: Set Financial Goals ........................................................................................................................... 29
Values Auction ........................................................................................................................................... 29
Auction Bidding Process ......................................................................................................................... 30
Activity 4: Values Auction ........................................................................................................................ 30
Activity 5: Values Auction Reflection and Discussion ............................................................................. 31
Needs vs. Wants ........................................................................................................................................ 31
Activity 6: Needs and Wants ................................................................................................................... 32
Set Goals .................................................................................................................................................... 32
Use the SMART approach to set realistic goals ...................................................................................... 32
Education ................................................................................................................................................. 33
First House .............................................................................................................................................. 33
Retirement ............................................................................................................................................... 33
Other Goals ............................................................................................................................................. 34
Activity 7: Check Out Your House Value (or Other Houses) ................................................................... 35
Activity 8: Estimate How Much You Need to Retire ................................................................................ 35
Activity 9: Identify What You Want to Achieve Financially This Year? .................................................... 35
Identify and Prioritize Personal Financial Goals ...................................................................................... 36
Activity 10: Personal Financial Goals Worksheet .................................................................................... 37
Resources: ................................................................................................................................................. 38
Unit 2: Net Worth Statement Your Personal Financial Picture ................................................................ 39
Activity 11: Calculate Your Net Worth ..................................................................................................... 43
Resources: ................................................................................................................................................. 44
Unit 3: Financial Institutions - Commercial Banks, Savings Banks and Credit Unions ......................... 45
What is a bank?.......................................................................................................................................... 45
What is a commercial bank? ................................................................................................................... 45
What is a savings bank? ......................................................................................................................... 45
What is a credit union? ............................................................................................................................. 45
What services do banks and credit unions offer? ................................................................................. 45
Personal Savings
What is online banking? ........................................................................................................................... 46

Why should you use a financial institution like a bank or credit union? ............................................ 46
The FDIC and NCUA .................................................................................................................................. 46
What to consider in choosing a bank or credit union............................................................................ 47
Activity 12: Compare Two Financial Institutions ...................................................................................... 48
Electronic Funds Transfer ........................................................................................................................ 49
Check your statements for errors ............................................................................................................ 50
Safety Tips for Using Bank or Credit Union Accounts .......................................................................... 50
Tips to Avoid Banking Fees ...................................................................................................................... 51
Why a bank or credit union may not open an account for you. ............................................................ 51
Activity 13 Solutions for the unbanked. ................................................................................................. 51
Resources: ................................................................................................................................................. 52
Unit 4: Checking Accounts ........................................................................................................................... 53
Why do we need checking accounts? ..................................................................................................... 53
ATM Cards, Debit (Check) Cards ............................................................................................................. 53
Evaluating Debit (Check) Cards .............................................................................................................. 53
Your Rights................................................................................................................................................. 55
Protect Your Debit Card ............................................................................................................................ 55
Lost or Stolen ATM or Debit (Check) Cards ............................................................................................ 56
Activity 14: Compare ATM/ Debit/ Check Cards .................................................................................... 58
Unit 5: Savings Vehicles ................................................................................................................................ 59
Why do we need savings? ........................................................................................................................ 59
What form of savings is right for you? .................................................................................................... 59
Savings Accounts ...................................................................................................................................... 60
Money Market Accounts ........................................................................................................................... 61
Money Market Mutual Funds .................................................................................................................... 61
Activity 15: Ask a Bank or Credit Union................................................................................................... 62
Resources: ................................................................................................................................................. 62
Unit 6: Certificates of Deposit ....................................................................................................................... 63
Types of Certificates of Deposit (CDs) .................................................................................................... 63
Traditional CD.......................................................................................................................................... 64
Bump-up CD ............................................................................................................................................ 64
Liquid CD ................................................................................................................................................. 64
Zero-coupon CD ...................................................................................................................................... 64
Callable CDs ............................................................................................................................................ 65
Brokerage CD .......................................................................................................................................... 65
CD Investing Strategies ............................................................................................................................ 65
CD Ladder Strategy ................................................................................................................................. 65
Bullet Strategy ......................................................................................................................................... 66
Barbell Strategy ....................................................................................................................................... 66
Early Withdrawal Penalties ....................................................................................................................... 66
Activity 16: Class Contest for highest CD rate: ...................................................................................... 67
Resources: ................................................................................................................................................. 67
Unit 7: Bonds .................................................................................................................................................. 68
How have bonds done compared to stocks? ...................................................................................... 69
How Do You Make Money From Bonds? ............................................................................................ 70
Why Buy Bonds? ................................................................................................................................. 72
Bond Rating, Credit Rating, Quality .................................................................................................... 72
Bond Types by Issuer ......................................................................................................................... 73
Other Bond Types and Groupings ...................................................................................................... 79
Bond Ladder Strategy ............................................................................................................................... 80
Activity 18-Create a Bond Ladder: .......................................................................................................... 82
Resources: ................................................................................................................................................. 82
Unit 8: Tax-Advantaged Savings .................................................................................................................. 83
Education-Savings Plans .......................................................................................................................... 83
529 Qualified Tuition Programs (QTP) .................................................................................................... 83
Personal Savings
Coverdell Education Savings Account .................................................................................................... 83

Individual Retirement Accounts (IRAs) ................................................................................................... 84
Why Should I Invest in an IRA? ............................................................................................................... 84
Traditional IRA's ...................................................................................................................................... 85
Roth IRA .................................................................................................................................................. 85
Self Employed: SEP-IRA ......................................................................................................................... 86
Rollover IRA ............................................................................................................................................ 86
Savings and Thrift Plan - 401K Plans (Contributory Retirement Plans) .............................................. 86
Activity 19: Maximize your tax savings. .................................................................................................. 88
Resources: ................................................................................................................................................. 88
Glossary .......................................................................................................................................................... 89
Sources ....................................................................................................................................................... 95
Personal Savings
About this course for instructors

Personal Savings is a course that teaches the basics of setting goals, the time value of money, savings
vehicles, bonds, plus the banking industry and its products and services. Saving returns and evaluating
alternative saving vehicles are the focus of this course. This one-credit college course teaches the basics of
personal savings and is part of a set of courses that teach financial education. There are some basic skills
that are fundamental for all the courses. It is possible the student will have developed these skills in previous
classes.
The topics that will be covered in this Personal Savings class are:
Setting short-term and long-term financial goals
Net worth statement
Time value of money
Banks and credit unions
Savings vehicles (checking, saving, NOW, money market accounts, certificates of deposit, money
market mutual funds, Treasury bills and bonds)
Bond returns and risks (volatility and inflation)
The banking industry and its products and services
At the end of this course, the learner will be expected to:
Discuss and quantify major financial goals education, home, and retirement
Assess the risk associated with each of these goals (inflation)
Describe the purpose of banks and credit unions
Create a net worth statement
Review several types of savings vehicles
Evaluate which are the best vehicles for their personal situations
About this course for students

One of the first steps to building a secure financial future is building savings. What are you saving for? Most
families have to save for emergencies, vacation, car, education, house, and retirement. In order to save
effectively you have to ask how much you need and when. Once youve determined that, you have to look at
all the options you have for savings. There are a variety of savings products that can match up with your time
horizon and access to your money. Whether you use a bank or credit union you have evaluate and find the
right vehicle for you.
The benefit of keeping a portion of your financial assets in savings vehicles is liquidity, preservation of
principal and lower risk. Its an important beginning step to achieving your financial goals.
Personal Savings information is very personal and is ever-changing. Only share what you are comfortable
sharing with others. A student always has the option to pass on a question that they feel is too personal.
This class is designed to teach you tools for financial planning; to start the process of writing things down,
evaluating where you are today, developing plans and strategies for the future, and knowing where to go for
information on the web for future questions as you go through your life cycle. Your life is ever-changing and
some of your goals may change. The goal is to help you develop the financial knowledge to empower you to
take control of your finances by becoming more discerning consumers. The knowledge and tools you
develop in this class will serve you well throughout your life
Personal Savings
Unit 0: Introduction
Overview of Financial Life
In our complex world we are required to make many choices. Knowing how to manage money can help you
make your money work harder for you, and you will make the right choices for your future. If you know what
obstacles are in your path you'll be more likely to avoid traps that can undermine the ability to attain your
financial dreams and goals. We rarely look at our lives from the long viewfinancially. This figure shows the
arch of your financial life.
Money management over your financial life
Learn to be thrifty.
Accumulate money for
saving, spending and
sharing. Work in
business.
Income
Childhood
Identify financial goals.

Create spending plan.
Maximize 401K contribution
with company match.
Use tax-advantaged saving for
retirement and education.
Dont borrow money to spend.
High School
and College
Starting a
family
10
20
Retirement
Pay yourself first with 10%
automatically going into
retirement savings.
Dollar-cost average into your
investments.
Rebalance to sell high and buy
low.
Dont borrow money to spend.
Minimize student loans and use

federal loans.
Dont have outstanding balances
on your credit card.
Create spending plan.
Contribute to 401K and Roth
IRA.
Growing your
career and life's
ups and downs
30
40
50
60
Manage your retirement

distributions so that
youll have enough for
your life.
70
80
Age
We start off life being dependent on others, like our parents to provide for us financially. As we move into
young adulthood, we learn about credit and debtthat is we learn how to use it but dont quite learn that
there can be some unpleasant consequences to that spending. At the beginning of our careers, earnings do
grow fast but so does the spending. There are the cars, the house, and then kids. As our career and
earnings progress, so does our spending. We upgrade our houses, save for retirement and our kids college
education. At the same time, we hit lifes bumps. There may be times of unemployment. We may divorce or
have to help others. Income starts to decline for most of us well before we hit retirement age. Then when we
retire, and have the job of making sure that our savings last as long as we do.
How does a typical person look financially? Not as prosperous as most of us believe. The typical household
income (includes all people in a living unit) in the US is $52,029 (2008). Although its increased throughout
most of the last century, theres been some slowing in recent years. Some evidence suggests that people
coming out in the workforce now may be the first generation to make less than their parents.
Personal Savings
Sometimes it seems like America is the land of millionaires or even billionaires. The truth of the matter is only
a few US households (4%) make over $200,000. Half of the households make $50,000 or less. If you break
down the $50,000 and less group even further, about 25% of US households have $25,000 or less in income.
Percent of population by household income 2010
35%
30%
30%
25%
25%
25%
20%
15%
12%
10%
5%
4%
4%
$150,000 to
$199,999
$200,000 and
over
0%
Under $25,000
$25,000 to
$49,999
$50,000 to
$99,999
$100,000 to
$149,999
Source: US Census
Washington State has higher household income at about $58,000 . Washington family income (people
related to each other in a household) broken down by family size is as follows:
Washington
Median Income
Total
70,498
2-person families
64,158
3-person families
72,533
4-person families
82,716
5-person families
73,804
6-person families
67,489
7-or-more-person families
72,990
Source: 2008 American Community Survey
How about age? This graph shows median household income by the age of the household head.
2010 Median household

income ($)
Your incom e goes up and dow n as you age

70,000
60,000
50,000
40,000
30,000
20,000
10,000
0
15 to 24
years
25 to 34
years
35 to 44
45 to 54
55 to 64
years
years
years
Age of householder
65 to 74
years
75 years
and over
Source: US Census
US Census, State Facts. 15 Dec 2010. <http://quickfacts.census.gov/qfd/states/53000.html>

Personal Savings
What can you do to improve your financial status? Education has an impact. Here is a chart that describes
the impact of education on your salary. Even with the same education, women make 60% to 70% of what
men make (see the chart below). Some speculate that this is because women are still the main caregivers
for both parents and children.
Typical Yearly Salary by Education and

Gender (2008 US Census)
180,000
160,000
140,000
120,000
100,000
80,000
Male
Female
60,000
40,000
20,000
0
Le
ss
n
ha
9
H
h
ig
Source: US Census
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Sc
S
ol
e
om
le
ol
ge
A
ia
oc
s
s
te
B
l
he
c
a
s
or
te
as
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rs
es
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r
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o
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na
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to
oc
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ra
Of course, your financial life doesnt proceed as smoothly as the charts above show. A person has an
2
average of 11 jobs from age 18 to 44 . So theres a pretty good chance that youll be unemployed,
underemployed, or self-employed for periods in your working life. You need to be financially prepared for
those possibilities.
Other life events such as marriage (70% of people get married) can have an effect on your financial life.
Marriage increases a persons wealth by about 77% because two can live as cheaply as one and half.
Divorce (40% to 50% of first marriages end in divorce) can have a significant impact on your financial life.
Divorce can decrease your wealth by 77%.
You already know than children can have an impact as well. Just as you cost your parents, so will your kids
cost you. Depending on the household income level, the average yearly child rearing expenses are from
3
about $11,000-$23,000/year for a total of about $187,000-$391,000.
The cost of a college education on average is at a Washington state public university is about $19,00023,000/year, or about $76,000 to $92,000 for a bachelors degree. Specific colleges can be priced at
http://apps.collegeboard.com/search/index.jsp.
It follows that net worth or the amount of wealth you have also increases as you age. Your net worth---what
you own (home, retirement accounts, investments, etc.) less what you owe (mortgage, car loans, etc.)
generally grows over your lifetime and declines as you retire and no longer earn money.
United States, Bureau of Labor Statistics. Number of Jobs Held, Labor Market Activity, and Earnings
Growth Among the Youngest Baby Boomers: Results from a Longitudinal Survey, September 10, 2010
3
USDA. Expenditures on Children by Families, 2008. 15 Dec 2010.
<http://www.cnpp.usda.gov/Publications/CRC/crc2008.pdf>
Personal Savings
Household wealth (2004)

200,000
150,000
Median net worth

Excluding home
100,000
50,000
0
Less than
35 years
35 to 44
years
-50,000
Source: US Census
45 to 54
years
55 to 64
years
65 years
and over
65 to 69
years
70 to 74
years
75 and
over
Age of householder
For most folks, as can be seen by the graph above, much of their wealth is tied up in their homes. People
4
tend to buy their first house when they are around 30 . However, as a financial asset, dont depend on your
home. Most folks view their homes very emotionally and will not sell it even when they retire. About 70% of
people who retire dont sell or even take money out of their homes to fund their retirement.
Area
2009 Median Price
Kennewick-Richland-Pasco, WA
167,100
Portland-Vancouver-Beaverton OR-WA
244,100
Seattle-Tacoma-Bellevue
306,200
Spokane
175,200
Yakima
155,200
Source: National Association of Realtors
As you navigate through your financial life, its important to learn crucial skills to help you deal with all the
twists and turns that can be thrown at you. Its important that you get smart about your money no matter
where you are in this journey.
For children, it is important to teach them to be thrifty. Studies have shown that adults who were taught to be
thrifty as children accumulate more wealth. Teach children to take the time to evaluate purchases. Teach
children to save for themselves and to give to others. Young people are assuming debt at earlier ages. Its
important to add credit and debt to the curriculum as children reach their teenage years. Learning to drive
offers the opportunity to learn about risk management to preserve your wealth.
As folks leave college, the career may start to take off with increased earnings. Its important to resist the
urge to spend more. Instead learn to focus on financial goals and saving. The time value of money or
compounding works the most wonders when people save early in their careers. The workplace offers the
opportunity to learn about employee benefits and how they fit into your financial life. As you grow your
career, you should grow your wealth. When you retire, you should retire debt-free and have a retirement fund
to carry you onwards.
Field Guide to Quick Real Estate Statistics, Updated November 2010, National Association of Realtors, 15
Dec 2010. <http://www.realtor.org/library/library/fg006>
Personal Savings
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Being smart about your money can help you buy a house, pay for a college education or cover your
retirement needs. In navigating your path, always remember that it is a marathon and not a sprint. You need
to keep focused on the finish line all the way.
Steps to Secure your Financial Future

Financial experts always cite these few simple steps in securing your financial future:
1. Set financial goals.
2. Develop and stick to a spending plan.
3. Create wealth by paying yourself first.
4. Grow your wealth by learning to invest intelligently.
5. Conserve your wealth with good credit habits.
6. Protect your wealth with good recordkeeping, insurance and fraud smarts.
(1) Set goals

Where do you want to go? Write these down. A study of college students found that those who wrote down
their goals and enlisted others to help them accomplish their goals were much more likely to achieve their
goals. Write down your financial goals and commit to getting to them.
Since these are financial goals, you have to put a dollar value on them. Then think about what time frame
you want to put on them. Dont forget, if you write them down and look at them every year, you wont forget
them. Make the goals realistic. Remember as you achieve the goals, you will develop a track record that will
help you achieve even bigger goals. Divide them into:
Short-term: such as paying off credit card debt or saving for a vacation
Long-term: such as saving for a house, a college education or retirement.
Now figure out how much you have to save every year to achieve your goals. When you first look at the
number, it may seem overwhelming. Break it down to every month, every week and maybe even every day.
Keep on target. Dont be discouraged. Youll get there in the end.
(2) Create a spending planand stick to it

Now that you've figured out your financial goals, you are ready to create a spending plan to attain them. Start
by taking stock of yourself financially. How much do you spend? Track your expenses for a month. Keep all
your receipts if you pay cash, use your online banking to download a list of checks written or debit card
transactions, and look at your credit card bill. Look at deductions from your pay check. Use a notebook to
track your spending. Categorize every expense. The key is to track everything you spend. Be realistic if you
have to estimate and go for high rather than low.
Divide your expenses into fixed, variable and discretionary. Monthly fixed expenses are regular savings,
housing, groceries, utilities, and car payments. Once you have noted all your fixed expenses, write down
your expenses that vary each month such as the telephone bill or utilities. These expenses happen every
month, but the amount you spend could change. Then note discretionary expenses such as clothing,
vacations, gifts and personal spending money. These expenses are the ones that you should give careful
thought to.
Now that you have figured out your expenses, write down your monthly income after all taxes and deductions.
Compare expenses to income. One of the advantages of doing a comparison of expenses to income is that it
provides a quick reality check. If you are spending more than you're bringing home every month in income,
you have a deficit. You need to evaluate every expense and figure out if theres a better way of living within
your means. If you're spending less than you're bringing home, you have a surplus. This surplus should be
put to saving towards an emergency fund or long-term financial goals.
Personal Savings
10
Once you have all your financial records organized, keep it up. Figure out a way to continue to track your
expenses and reconcile your checking account, your bill payment and your credit card accounts. Use this
system to help you do your taxes correctly and painlessly. Good recordkeeping in itself will help you build
your wealth.
Act on your plans right away. Procrastinating can cost you much in the future. Once you have set goals,
estimated your expenses and identified monthly savings targets, it's time to put your plan to work. Give it
some timeabout three months. Then see how you're doing. Were you able to meet your savings goals? If
so, stick with it. If not, look at your variable and discretionary expenses for opportunity areas to cut back
spending and increase savings.
Evaluate your plan every three months and make adjustments as needed. If you're not saving enough to
meet your monthly goals, you may need to spend less. Saving is the key to successful financial plans. You
can make more money saving aggressively than you can by investing aggressively.
(3) Create wealth by paying yourself first.

An estimated seventy-five percent of families will experience a major financial setback in any given ten-year
period. Saving is a good way to weather financial thunderstorms. In the past few years, Americans havent
been saving much. In fact during 2006, they were dipping into their accounts to spend to the tune of a
negative 1.2% of disposable (after taxes) income. This hasnt happened since the 1930s. Its not because we
cant save. During much harder times like from 1943 to 1948, right after World War II, Americans were
saving at over 25% a year (see chart below). If you talk to people who remember those times, they talk about
a national campaign to save and buy war bonds. The country was determined to save. Now it seems the
country is determined to spend.
In recent years, the savings rate has gone up again, probably due to concern about the economy.
Personal Savings
11
Personal saving as a % of disposable personal income

30
25
20
15
10
0
1929
1934
1939
1944
1949
1954
1959
1964
1969
1974
1979
1984
1989
1994
1999
2004
2009
-5
Source: BEA report - Personal Income and Its Disposition

Compared to just about every country in the world, the US does poorly in saving. In some Asian countries
people save over 30%.
2009 Household saving rates

(as % of disposable income)
USA
Sw itzerland
Netherlands
Korea
Japan
Italy
Ireland
Germany
Finland
Canada
Belgium
Australia
0.0
5.0
10.0
15.0
20.0
Source: OECD Economic Outlook 87 database
Saving means giving up something now, so you will have more in the future. It's not easy deferring or
eliminating spending for things you want today. Its a decision you have to deal with everyday for a reward is
that way off in the future. Study after study shows that we wont do this of our own free will. We need to make
it automatic. The best way to deal with this is to pay yourself first with automatic deductions from your
paycheck.
The first thing you need to do is to establish an emergency fund that will cover 3 to 6 months of expenses.
This fund will tide you over when you lose your job unexpectedly or have an emergency medical bill.
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Which is more
at age 65?
Assumes 8% rate
of return
1. Saving $4000 a year from 25 to

45 years old and then no more
savings but you leave it in your
account.
2. Saving $8000 (double) a year
from 45 to 65 years old
So start depositing money younger . . . The more time the

money has to grow, the more money you get. So start
saving today!
900000
800000
700000
600000
500000
400000
300000
200000
100000
0
25 to 45
years
45 to 65
years
(4) Grow your wealth by investing intelligently.

If you work, join your company's retirement-savings plan (such as a 401K or 403B). Your contribution avoids
current taxes and accumulates tax deferred. Companies sometimes match your contributions (on average
they will match 50 cents for every dollar that you put in) and this can really increase your return on
investment.
Make full use of other tax-advantaged accounts like Roth IRAs that are paid with after-tax dollars but have
returns are not taxed at all. Put all your pay raises right into savings before you get used to having them.
Other windfalls such as tax refunds should also be put directly into savings.
Contributing to your investments with every paycheck helps you weather the ups and downs of investments
by dollar-cost averaging. This has proven to be much more effective than trying to outguess the market. As
you learn more about investments, move into higher return and higher risk investments, Use asset allocation
to diversify and manage that risk. Rebalance your portfolio to buy low and sell high automatically.
Youll find that investing intelligently isnt rocket science. Studies have shown that the sooner you learn about
the different kinds of investments, the more wealth you will accumulate.
(5) Conserve wealth with good credit habits.

Those who lived through the depression of the 1930s were careful about spending and didnt want to borrow
money. Attitudes have changed a lot in the past 70 years. Some experts believe that we have become the
debt generation. Here is the percent of families that have various kinds of debt.
2007 Consumer Finance Survey

Primary residence mortgage
Other real estate mortgage debt
Installment debt (e.g., auto and education)
Credit card balance
Other debt
Percentage of
families with debt
49%
6%
47%
46%
7%
$
$
$
$
$
Median Debt
Amount
107,000
100,000
13,000
3,000
5,000
The trends are not good. Consumer borrowing (other than mortgages) has more than doubled in the last 15
years as can be seen by the chart below:
Personal Savings
13
Consumer Debt
1980-2009 (Billions)
3,000
2,500
2,000
1,500
1,000
500
0
1980
1985
Source: Federal Reserve
1990
1995
2000
2005
Year
Owning a home free and clear used to be a major financial goal of most families. Where people in the 1950s
would work hard to put a substantial down payment and pay down a mortgage, folks now are putting less
down and cashing out on their home equity by taking out more debt (see chart below). In this decade,
household debt has exceeded disposable income or income after taxes.
Compare our household debt with our disposable income as a nation.
Personal Savings
14
Total Household Debt is More than Personal

Disposable Income 1975-2009 ($ Billions)
16,000
14,000
Personal disposable income
12,000
Total debt
10,000
8,000
6,000
4,000
2,000
0
1975
1980
Source: Federal Reserve
1985
1990
1995
Year
2000
2005
The general message from all these charts is that we are becoming the debt generation. Debt weakens the
financial strength of a family and it is especially dangerous if the family is straining to pay for too much
spending.
To avoid this trap, carefully evaluate and comparison shop major and minor purchases and the borrowing
you have to take on. Borrowing includes mortgages, car loans, student loans, credit cards and more. Some
of these are very expensive ways to borrow money. Borrowing money has risks that go well beyond the
dollar amount of the loan you get. It can affect what you pay in interest rates, insurance, and whether or not
you get a job. Many financial advisors recommend that you do not borrow money to buy things that
depreciate or go down in value. This includes electronics, clothes, and vacations.
Pay all your bills in full and on time. This will stop you from getting into the spiral of debt. Review your credit
report annually to correct any mistakes and keep your credit rating high.
(6) Protect your wealth.

The first way you should protect your wealth is to make sure that you have adequate insurance to cover all
your assets. Car insurance (required by law) and homeowner insurance are musts. Have insurance to cover
your health needs as those medical expenses can drain your wealth. Think of ways to protect your income
with disability insurance. Income is the source of most of your wealth. If you have a family, take steps to draw
up a will to protect your assets for their use.
There are unscrupulous companies and people in the world of finance just as there are these types of people
in other arenas. In this increasing complex world of financial services, its important that you arm yourself
with the knowledge and actions that will protect you and your wealth against fraud and scams. Learn how to
identify and resist persuasive tactics that entice you to do the wrong things.
It all starts with keeping good records. Balance your checkbook. Reconcile all your credit card charges. Use
your financial institutions online facilities to check on your money once a week. This is your early warning
system for any suspicious activity. Keep records so that you can take full advantage of tax deductions and
reimbursements that you are entitled to. Create a detailed list of all your valuables (a video or photographic
record will also help) and do an annual net worth statement.
Adopt strategies to safeguard your financial information and catch fraudulent activities early. Know how to
report these so that you can prevent others from being scammed. Learn how to identify and resist persuasive
tacticsthere are a lot of them. Carefully evaluate everything you buy or invest in. Check out every person
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and every company that you do business with. Dont buy anything you dont understandyoure not missing
anything. Just remember, if it sounds like its too good to be trueit is.
Learning the skills to evaluate each financial decision carefully so you dont make the wrong choices is the
smart thing to do. Dont rely entirely on advice from others because even the most trustworthy sources may
turn out to be not so reliable. Remember, nobody will care as much about your money as you do.
This was a quick tour of your financial life and the habits you need to adopt. Take the financial behavior
evaluation in the activity section. This inventory lists all the habits you should adopt to secure your financial
future. On average, folks engage in about half of them. How did you do in your financial behavior inventory?
Go over the list again and check the ones you plan to adopt this year. Then take action right away to get
smart about your money
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Activities
Activity 0: Financial Behavior Evaluation
Take the survey below to see what financial behaviors you have now and what habits you should develop.
Do you do this now?

Pay all my bills and loan payments on time.
Have a recordkeeping system for my financial affairs.
Balance my checkbook and monitor all my financial transactions monthly.
Track all my expenses.
Use a spending plan or budget.
Have an emergency savings fund.
If yes, how many months of expenses: 1-3 months ____4-6 months ____
Save or invest money from every paycheck. If yes, percent paycheck saved
__%
Save for long-term goals.
If yes, which goals: (Check any that apply.)
Education____ Car ____ Home ____ Home upgrade ____ Vacation _____
Plan and set goals for financial future.
Have money in more than one type of investment. If yes, check any that
apply:
Individual stocks ____ Mutual Funds ____ Bonds ____ Real Estate ____
Treasury bills or CDs ____ International ____ Commodities ____
Calculated net worth in the past two years.
Participate in employers retirement plan. 401(k) ___ 403 (b) __ Other: ____
Have insurance to protect my loved ones.
If yes, check any that apply:
Health ___ Life___ Property___ Auto___ Disability ___ Umbrella _____
Put money into other retirement plan:
Roth IRA ___ Traditional IRA __ SEP or SIMPLE IRA __
Review my credit report annually.
Pay credit card balances in full each month.
Research and compare offers before applying for a credit card or loan.
Do my own taxes.
Read about personal money management to improve how Im doing
Activity 1: Needs and Wants

Short form: Think of the last ten items you bought. List them. Classify them as needs or wants. Share your
list with the class and discuss what you would do differently. Create an action list and give it to the instructor.
Review this action list at the end of the course.
Long form: Bring in your credit card statement for a month. Classify each expense as a need or want. What
percent of your purchases were wants? Share this with the class and discuss what you would do differently.
Create an action list and give it to the instructor. Review this action list at the end of the course.
Activity 2: Spending Plan
Estimate your expenses for a month.

Classify them as fixed, variable or discretionary.
Create a monthly spending plan.
How does it compare to the suggested allocation?
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Where can you save?

Try the spending plan for the next month.
Does it work? What would you change?
Activity 3: Financial Goals

List and quantify all your financial goals and give the year you want to achieve them. Classify your goals as
long term, intermediate term and short term.
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The Time Value of Money

The time value of money or compounding is a powerful tool. When you understand how it works, it will
change your financial life. You will understand why its important to build your financial security now versus
waiting until later. You will be able to evaluate financial options just as the professionals do. Also, studies
have shown that folks who understand the time value of money are less susceptible to fraud. It is the basis
for pricing just about every financial product there is out there.
For example, if you save $25 a week for the next 40 years, how much money would you have? If it does not
earn interest, you have $52,000. If it earns a 3% to 8% rate of return you end up with about $100,000 to
$350,000. That is the power of compounding. The answer seems incredible but its quite true.
We are going to cover four versions of the time value of money:
1. Future value of a sum of money now: This allows you to determine how much you will have in the
future if you put aside some money now.
2. Present value of a sum of money in the future: If you have a financial goal in the future, say a down
payment for a house in 10 years, this will tell you how much you have to set aside today.
3. Future value of annual savings: This will let you calculate how much money you will have in the
future if you set aside a certain amount of money every year.
4. Annual savings needed for a sum of money in the future: This will tell you how much you need to
save every year for a goal like buying your first house or retirement.
(1) Future value What my savings will be worth in the future
Used with permission of Leslie Lum

If you put $100 in the bank for 2 years and get 5% per year, you would have $5 in interest the first year and
$5 in interest the second year, right? Not exactly. In the first year you would get $5 in interest. However, in
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the second year you would actually get 5% times $105, or $5.25 in interest. Why the fuss about a quarter?
Because over a long period of time, it becomes a big deal.
Let's say you have $1000 in the bank over 10 years and you spend whatever interest you earn each year,
which would only be $50 a year times 10 years, or $500. But, if you leave the interest in the bank, you earn
$628.90 in interest, or $128.90 more. That's the beauty of compounding.
$1000 (1 0.05)10 $1628.90

Everyone knows that the better rate you invest at, the more money you will make. Investing at 10% is always
going to be better than investing at 8%. The trouble is most investors cant predict with any certainty what
their future returns will be. Everyone knows the longer you keep your money invested, the more you will
have. Keeping money invested for 10 years is always better than 5 years. Its just more time for the
compounding to take effect. Is this something you can control? Absolutely!
So, the important point is to start saving now. Saving now gives compounding more time to work for you. Say
you put $10,000 away for 5 years at 10%. At the end of 5 years, youll have about $16,110. If you put $5,000
(half the amount) away for 40 years at 5% (half the return), youll end up with over $35,000. Saving over a
long period of time can overcome a low return.
Here is a table which shows what will happen to $1000 at various levels of return and various years. To find
the value of $1000 at 10% for 5 years, look down the first column until you get to 10% and across until you
get to 5 years (the first column). You can see that the value is $1611 for $1000.
For any other sum, take the sum divide by $1000 and multiply by the value you find in the table for the
appropriate return and number of years. For example, if you want to find the future value of $5000 in 30
years at a 6% return. First look up the value at 6% and 30 years on the table. This value if $5743 and then
do the following:
$5000
$5743 $28,715
$1000
Future Sum
Personal Savings
Value Now
(Look up Table at __% and __ years)
$1,000
20
Table 1
Future Value per $1000 Investment Now

Return
2%
3%
4%
5%
6%
7%
8%
9%
10%
11%
12%
13%
14%
15%
5
$1,104
$1,159
$1,217
$1,276
$1,338
$1,403
$1,469
$1,539
$1,611
$1,685
$1,762
$1,842
$1,925
$2,011
10
$1,219
$1,344
$1,480
$1,629
$1,791
$1,967
$2,159
$2,367
$2,594
$2,839
$3,106
$3,395
$3,707
$4,046
15
$1,346
$1,558
$1,801
$2,079
$2,397
$2,759
$3,172
$3,642
$4,177
$4,785
$5,474
$6,254
$7,138
$8,137
20
$1,486
$1,806
$2,191
$2,653
$3,207
$3,870
$4,661
$5,604
$6,727
$8,062
$9,646
$11,523
$13,743
$16,367
Number of Years
25
30
$1,641
$1,811
$2,094
$2,427
$2,666
$3,243
$3,386
$4,322
$4,292
$5,743
$5,427
$7,612
$6,848
$10,063
$8,623
$13,268
$10,835
$17,449
$13,585
$22,892
$17,000
$29,960
$21,231
$39,116
$26,462
$50,950
$32,919
$66,212
35
$2,000
$2,814
$3,946
$5,516
$7,686
$10,677
$14,785
$20,414
$28,102
$38,575
$52,800
$72,069
$98,100
$133,176
40
$2,208
$3,262
$4,801
$7,040
$10,286
$14,974
$21,725
$31,409
$45,259
$65,001
$93,051
$132,782
$188,884
$267,864
45
$2,438
$3,782
$5,841
$8,985
$13,765
$21,002
$31,920
$48,327
$72,890
$109,530
$163,988
$244,641
$363,679
$538,769
QUESTION 1:
What if you did the following 10 years ago?
Bought $1000 of soda and candy (thats about $20 a week)
Put $1000 in the bank making 5% interest
What would be todays value?
QUESTION 2:
If you put $2000 into a 529 plan to save for your kids college and got an 8% return each year, what would
you have in 20 years?
QUESTION 3:
If you put $4000 into an IRA this year to save for your retirement and got 9% return each year, what would
you have for your retirement in 30 years?
QUESTION 4:
About 57% of people (especially the younger ones) who leave companies cash out their retirement benefits
which average about $8445. Instead of taking it out, if you left this money in a retirement plan for 40 years at
a return of 8%, calculate what it contributes to your retirement. Look at Table 1 to help you calculate how
much you will have at retirement.
(2) Present Value What I set aside today for a future goal
Now lets do a little math to figure out how much you need to set aside now to achieve your financial goals in
the future. To do this, we take the same equation we used in compounding and algebraically solve for what
we need to set aside today. Lets say you want to pay cash for a car in five years. This used car is going to
cost you $8000. How much would you have to set aside today at 8% return a year?
Personal Savings
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To handle what we need to set aside today for a future sum, we have created a table that allows you to look
up what you need to set aside today for $10,000 in the future. To find out for any other sum, take the sum
and divide by $10,000 and then multiply by the value you find in the table for the return and number of years:
Sum Needed Today
Value in Future
$10,000
Table 2
Value to set aside for $10,000 in the future
Return
3%
4%
5%
6%
7%
8%
9%
10%
11%
12%
13%
14%
15%
Personal Savings
5
$8,626
$8,219
$7,835
$7,473
$7,130
$6,806
$6,499
$6,209
$5,935
$5,674
$5,428
$5,194
$4,972
10
$7,441
$6,756
$6,139
$5,584
$5,083
$4,632
$4,224
$3,855
$3,522
$3,220
$2,946
$2,697
$2,472
15
$6,419
$5,553
$4,810
$4,173
$3,624
$3,152
$2,745
$2,394
$2,090
$1,827
$1,599
$1,401
$1,229
Number of Years
20
25
30
$5,537 $4,776 $4,120
$4,564 $3,751 $3,083
$3,769 $2,953 $2,314
$3,118 $2,330 $1,741
$2,584 $1,842 $1,314
$2,145 $1,460
$994
$1,784 $1,160
$754
$1,486
$923
$573
$1,240
$736
$437
$1,037
$588
$334
$868
$471
$256
$728
$378
$196
$611
$304
$151
35
$3,554
$2,534
$1,813
$1,301
$937
$676
$490
$356
$259
$189
$139
$102
$75
40
$3,066
$2,083
$1,420
$972
$668
$460
$318
$221
$154
$107
$75
$53
$37
45
$2,644
$1,712
$1,113
$727
$476
$313
$207
$137
$91
$61
$41
$27
$19
22
QUESTION 5:
Here are some typical goals. Estimate how much each costs:
Down payment on house
Wedding
Childrens college tuition
Starting your own business
Retirement
QUESTION 6:
Lets say you want to put $40,000 down on your first house 10 years from now. You expect an investment
rate of 7%. Calculate what you would have to set aside today.
QUESTION 7:
Lets say you want to start a business with $50,000 in 15 years. You expect a return rate of 8%. What you
would have to set aside today?
(3) Future value of an annuity Value of saving every year

Setting goals is the fun part of the financial plan. Its nice to think about the nice house youre going to buy or
the retirement you will enjoy. But, there may be a big difference between what you have today ($1000) and
your financial goal for the future ($1 M for retirement). How do you get from here to there?
It becomes apparent pretty quickly that for some goals, its impossible to set aside enough money and
achieve the goal. Most of us dont have $10,000 that we can just tuck away for a future financial goal. What it
takes is a steady plan of saving every week to get there. This means applying the future value of money
formula to a stream of savings over many years.
The following table was compiled as a quick way of doing this calculation. Say you put away $1000 a year for
15 years and you get 5% on your money. At the end of the 15 years, you will have $21,579. That is a lot
more that just putting away $1000 once for 15 years at 5% (see Table 1) which would give you $2079. For
any other annual savings, use the following method of finding what you will have in the future.
Future Sum
Annual Savings
$1,000
Table 3
Future Value of Saving $1000 Every Year
Return
3%
4%
5%
6%
7%
8%
9%
10%
11%
12%
13%
5
$5,309
$5,416
$5,526
$5,637
$5,751
$5,867
$5,985
$6,105
$6,228
$6,353
$6,480
Personal Savings
10
$11,464
$12,006
$12,578
$13,181
$13,816
$14,487
$15,193
$15,937
$16,722
$17,549
$18,420
15
$18,599
$20,024
$21,579
$23,276
$25,129
$27,152
$29,361
$31,772
$34,405
$37,280
$40,417
20
$26,870
$29,778
$33,066
$36,786
$40,995
$45,762
$51,160
$57,275
$64,203
$72,052
$80,947
Number of Years
25
30
$36,459
$47,575
$41,646
$56,085
$47,727
$66,439
$54,865
$79,058
$63,249
$94,461
$73,106 $113,283
$84,701 $136,308
$98,347 $164,494
$114,413 $199,021
$133,334 $241,333
$155,620 $293,199
35
$60,462
$73,652
$90,320
$111,435
$138,237
$172,317
$215,711
$271,024
$341,590
$431,663
$546,681
40
$75,401
$95,026
$120,800
$154,762
$199,635
$259,057
$337,882
$442,593
$581,826
$767,091
$1,013,704
45
$92,720
$121,029
$159,700
$212,744
$285,749
$386,506
$525,859
$718,905
$986,639
$1,358,230
$1,874,165
23
14%
15%
$6,610
$6,742
$19,337
$20,304
$43,842
$47,580
$91,025
$102,444
$181,871
$212,793
$356,787
$434,745
$693,573
$881,170
$1,342,025
$1,779,090
$2,590,565
$3,585,128
Going back to the example presented at the beginning of this section: What if you save $25 (about the cost
of coffee every day) a week? What would that be worth in 20 or 40 years. Well, according to our calculations,
$25 a week can come to $42,986 in 20 years at 5%. If you scrimp and save a bit more and raise your
savings to $50 a week, the amount in 20 years doubles to over $85,971.
Interest Rate
5%
5%
5%
Savings per Week

$25
$50
$75
Number of Years
20
20
20
Future Value
$42,986
$85,971
$128,957
If you have 40 years to retirement, you can accumulate $457,806 at 5% interest per year.
Interest rate
5%
5%
5%
Savings per week

$25
$50
$75
Number of Years
40
40
40
Future Value
$152,602.02
$305,204.03
$457,806.05
(Assumes daily compounding of interest.)
So, the amount of savings is one factor that can increase what you will have in 40 years. How about finding
better ways to invest your money. If you can find an 8% return (which would be a combination of stocks and
bonds over a long period) and you save at $75 a week, you would increase your account to over $1 million
over 40 years.
Interest rate
8%
8%
8%
Savings per week

$25
$50
$75
Number of Years
40
40
40
Future Value
$349,100.78
$698,201.57
$1,047,302.35
(Assumes daily compounding of interest.)
QUESTION 8:
You save $1000 every year at a 10% return. Look at the table and find the amount you will have in 5 years.
QUESTION 9:
You save $300 every year at a 5% return. Calculate the amount you will have in 45 years.
(4) Future value of an annuity Savings needed for future goal

Now lets combine everything to determine what you need to set aside every year to reach a financial goal in
the future. Lets say you need $50,000 to send your kid or grandkid to college in 15 years. You expect an 8%
return. You can put $32,000 away right now but most of us dont have $32,000 waiting to be invested, so
does that mean the kid has no chance of going to college? You can put away $3700 every year for the next
15 years and get to $100,000 just as well. $3700 a year sounds feasible for two people saving. Actually,
saving every year works like a charm. Even the most insurmountable goals (like $1 M for retirement) are
pretty manageable if you save on an annual basis ($2600for 45 years at 8%).
For those of you who are mathematically inclined, here is the formula for figuring out how much you need to
save every year. Just remember, you dont have to know the formula to calculate what you need to save
every year. There are plenty of calculators to do this for you.
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You can also use the table below to approximate what you need to save on an annual basis to reach a
financial goal in the future.
Annual Savings Needed
Value in Future
$100,000
Table 4
Savings per year to get $100,000 in the future
Return
3%
4%
5%
6%
7%
8%
9%
10%
11%
12%
13%
14%
15%
5
$18,835
$18,463
$18,097
$17,740
$17,389
$17,046
$16,709
$16,380
$16,057
$15,741
$15,431
$15,128
$14,832
10
$8,723
$8,329
$7,950
$7,587
$7,238
$6,903
$6,582
$6,275
$5,980
$5,698
$5,429
$5,171
$4,925
15
$5,377
$4,994
$4,634
$4,296
$3,979
$3,683
$3,406
$3,147
$2,907
$2,682
$2,474
$2,281
$2,102
Number of Years
20
25
30
$3,722 $2,743 $2,102
$3,358 $2,401 $1,783
$3,024 $2,095 $1,505
$2,718 $1,823 $1,265
$2,439 $1,581 $1,059
$2,185 $1,368
$883
$1,955 $1,181
$734
$1,746 $1,017
$608
$1,558
$874
$502
$1,388
$750
$414
$1,235
$643
$341
$1,099
$550
$280
$976
$470
$230
35
$1,654
$1,358
$1,107
$897
$723
$580
$464
$369
$293
$232
$183
$144
$113
40
$1,326
$1,052
$828
$646
$501
$386
$296
$226
$172
$130
$99
$75
$56
45
$1,079
$826
$626
$470
$350
$259
$190
$139
$101
$74
$53
$39
$28
QUESTION 10:
You are 25 years old and plan to retire at age 65 with $1 M. Calculate what you have to save every year at 8%
return if you start at age 45.
QUESTION 11:
Calculate what you have to save every year at 8% return if you start at age 35.
QUESTION 12:
Calculate what you have to save every year at 8% return if you start at age 25.
QUESTION 13:
Which is more?
a) At age 25, you save $4000 a year for 20 years. Then let the money sit for the next 20 years until age 65.
b) Staring at age 45, you save $8000 a year for 20 years until age 65.
Personal Savings
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Planning For Uncertainty
Inflation Uncertainty
Planning for the future is tough to do. Its like try to hit a moving target. Think of sending your kids to college
in 15 years. A college education costs about $50,000 now. What will it cost in 15 years? Inflation is a factor in
all financial plans.
For your kids college education, if educational inflation (which is currently higher than general inflation at 7%
a year) is a low 5% a year for the next 15 years, that same college education could end up costing $104,000.
If you planned to have $50,000, youll be short by $54,000 when the bills start rolling in. What can you do to
avoid this? Apply an inflation rate to your financial goals.
Return Uncertainty
The other big uncertainty is how much return youll get on your investments. If you use a return thats higher
than what you actually get, youll end up short. That is, for that same college education, if you save based on
a 10% return but get 8% instead, youll be $10,000 short of your goal.
Personal Savings
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Most financial planners use history as a guide when it comes to trying to figure out what returns will be in the
future. Based on history, your return will vary depending on what asset class you invest in. Of course, as the
figure above shows, even for each of these categories you can get a different return depending on which
decade you look at.
Large stocks (S&P 500)

Bonds
Savings interest (T-bill)
Average Annual Return 1970-2008

11%
9%
6%
Just remember, the lower the return you use (the more conservative you are), the more you will have to
save. But, the more likely youll achieve your goal. If you want to make sure that you achieve your goals, use
a 6% return for your plan. The good news is, if you do get a better return, youll exceed your goal and have
money left over for other things.
Professional financial planners often do a sensitivity analysis on their projections using various levels of
inflation and returns. This way they can determine the probability that you will reach your financial goals with
various levels of savings. The moral of story is still rather simple. Aim for 10% for retirement and 10% for
other needs. If you cant achieve these goals, then save as much as you can. If you dont, youll have to
downsize your goals to meet whatever savings you have. That could mean giving up a house, education for
a child, or a comfortable retirement.
QUESTION 14:
You want to buy a house in 10 years that costs $200,000 today. You think inflation will be 3% over the next
10 years. How much will the house cost?
QUESTION 15:
You want to have a wedding that will cost $10,000 in 5 years. You think that youll invest in bonds at 8%.
Calculate the annual savings needed.
QUESTION 16:
5
Ibbotson SBBI Classic Yearbook 2009

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You want to save $75,000 for your kids college education in 20 years. You think that youll invest in stocks
that make an average of 8%. Calculate the annual savings needed.
Resources
For education, check out the College Board for costs of the college you want to go to:
http://www.collegeboard.com/student/pay/add-it-up/482.html
For retirement, consider the income level for the lifestyle you want to live in at that time and divide by 4%.
For example, if you want to have $50,000 a year in income when you retire, aim to have $50,000/4% = $1.25
million in income producing investments.
For estimations on the cost of a home, pick an area and then look at the local paper or their website. Many
websites such as www.zillow.com and real estate websites can help you determine the approximate cost of a
home you might be interested in.
Advanced exercise:
Depending on when you plan to spend money for you goals, inflation could be a large factor. Determine the
future inflated value of your financial goals using an online savings calculator such as the Future Lump Sum
Savings Calculator in the Lum web book at:
http://facweb.bcc.ctc.edu/llum/Personal%20Investing%20Book/index.htm
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Unit 1: Set Financial Goals

Any long-range plan or goal should have a road map or game planwhich is an outline of the actions
needed to reach a goal. Without goals, its difficult to accomplish anything. Have a plan for you and your
money.
Plan Ahead and Remember
Just as an athlete trains for a sport, it takes discipline, planning, and endurance to develop a
personal money management plan that can go the distance.
Plan ahead and start early to save money in order to achieve your personal goals.
Be disciplinedyoull develop better spending patterns based on the habits and patterns you adopt.
Be realistic about your plan so you can stick with it. This is a marathon, not a sprint.
Assessing Your Interests and Personal Values

Decisions about your future, career, and financial behaviors are all based on your personal view of the world.
Before you can make sound decisions about your future financial goals you should have a clear
understanding of your personal values.
A self-assessment answers the question, Who am I? It includes an assessment of your interests and
values to form a baseline of information about yourself before you begin to develop your financial goals and
action plans. This assessment activity will help you learn basic information about yourself to clarify your
financial goals and personal priorities.
Values are described as the principles which influence the most important aspects of your life. They affect
your actions, attitudes, and behaviors.
Values impact more than broad areas such as relationships, finances, health, educational pursuits, work and
aesthetics. They also influence the people you live with, where you live, and how you spend your free time.
Your choices are a reflection of your values.
This Values Auction activity will help you understand the impact of values on your financial choices by having
you rank what is most important to you and then see how much you are willing to spend to get it.
Values Auction
When setting financial goals we consider our values. A Values Auction will help us learn about our priorities
by:
Planning how much will be spent on items on a list.
Bidding on items using a set amount of money (pretend money).
Imagining the words, Highest bidder wins!
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Auction Bidding Process

You have $100,000 to spend on the items. For the auction you must bid in increments of $100. You cannot
resell an item. Before the auction begins, fill in the left hand columns with the Spending Plan amounts you
plan to bid on the items that interest you. As the auction proceeds, fill in the appropriate amounts for each
item. Of course, the highest bidder wins the item.
When you are the highest bidder for an item, circle the item # and description for each item. Keep track of
how much money you actually spend during the auction and calculate as you go how much you have left to
spend on the remaining items. If you dont get an item, you can reallocate those funds as the auction is
taking place. You will have to think and act quickly!
Review the Values Auction items below to prioritize and assign Spending Plan bid amounts before the
Auction begins. See the Personal Money Management Workbook for the Values Auction and Writing
Assignment sheets.
Activity 4: Values Auction

Fill in the left hand columns of the Values Auction sheet below with the Spending Plan amounts you plan to
bid on the items that interest you.
Values Auction
($100,000 total Spending Plan)
1. Financial ability to provide for children or

2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
My Spending
Plan
My High
Bid
Highest Bid
= Sold
My $ Left
elderly parents.
Freedom to do what you want
Three more good friends
World peace
Great musical talent
Tickets to any entertainment or athletic
event as often as you wish
Your student loan paid off in full
Beauty makeover including lifetime
wardrobe
Being able to retire securely
A satisfying and fulfilling relationship with a
lifetime partner
Lifelong financial security
A large and expensive house
Satisfying and fulfilling career
$50,000 for any charity you choose
Own your home, debt-free
Lifetime college education
Health insurance for life
A contract to play professional sports team
of your choice
Unlimited travel around the world
One hundred meals at the best restaurants
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Activity 5: Values Auction Reflection and Discussion

Answer as many questions as you can on separate paper, and then discuss what you learned.
A. What did you bid on? Why?
B. What did you buy? Why were you able to do so?
C. Did you get everything you planned for at the price you expected to pay?
D. Did anybody pay more than their spending plan? Why?
E. Did anybody get a bargain? Why?
F. On what did the group bid the highest? Why?
G. On what did the group bid the lowest? Why?
H. From this activity, what did you learn about your values?
I. From this activity, what did you learn about your priorities and spending plans?
J. How might this activity affect the setting of your financial goals in the future?
Needs vs. Wants

Can you differentiate between the things you truly need to accomplish your goals and the things you merely
want?
Multiple Choice Questions on Needs, Wants and Goals
Choose the best answer for the following three questions.
QUESTION 1:
What are needs?
A. Things that are nice to have and gratify some desire or urge.
B. Necessities for your everyday living such as food, housing and books for school.
C. Desires and plans to achieve a specific outcome.
D. Something you think about but dont accomplish.
QUESTION 2:
What are wants?
D. Something you think about accomplishing but dont.
QUESTION 3:
What are goals?
D. Something you think about but dont accomplish.
Your Needs include items that are necessary for survival, such as food, clothing, housing and medical care.
Your Wants are all the things you think you need, but can do without.
Identifying your needs and wants will help you plan for the future. The pressure to obtain present wants is
often greater than the willingness to provide for future needs. If you spend your money to satisfy wants
before your needs are met, you will probably experience financial difficulties.
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Activity 6: Needs and Wants

On a sheet of paper, identify and write down 10 of your recent purchases.
Put an N next to the purchases you felt were essential and important to you.
Put a W next to the purchases that were not essential, but things you wanted to have.
Compare the number of Ns and Ws.
Did you spend more money on needs or on wants?
How many of your needs might be considered wants?
How much of your spending was a function of retail therapy (spending money because it makes you
feel good)?
What did you learn about your needs and wants from this activity?
Set Goals
According to The Facts about Saving and Investing (1999) put out by the SEC, two out of three of all US
families fail to reach one major financial goal. Its important that you write down your financial goals and work
on them.
The first important step in your strategy to become financially secure is to have goals. When we dont have
goals we drift and at the end of our work lives, we wonder why we didnt do what we wanted. When we have
goals, we achieve them.
Use the SMART approach to set realistic goals

Identify financial or saving goals that excite you, such as saving to buy a car; staying home with the kids;
leaving an awful job; paying off your mortgage; starting your own business; traveling with your family or
friends, helping others, etc. The following advice will help you write a SMART goal.
Specific. Smart goals are specific enough to suggest action.

Save money for a used car.
Measurable. Goals need to be measurable when youve reached your goal.

This used car will cost $8000 so I need to save $1,000 for a down payment.
Attainable. Goals need to be reasonable.

$8000 for a used car (versus $20,000 for a new car) is reasonable for my circumstances.
Realistic. The goals need to make sense.

I make $30,000 a year so I should buy a used car makes sense and saving $84 a month for $1000
is realistic with my income.
Time-related. Set a definite target date.

I can save $84 per month and reach $1000 within 12 months.
Lay out your lifetime financial goals. Thats rightfor your whole life. This is tough because we tend to have
short-term horizons. However, you need to think about all your goals now because some of them will take a
long time to achieve.
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Education
Education is a big ticket item with students paying about $10,000 a year in tuition plus $10,000 in living
expenses to go to Washington states public four-year universities. Community colleges cost about
$5,500/year on average in the US. College seems to be a necessity in this new global age where higher skill
sets are necessary. With this large cost, often grandparents must chip in along with parents to ensure that
the kids in the family have a chance to get a college education. This can cost you $25,000 to $100,000 per
child for four years of college.
First House
The first major financial goal for young adults starting out is saving for a house. If youre living in a typical
Washington state city, housing costs start at $200,000 or more, with a $40,000 (or more) down payment.
Keep in mind that these prices vary greatly depending on where you live.
Retirement
How much will you need when you retire? The experts dont always agree on the amount you need because
theres so much uncertainty involved in your longevity and the amount of Social Security you may receive,
not to mention inflation rates and rates of return. Yet you should have some retirement goal even if you are
in your twentys. All experts agree that the earlier you start saving, the more you can depend on
compounding to help you reach what you need.
Most of you are going to live longer than the current life expectancy (about 78 years) because of
developments that are prolonging life. This means that you will have to ensure that you have enough money
6
for a longer period of time. Yet 31% of the workforce has no savings set aside for retirement .
When we retire, many of us will get monthly benefits from the federal governments Social Security program,
but if you think this will take care of all your bills, think again. The monthly Social Security benefit amount
varies based on several factors, but in 2010, the average was $1,074/month. You also have to pay taxes on
the benefits. Would this be enough for you to live on? Yet for those receiving Social Security, 20% of
married couples and about 41% of single persons rely on the monthly benefits for 90% or more of their
7
income.
Social Security Online, Press Office Fact Sheet 16 Dec 2010.

<http://www.ssa.gov/pressoffice/basicfact.htm>
7
Social Security Online, Press Office Fact Sheet 16 Dec 2010.
<http://www.ssa.gov/pressoffice/basicfact.htm>
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There are also worries Social Security may not be able to keep up with the financial demands on it, so
benefit amounts are likely to change. Changes might be to increase the age workers can receive benefits or
to reduce benefits.
Do you think your expenses will go down when you retire? Many people keep their homes (and all the
expenses that come with them) when they retire. In addition, when you get older, some expenses get bigger.
Your medical costs can increase as your health declines.
Medicare is a federal health insurance program which you may qualify for when you are 65 years old.
However, it does not cover all medical costs. For example, you must pay extra for doctor visits and if you
need long-term care such as a nursing home, you have to pay the bill yourself. Changes to the Medicare
program are also expected over the coming years.
Most people are now resigned to the fact that employers will no longer take care of you when you retire.
Most people dont even work long enough at any company to even qualify for the traditional pension plans.
Employers are slowly phasing out traditional pension plans and phasing in retirement savings plans that
require you to save and invest for yourself. Employers believe that these types of plans match what workers
do. Most workers dont stay the 5 years necessary to get any benefits, let alone the 30 years it takes to get
adequate benefits. When these workers leave, they can take their retirement accounts with them.
If you have a retirement account with an employer and can take it with you when you leave the company,
experts advise you not to cash it out and spend it. The best thing to do is to roll it over into a qualified IRA or
other retirement plan so you can take advantage of compounding and so it will be there when you need it at
retirement. Unfortunately, a recent study showed that about half of workers cash out their retirement
8
accounts when they leave their companies .
Other Goals
Maybe you have other goals, like starting your own business (Jeff Bezos used $60,000 of his own money to
start Amazon.com). Lay your goals out and put a price on them. According to the 2007 Consumer Finance
Survey, here are the top reasons people save:
Education
For the family
Buying own home
Purchases
Retirement
Liquidity
Investment
8.4
5.5
4.2
10.0
33.9
32.0
1.3
Once you've got your goals list, check it every year. Your needs may change. Tax time is a good time since
youre looking at your finances anyway. Your tax return will tell you how much you earned and you should
figure out how much you spent. Did you save enough for the year? Check out your goals. Do you have
additional goals now? (A life event marriage, having children-- tends to change your financial goals.)
In addition to using the SMART approach you should:
Keep away from New Years-type resolutions. Set personal goals according to your internal
timetable. Avoid general goals such as save money or invest better. Redefine them or toss them.
Be specific. The more specific you are, the greater the possibility youll succeed.
Break goals into small segments. Try breaking your goals into smaller terms, such as Save $5 a
day rather than Save more money.
Develop an action plan. What do I need to do to achieve this goal? If the goal is to Save $5 a day,
the action is to give up a purchased soda or snack in order to save the $5.
8
Hewitt, Hewitt Study Shows Nearly Half of U.S. Employees Cash Out Their 401(k) Accounts When Leaving
Their Jobs. Oct 28, 2009. 16 Dec 2010 <http://www.hewittassociates.com/Intl/NA/enUS/AboutHewitt/Newsroom/PressReleaseDetail.aspx?cid=7498>
Personal Savings
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Focus on a few, key goals to realistically achieve success. Dont include too many.
Be flexible Your life circumstances will change. You may marry, have children or become ill. You
need to alter your plans if necessary.
QUESTION 4:
If you have a retirement savings plan with a company you are leaving, what should you do with that money?
What should you not do?
QUESTION 5:
T/F If you are 65 and qualified for Medicare, you do not have to worry about health related expenses
because Medicare will cover it all.
QUESTION 6:
Your life expectancy when you reach age 65 is _____.
A. 13 years longer
B. 18 years longer
C. 23 years longer
Activity 7: Check Out Your House Value (or Other Houses)

Check out www.zillow.com which shows the price of a house in a neighborhood that you to live in or want to
live in. Understand these are broad estimates of prices. How much will you have to pay for the house?
Activity 8: Estimate How Much You Need to Retire

One method for estimating how much money you need at retirement is to estimate how much in living
expenses/year you will need at that time. Most people will take out 4% of their retirement fund for annual
living expenses. Decide what level of lifestyle you want when you retire (e.g. $30,000/year, $60,000/year,
etc.) and divide by 4%. For example, $50,000/4%=$1.25 million. Set realistic goals using the SMART
approach.
Activity 9: Identify What You Want to Achieve Financially This Year?

Write your responses to these questions on separate paper.
A. Over the next year, what ONE occurrence would have to happen for you to feel youve made significant
financial progress? _______________________________________________________________
B. Write this occurrence as a goal. _____________________________________________________
C. Describe why it is important to you.___________________________________________________
D. Describe how you will feel when you have accomplished this goal.___________________________
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Identify and Prioritize Personal Financial Goals

Complete the Personal Financial Goals Worksheet
with at least one goal in each category to help you focus
on your most important goals. Estimate the cost and date
you want to achieve each goal. Then fill in more goals at
home as part of this weeks assignment.
Personal Financial Goals Worksheet

Name(s): _________________________
Date: _________________________
Non-monetary Goals
Priority
Short-Term: such as paying off credit card debt,

saving for a vacation.
Long-Term: such as saving for a home down
payment, college education, retirement.
Brief Description
Actions to Be Taken
Target Date
for Completion
Example: Lose weight 10 pounds
Eat less and exercise more
Six months
Short-Term Money Goals (3-12 months) _____________

Priority
Review your financial goals.

Narrow your goals. You probably wont be able to
accomplish every financial goal, so decide which
are most important to you.
Be ready for conflicting goals. Determine which of
the conflicting goals will benefit more people than
the other.
If you have more than one goal in any goal section,
prioritize these goals by writing 1, 2, 3, etc. with 1 as
the most important.
Goals for: saving, spending and credit

Year:__________ Months _________
Brief Description
Actions to Be
Taken
Example: save for emergency-health,

car, etc; college tuition, books; a
regular savings/investment program
Set up automatic
monthly transfer
from checking
Target
Cost
Date for
Estimate
Completion
Savings
Needed Per
Month
3 months
$400
$1,200
You may not be able to do everything immediately, but

you do need to get started! Take it one step at a time. Do
not procrastinate.
See the worksheet on the next page to list your

information
Priority
Long-Term Money Goals (One year or more)_________

Brief Description
Actions to Be
Taken
Target
Date for
Completion
Example: Save for a wedding, a home Increase contribution Four years . .

by age 30-- down payment, a baby, to savings program
for retirement, other. . .
by 10% per year
Cost
Estimate
Savings
Needed Per
Month
$15,000
$313
www.bellevuecollege.edu/financialeducation
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Activity 10: Personal Financial Goals Worksheet

Name(s): _________________________
Date: _______________
Year:_______
Goals for: saving, spending and credit

Months ___________
Priority
Non-monetary Goals
Brief Description
Actions to Be Taken
Target Date
for Completion
Example: Lose weight
Eat less and exercise more
Six months
Priority
Short-Term Money Goals (3-12 months)

Brief Description
Actions to Be
Taken
Target Date
for
Completion
Cost
Estimate
Savings
Needed for
Month
Example: save for emergency health,

car, college tuition, books, a regular
savings/investment program
Set up automatic
monthly transfer
from checking
3 months
$1,200
$400
Long-Term Money Goals (One year or more)

Priority
Brief Description
Example: Save for a wedding, a

home by age 30--down
payment, a baby, for retirement,
other. . .
Personal Savings
Actions to Be
Taken
Target
Date for
Completion
Cost
Estimate
Savings
Needed
for
Month
Increase contribution
to savings program by
10% per year
Four
years . . . .
$15,000
$313
37
Resources:
Following is a list of great websites with more information on financial goal setting:
Bankrate.com has news, advice, and rate comparisons on mortgages, home equity loans, auto loans, CDs
and investments, credit cards, college finance, insurance, and taxes: www.bankrate.com
Building Wealth: A Beginners Guide to Securing Your Financial Future,
http://dallasfed.org/ca/wealth/index.cfm
CNN Moneys Money 101 program has 23 lessons on money management, other financial education
information and calculators: http://money.cnn.com/magazines/moneymag/money101/index.html
Federal Reserve Bank has consumer information about money management, budgeting, saving, investing
and credit: http://www.federalreserve.gov/consumers.htm
For homes, look at http://www.zillow.com/homes/WA/
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Unit 2: Net Worth Statement Your Personal

Financial Picture
Your net worth statement is a picture of your wealth at a certain point in time. Over time, net worth
statements provide a good scorecard for you to gauge whether you are reaching your long-term financial
goals. As a family, you should work to increase your net worth every year.
Your net worth is what you own (assets) minus what you owe (liabilities).
Net Worth = Assets Liabilities
Assets are everything of value that you own. For some assets like cash, its fairly easy to look at a bank
statement and find the value. For other assets, you have to establish their fair market valuewhich is what a
buyer would be willing to pay for the item. Often this is not what you paid for it. For example, look at your
brokerage statement to find the latest market value for your investments. Check out your 401K statements to
see what you have in your retirement accounts.
For other assets such as your car, check out the latest blue book value. Estimate the value of your home
furnishings. Unless you purchased antiques, most of these will have depreciated since you purchased them.
Use statements to get these

Cash (cash on hand)
Checking
Savings
Investment accounts
Pension accounts
Tax refund due
Use Fair Market Value:

Autos
House
Condominium
Household furnishings
Computer
Jewelry
Other big ticket items
Liabilities are what you owe. The major liabilities families have are their debts. This includes your mortgage,
car loans, student loans and credit card balances. To figure out your liabilities, you have to look at the
outstanding balance on your loan in the latest statements from your lenders.
Unpaid bills-past due
Home/condominium mortgage loan
Auto loan outstanding
Home equity loan outstanding
Credit card balances

Education loans outstanding
Taxes unpaid
Other personal loans.
If the total of your assets is greater than the total of your liabilities, you have a positive net worth. If you have
more liabilities (debts) than assets you have a negative net worth, which is not a good thing. The more net
worth you have, the more financially secure you will be.
Your net worth is tied to your spending plan. Whatever you dont spend, you can put into savings which
makes your net worth higher. If you invest in assets that grow in value, this makes your net worth higher. If
you borrow money, this lowers net worth. Review your net worth at least once a year, and look to see how
your assets grew and look to see that your liabilities are getting smaller.
A net worth statement is required when applying for a loan. Families with larger net worth tend to get lower
interest rates and other benefits because they are coveted by businesses who want them as customers.
They have more choices in where they can live. They have more cushion to deal with adverse events like
illness.
Lets look at a sample Net Worth statement for two different people.
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Situation #1: Taylor Jones is a college student, who has acquired only a few items of value. Notice that
Taylor has more liabilities than asset value, which means more debt than assets, or a negative Net Worth.
After graduation and getting a full-time job Taylors net worth statement should change dramatically in just a
few years.
Situation #1: Net Worth data for college student, Taylor Jones as of January 1, 2006
Assets
Liabilities
Cash on hand
$ 40
Unpaid utilities(gas, elect)
Checking account
350
Unpaid cell phone(txt mess)
Savings account
850
Unpaid medical bills
Unpaid credit card balance
Auto (Blue book value)
4,200
Personal property* household
3,310
Auto loan
Personal property (jewelry, etc.)
50
College loan
Government education loan
Total Assets
$8,800
Total Liabilities
Net Worth Calculation:
Total Assets
$8,800
--Total Liabilities
-- 9,130
Net Worth
($ 330)
$100
55
75
500
3,900
2,500
2,000
$9,130
*Personal property: at fair market value: clothing, $500; dresser $60; TV, $150; couch and chair, $250, cooking/dining
items, $100; computer equipment, $2,250
Situation #2: Emilio and Maria Rodriquez are a working, married couple with two children. Their net worth
statement shows many more items and is more financially complex after working for several years. They
have a positive net worth.
Situation #2: Net Worth data for a couple with two children, Emilio and Maria Rodriquez-Jan. 1, 2006
Assets:
Cash on hand
Savings accounts
Emilios checking account
Marias checking account
Tax refund due
$ 300
12,000
500
700
600
Home (market value)

Personal property
Autos (2)
300,000
20,000
26,500
Mutual funds
Life insurance cash value
IRA
Total Assets
Liabilities:
Unpaid current bills
Unpaid medical bills
Unpaid credit card balance
$ 1,500
800
3,200
College education loan

Auto loans
Mortgage loan
4,500
20,000
185,000
Total Liabilities
$215,000
10,000
5,400
7,000
$383,000
:
Net Worth Calculation
Total Assets
--Total Liabilities
Net Worth
--________
$
QUESTION 1:
Calculate Emilio and Marias Net Worth on the Net Worth Worksheet above $__________.
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Take a look at the chart below. As you probably suspected, people generally are worth more as they get
older, and then their level of wealth goes down during the later years. Here is some more food for thought.
The chart below also shows the mean net worth of US households without their homes.
Look at the category for ages 65 and over. In general, their home represents about 45% of their wealth.
While it is true that appreciation in housing prices along with paying down mortgages can increase net worth,
it is not wise to rely on your home for most of your wealth in retirement. Many folks, especially older ones,
find it emotionally difficult to give up or use their homes to finance their other needs. Would you be willing to
sell your home to take out money to live on later? Try to increase your wealth outside of your home, too.
Mean Net Worth
Household Wealth (2004)

500,000
450,000
400,000
350,000
300,000
With Home
Without Home
250,000
200,000
150,000
100,000
50,000
0
Less than
35 years
35 to 44
years
45 to 54
years
55 to 64
years
65 years
and over
Age of Householder
Once you know your net worth, evaluate where you are. Based on the graph below, about 35% of us have a
net worth of less than $25,000. Do you have enough wealth to finance your short and long-term dreams? If
your liabilities are more than your assets, resolve to control spending and increase investments. Seek credit
counseling to see if you can work out a plan to reduce your debt. Keeping more of what you make is the key
to increasing your net worth. Evaluate your net worth every year to see if it is growing adequately.
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How do you compare?

Breakdown of households by net worth
$500,000 or over
13%
Zero or Negative
16%
$250,000 to
$499,999
13%
$1 to $4,999
9%
$5,000 to $9,999
4%
$100,000 to
$249,999
20%
US Census: Wealth
and Asset Ownership
2004
$50,000 to
$99,999
12%
$25,000 to
$49,999
7%
$10,000 to
$24,999
6%
The key with managing your net worth is to increase your wealth through savings early and investing
early and later in your career. It is also important to reduce debt. Remember, interest on debt can only
be paid if you are working. As you move towards retirement age, debt should be whittled down to nothing.
This takes a lifetime of planning, saving and investing.
Some planners use financial ratios to determine how much you should have in savings and debt. Here is one
financial planners recommendation for savings and debt. At age 30 this financial planner recommends that
you have 0.1 or 10% of your income in your savings. So if you are a couple making $60,000 a year, you
should have $6,000 in your saving accounts. Your debt to income will be at the highest point when you are
starting your career. His recommendation is that you take on maximum debt of 1.7 times. For the same
couple making $60,000, this would be $102,000. This may have to adjusted in some metropolitan areas such
as Seattle where mortgages will be a higher percent of income. As you reach the end of your working life at
age 65 and lets assume you now make $50,000, you should have 15 times or $750,000 in your nest egg
and no debt.
Age
30
35
40
45
50
55
60
65
Savings to
Income
0.1
0.9
1.7
3
4.5
6.5
8.8
12
Debt to
Income
1.7
1.5
1.25
1
0.75
0.5
0.3
0
Savings Rate
12%
12%
12%
12%
12%
12%
12%
12%
Source: Journal of Financial Planning, January 2006

Personal Financial Ratios: An Elegant Road Map to Financial Health and Retirement by
Charles J. Farrell, J.D., LL.M.
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Activity 11: Calculate Your Net Worth

To calculate your net worth collect copies of your bank/credit union statements, investment and life insurance
statements, and information on the current value of your assets and debts.
Fill in your information on the Net Worth Worksheet. Here is a sample worksheet.
NET WORTH WORKSHEET

Name:
Assets (What You Own)
Cash:
Cash on hand
Checking accounts
Savings accounts
Money market accounts
Other
Total Cash
Date:
$
Investments: (Market Value)

Savings bonds
Certificates of deposit
Stocks
Bonds
Mutual funds
Cash value of life insurance
Retirement plans
Pension/profit-sharing
IRAs
NET WORTH
Personal Savings
Credit/Charge Card Balances

Credit cards
Department Store Cards
Other
Other
Total Credit Card Debt
Loans:
Home mortgage balance
Second mortgage or
Home Equity loan balance
Other Real Estate loan balances
Bank/Finance Company loan
Bank /Finance Company loan
Automobile(s) loans
Education loans
Boat/ RV loans
Life insurance loans
Retirement fund loans
Personal loans from family or
friends
Other loans
Other
Other
Total Loans
401(K), 403 (B) plans

Annuities
Other investments
Total Investments
Personal Property: (Present Value)
Home ((Market Value)
Automobiles (Blue Book value)
Other property
Furnishings and other Personal
property
Boat, RVs (Blue Book value)
Collections
Furs, jewelry
Other
Total Personal Property
TOTAL ASSETS
= Total Cash + Total Investments
+ Total Personal Property
Net Worth Calculation:
Total Assets
- Total Liabilities
Liabilities: (What You Owe)

Current Debt:
Unpaid Household bills
Unpaid Medical bills
Insurance premiums
Unpaid utility bills
Unpaid taxes
Unpaid legal
Other unpaid bills.
Total Current Debt
TOTAL LIABILITIES
$
= Total Current Debt

+ Total Credit Card Debt + Total Loans
_________
$
43
Resources:
Following is a list of great websites with more information:
Bankrate.com has news, advice, and rate comparisons on mortgages, home equity loans, auto loans, CDs
and investments, credit cards, college finance, insurance, and taxes: www.bankrate.com
http://www.dallasfed.org/ca/wealth/index.cfm
Federal Reserve Bank has consumer information about money management, budgeting, saving, investing
and credit: http://www.federalreserve.gov/consumers.htm
Lum, Leslie, Personal Investing, http://facweb.bcc.ctc.edu/llum/Personal%20Investing%20Book/index.htm
National Endowment of Financial Education has information about financial planning, credit and debt, saving,
investing, retirement plus Life Events and Financial Decisions: www.smartaboutmoney.org
Young Money has calculators for savings, retirement, personal finance, loan and mortgage, credit card and
debt management, and auto buying: http://www.youngmoney.com/calculators
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Unit 3: Financial Institutions - Commercial Banks,

Savings Banks and Credit Unions
What is a bank?
Banks are businesses that sell financial services such as savings accounts, checking accounts, certificates
of deposit, individual retirement accounts (IRA), auto loans, home/condominium mortgage loans, credit card
accounts and business (commercial) loans. Banks make profits by collecting money (deposits) from people
who want to save and lending (loan) to people or businesses that need to borrow.
If people and businesses did not put money into banks, the banks would have very little money to lend. Since
the money belongs to you and other bank account depositors, banks have a responsibility not to take large
risks when they make loans. Banks also make money by charging fees and providing other services.
What is a commercial bank?

A commercial bank offers a broad range of deposit accounts, including checking, savings, and certificate of
deposits, and makes loans to individuals and businesses. Originally commercial banks focused on meeting
the needs of businesses (commercial) customers. Now the difference between commercial and savings
banks have been blurred.
What is a savings bank?

In the past, savings banks primarily accepted consumer savings deposits, and residential mortgage loans.
Now they offer checking type deposits, savings accounts and certificates of deposit plus they make a wider
range of loanscar loans, boat loans, home equity loans, and commercial loans.
What is a credit union?

A credit union is a non-profit, cooperative financial institution that is owned and operated entirely by its
members. Credit unions are exempt from taxes so they can offer better rates to their membership. Credit
unions provide financial services for their members, including checking-type accounts, savings and lending.
To join a credit union, a person must be eligible for membership in a participating organization (business,
college alumni association, labor union) or meet location requirements. In Washington State there are some
credit unions that only require living in state of Washington to open an account. When a person deposits
money in a credit union, he/she becomes a member of the credit union because the deposit is considered
partial ownership in the credit union.
Credit unions designated as low-income serve primarily low-income members in distressed and financially
underserved areas. Recently the National Credit Union Association has emphasized the benefits low-income
designated credit unions provide to people who are often underserved by traditional banking institutions.
What services do banks and credit unions offer?

Banks and credit unions provide many of the following services:
Checking accounts are used to take care of daily needs, such as depositing pay checks and paying
bills. They offer safety, convenience and financial transaction recordkeeping. Banks or credit unions
have several options for these types of accounts. They can include monthly fees, minimum balance
requirements or interest paid on the account.
Money market deposit accounts are similar to checking accounts that earn interest, however they
usually pay a higher rate of interest and require a higher minimum balance (usually $2,500 or more).
These accounts also limit the number of checks you can write per month.
Savings accounts provide a safe place to keep your money and earn interest at the same time. You
dont need a lot of money to open a savings account and you can withdraw your money easily. Often
savings accounts can be tied to checking accounts where you can transfer money between the two.
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Certificates of deposit are savings deposits that require keeping a set amount of money in the bank or
credit union for a fixed period of time (such as $1,000 for one year). Generally certificates of deposit
earn a higher rate of interest than savings accounts.
Individual retirement accounts (IRAs) are savings accounts that allow you to save for retirement in a
tax-advantaged way. Your pre-tax interest earnings grow tax-deferred until they are withdrawn. You
dont have to pay the tax on the interest earned until you withdraw money from the IRA (usually 59
or older). There is a significant penalty if you withdraw your money before you are 59 or older.
Roth individual retirement accounts are also retirement savings. Contributions are not tax deductible
but the interest earned is free from federal taxes when withdrawn during retirement.
Wire transfers and cashiers checks are used to move money within the United States or overseas
Debit cards or ATM cards can be used to take money out of your account from the bank or credit
union, out of an ATM machine or to make a store purchase.
Safety deposit boxes are a good place to store important legal documents.
Notary services to verify your signature for financial transactions
Loans (student, mortgage, car, boat, RV, computer, home equity loans or lines of credit)
Business loans for business owners.
Financial advisory services such as a personal banker to advise you on where to put your money.
Brokerage services to buy and sell stocks, bonds, funds and other investments.
Insurance services to purchase coverage for your home or car.
What is online banking?

Online banking is a service offered by several commercial banks, savings banks and credit unions that allow
you to complete banking transactions over the Internet, using a personal computer, phone or personal digital
assistant (PDA). Online banking helps you administer checking and savings accounts day or night, including
weekends. You can receive and pay bills online, see if checks or deposits have cleared, transfer funds
between accounts, apply for loans and download financial information directly into personal finance software.
Online only banks do not have branches to visit and no tellers. You get information and do business
electronically through their website, via phone or via ATMs.
It is convenient to comparison shop banking services on the Internet. You can check out rates for savings
accounts, certificates of deposit, credit card rates and terms, loans and other financial services. Be sure to
go to the FDIC website and make sure any bank you want to use is FDIC insured.
Why should you use a financial institution like a bank or credit

union?
9
Do you already have a savings or checking account? Many people do not. In 2009 the FDIC did a study
which showed about 7.7% of US households were unbanked. In addition, about 18% of US households
were underbanked. That is, they had a checking or savings account but also relied on alternative financial
services such as nonbank money orders, nonbank check-cashing services, payday loans, rent-to-own
agreements, pawn shops or refund anticipation loans. These alternative financial services have very high
costs, so use the services of banks and credit unions to save money.
The FDIC and NCUA

United States banks and credit unions are closely regulated and supervised to ensure that your money is
safe. The deposits in all legally operated US banks are insured by the Federal Deposit Insurance
Corporation (FDIC). The National Credit Union Administration (NCUA) does the same thing for credit unions.
In the unlikely event that your financial institution fails, your deposits and interest are covered up to the legal
limit.
9
FDIC, FDIC Survey on Banks Efforts to Serve the Unbanked and Underbanked. Feb 2009. 20 Dec 2010.
<http://www.fdic.gov/news/news/press/2009/pr09216.html>
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Not all kinds of accounts are protected by FDIC and NCUA insurance. Deposit type accounts that are
covered include checking, savings, trust, money market and IRA retirement accounts. Deposit accounts are
insured in aggregate up to $250,000 per depositor per institution. However, your financial institution may
also provide investment products mutual funds, annuities, life insurance policies, stocks and bonds. These
are not covered.
You can find a list of FDIC and NCUA insured financial institutions at their respective websites:
http://www.fdic.gov or http://www.ncua.gov. Online insured banks will also be included. If you use a bank
that is not licensed in the United States, your deposits may not be insured. Also, you may not benefit from
other important consumer protections available in the US.
What to consider in choosing a bank or credit union

Shop around to see which banks offer the best services and the lowest fees. Some banks charge a monthly
fee if your account balance falls below a minimum balance level and that fee may be higher than the interest
your account earns. Other banks may charge fees for many types of financial transactions. This may not be
as desirable to you.
Is the bank or credit union in a convenient location?

Are its business hours convenient for you?
Do the bank employees make you feel comfortable and communicate well with you?
Does your bank or credit union pay a competitive rate of interest on interest-bearing accounts?
Do they offer competitive fee structure for the financial services they offer (checking, savings, credit
cards, other financial services, etc.)?
Is your deposit insured by the FDIC (Federal Deposit Insurance Corporation) or the NCUA (National
Credit Union Administration)?
Does the bank or credit union provide courteous and efficient services?
Is the bank or credit union a good corporate institution that invests in your neighborhood?
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Activity 12: Compare Two Financial Institutions

Visit financial institutions or websites to get information on what they offer. Complete this worksheet to help
you compare and evaluate which of two financial institutions, a bank and a credit union, meet your needs:
Financial Institution Comparison Worksheet

Compare one Bank and one Credit Union
Bank
Credit Union
Financial institution name:

Branch close to home or work?
Hours open?
ATMs (cash machines) close to where I live, work
or shop?
Languages employees available who speak my
language?
If a credit union, am I eligible to join?
1. Checking Accounts:
2.
Name of checking account type?

Is checking free?
Minimum balance required? How much?
Is there a monthly fee? How much?
Interest paid on checking accounts? How
much?
ATM/ debit/ check card?
Fees for using at this institution?
Fees for using another institutions cash
machine, ATM?
Overdraft protection available?
Fees for bounced checks (NSF)?
Other fees?
Savings Accounts:
Name of savings account type?

Interest rate paid on savings account?
Minimum balance required? How much?
Interest compounded daily, monthly or
quarterly?
3. Money Market Accounts:
Minimum balance to open? How much?
Interest rate?
4. Certificates of Deposit:
Interest rates and the terms?
Is the institution federally insured?
Who insures your institution?
Are there options for online activities?
Does the institution offer credit cards?
Interest rate?
How are the interest charges calculated-average daily balance, other?
Late fees? How calculated?
Other information:
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Electronic Funds Transfer

Electronic funds transfer is a national payment mechanism that moves money between accounts in a fast,
paperless way. Banks and financial institutions like electronic transfer of funds because it can save them
significant money. A check costs about $3 to process while an electronic transfer costs about $1.50 or half
as much. Here are some examples of electronic funds transfer (EFT) systems in operation today:
Automated Teller Machines (ATMs). Consumers can do their banking without the assistance of a teller.
They can get cash, make deposits, pay bills, or transfer funds from one account to another electronically.
These machines are used with a debit or ATM card (sometimes referred to as check cards) and a code,
which is often called a personal identification number or PIN.
Debit Card Purchase Transactions. Some debit or ATM cards can be used when shopping to allow the
transfer of funds from the consumers account to the
merchants. This could be at a store, online or by phone.
Frequency of use per week
To pay for a purchase, say at a supermarket, the
consumer presents an ATM/debit card instead of a check
or cash. Money is taken out of the consumers account
and put into the merchants account electronically.
Source: The Federal Reserve Board

Check Card Survey 2007
Direct Deposit. This is a method of automatically

depositing to or withdrawing funds from an individuals
account, when you authorize the bank to do so. For
example, people can authorize direct electronic deposit of
wages, social security, or dividend payments to their
accounts. They can authorize payments into retirement
accounts or they can authorize financial institutions to
make regular, ongoing payments of insurance, mortgage,
utility, or other bills.
Pay-by-Phone Systems. Consumers can transfer funds from one account to another from savings to
checking, for exampleor order payment of specific bills by phone or via the internet through online banking.
Online Banking. This lets you handle banking transactions through your personal computer or phone to do
activities like viewing your account balance, requesting transfers between accounts and paying bills
electronically. Some banks will even deposit checks for you online.
Electronic Check Conversion. A typical example of an electronic check conversion happens with a
merchant. You give your paper check to a store clerk who runs it through a machine that immediately
converts the information into electronic data and sends the data to your bank or credit union. Your check
should be handed back to you as voided or marked in a way so the check cant be used again. Another
example is when you mail a check for a purchase or pay on an account. The merchant or company may
convert it from a paper check to an electronic check and then destroy or mark the paper check copy as
converted to electronic check. You may not know which merchants or companies will convert your paper
check to an electronic check, so be sure you have funds in your checking account to cover the check on the
same day that you send your payment.
Electronic check conversion has special protections for errors and unauthorized transfers under the Federal
Electronic Fund Transfer Act.
Substitute Checks. Substitute checks and electronic check conversion are different. Both are processed
electronically but the processes are different. Under a law called Check 21, your paper check can be
replaced with a paperless copy called substitute checks. Substitute checks should state: This is a legal
copy of your check. You can use it the same way you would use the original check. You can use a
substitute check as proof of payment. Check 21 has special refund procedures if you suffer a loss related to
a substitute check you receive and certain protections against wrong and unauthorized check payments. Be
sure you write legibly, keep timely, accurate records and promptly notify your bank or credit union of errors.
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Substitute checks are be processed electronically. This means that your check will be deducted from your
checking account faster. So if you write a check today, you need to have the funds in your account today to
cover it. If you have insufficient funds in your checking account, your bank or credit union may return it as a
bounced check and charge you a fee. Bounced checks can blemish your credit record.
Other Comments. With electronic transfers, you can get a written receipt, much like a sales receipt you get
with a cash purchase, showing the amount of the transfer, the date it was made, and other information. This
receipt is your record of the transactions. If you bank online, be sure to note the confirmation number of any
payments you make. Not paying a bill on time can cause you to incur late payment and other charges.
Your monthly bank statement will also show electronic transfers to and from your account, including those
made with debit cards, by a preauthorized arrangement, or under a telephone transfer plan or online banking.
The statement will also name the party to whom payment has been made and show any fees for EFT
services (or the total amount charged for account maintenance) and your opening and closing balances.
Check your statements for errors

You should check your bank statements every month. If you find an error, you must report it promptly. Write
or call your financial institution immediately if possible, but no later than 60 days from the date the first
statement was mailed to you that you think shows an error. Give your name and account number and explain
why you believe there is an error, what kind of error, and the dollar amount and date in question. If you call,
you may be asked to send this information in writing within 10 business days.
The financial institution must promptly investigate an error and resolve it within 45 days. For errors involving
new accounts (opened in the last 30 days), purchases with your debit card transactions, and foreign
transactions, the institution may take up to 90 days to investigate the error. However, if the financial
institution takes longer than 10 business days to complete its investigation, generally it must put back into
your account the amount in question while it finishes the investigation, called a recredit. For new accounts,
the financial institution may take up to 20 business days to credit your account for the amount you think is
in error.
The financial institution must notify you of the results of its investigation. If there was an error, the institution
must correct it promptly, for example, by making a recredit final. If it finds no error, the financial institution
must explain in writing why it believes no error occurred and let you know that it has deducted any amount
recredited during the investigation. You may ask for copies of documents relied on in the investigation.
Safety Tips for Using Bank or Credit Union Accounts

1. Write ALL your transactions in your check register--checks, ATM withdrawals, debit card purchases,
deposits and online transactions, or print the online statement.
2. Write the type of transaction, date, check number (for checks only), dollar amount and subtract it from
your checking account balance in your checkbook register.
3. Review your online checking account weekly to ensure there has not been fraudulent activity on your
account.
4. Beware of pharming attempts. Pharming is a scamming practice in which malicious code is installed on
a personal computer or server, misdirecting users to fraudulent Web sites without their knowledge or
consent. Do not put your banks website in your internet Favorites. ALWAYS type the name in to prevent
a pharming fraud.
http://searchsecurity.techtarget.com/sDefinition/0,290660,sid14_gci1097059,00.html)
5. Consider ordering duplicate checks, so you can staple the extra check to a bill that has been paid.
6. When you withdraw cash, write the purpose for the cash withdrawal on the ATM receipt so you can
enter it in your Spending Plan records.
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50
7. Balance your bank statement monthly. This is your best defense against fraud and identity theft.
Immediately report any errors or lost or stolen checks to your bank or credit union!
8. Keep your bank statements, ATM receipts, deposit receipts and check registers with your other financial
records in a secured place in your home, so visitors do not have easy access to them. Keep good
records.
Tips to Avoid Banking Fees

1. Ask the bank or credit union for a copy of its fee schedule and review all charges. They might surprise
you.
2. Check out free checking accounts. Some institutions may require a certain minimum balance for free
checking. You can compare at fees at Bank Rate. http://www.bankrate.com/
3. The non-sufficient funds (NSF) fee is one of the most expensive fees for overdrawing your checking
account (writing checks for more than you have in your checking account). Some banks and credit
unions will allow you to have an overdraft without charging you a NSF fee.
4. Keeping track of your checking account balance will keep you from overdrawing and incurring NSF fees.
5. If you incur an overdraft charge ask if your bank or credit union will waive it by not deducting the
overdraft charge from your account.
6. Avoid ATM fees for using ATMs that are not-your-bank or credit unions ATMs:
7. Be aware of fees: counter checks, account closed early, early withdrawal of CDs, use of tellers and
inactive accounts.
8. You can comparison shop bank fees for safe deposit boxes, cashiers checks, electronic funds transfers
(EFT), check printing, and money orders.
9. Keeping larger balances in your account will give you more benefits, such as free checks.
10. For online bill payment, be sure to check that your payment went through on your online and/or paper
statement. Be sure to write the confirmation number in your records.
Why a bank or credit union may not open an account for you.
Many banks choose not to open a checking or savings account if a persons name is on the ChexSystem or
SCAN (Shared Check Authorization Network) lists, The ChexSystem list has over 7 million consumers on it.
This list identifies if a person has had a checking or savings account closed by the bank or credit union due
to overdrafts (or insufficient funds) or fraudulent activity within the past five years. If you are on this list, you
will remain in their database for 5 years. You have the right to correct any inaccurate information your Chex
report contains, but accurate negative info is allowed to remain for 5 years. You have the right to examine
your Chex report and dispute any inaccuracies. Contact ChexSystems at 1-877-382-7226, or request your
report at https://www.consumerdebit.com/consumerinfo/us/en/chexsystems/report/index.htm
Most banks will terminate (close) accounts of customers they refer to ChexSystems. The ChexSystem
database will indicate if a customer subsequently repaid the outstanding debt (amount owing for the check
and fees) if the accounts were closed due to insufficient funds.
Activity 13 Solutions for the unbanked.

Invite an asset-building coalition or low-income credit union speaker to class to talk about strategies for
getting the bank services for people who might have trouble getting bank accounts.
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Resources:
Checking and Savings, Bankrate.com,
http://www.bankrate.com/gookeyword/news/news_checking_home.asp
ChexSystems, https://www.consumerdebit.com/consumerinfo/us/en/chexsystems/report/index.htm
Bank Insurance Limits, Federal Deposit Insurance Corporation, http://www.fdic.gov
Credit Union Insurance Limits, National Credit Union Administration, http://www.ncua.gov
Check Survey 2007, Federal Reserve Bank
Pharming, SearchSecurity.com,
http://searchsecurity.techtarget.com/sDefinition/0,290660,sid14_gci1097059,00.html
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Unit 4: Checking Accounts

Why do we need checking accounts?
Checking accounts at banks and credit unions are safe, convenient places to hold money you may need to
withdraw immediately. Once you deposit money in a checking account, you can make a cash withdrawal by
going to the bank/credit union or using an ATM machine. You can use a debit card connected with the
checking account to pay for items. You can pay bills by writing paper checks or transferring money online.
There are many advantages to using a checking account over using cash. It is safer than carrying cash.
Writing a check costs less than using a money order. Your check register and monthly statements help you
keep track of expenses.
Checking accounts also have negatives. If you write a check and dont have the funds to cover for it, you can
be charged for nonsufficient funds. Some checking accounts are free, some are not. Choosing the right types
of account can save you a bundle in fees. You may have to obtain overdraft protection by linking a credit
card or line of credit to your checking account. Debit cards have other risks.
Evaluate your checking account needs by asking the following questions:
What is the minimum balance amount to avoid fees?
Can the minimum balance be in a linked saving account?
How many checks can be written every month?
Are checks free?
What is the NSF fee for a bounced check?
Can you tie a line of credit to the checking account for overdraft protection? What is the cost?
What is the interest rate? Does it change with different balances?
Are account statements mailed every month? If not, how often?
Can you access the account online?
Can you pay bills, transfer funds and pay loans online?
Can you use direct deposit for pay checks, social security, etc.?
Can you automatically allocate money to the savings account?
ATM Cards, Debit (Check) Cards

Banks and credit unions issue ATM cards which allow you to take money out of your checking account from
cash machine (Automated Teller Machine) without writing a check. ATMs provide convenience with a price
tag. You will pay a fee for using an ATM that does not belong to your bank or credit union. Your bank and the
bank that owns the ATM may each charge you an ATM fee, $1-4, for using it.
Debit (check) cards allow you to make purchases and pay for bills from your checking account without
writing a check.
You can get an ATM card and a debit card separately, but nowadays banks issue debit cards which also
work at ATM machines. In this case one card serves both purposes.
Unlike a credit card, where you pay for your purchases once a month when you receive a statement,
purchases paid for with a debit cards are deducted usually the same day as the purchase from your checking
account. This deduction from your checking account can trigger Non-Sufficient Funds or overdraft fees if the
money is not in the account when the deduction goes through. This relatively fast deduction of funds may
also make the return of merchandise more difficult.
Evaluating Debit (Check) Cards

There may be fees for using your debit card. For example, some banks or credit unions charge a fee if you
enter a PIN (Personal Identification Number) to conduct a transaction instead of signing your name. You may
trigger a fee if you overdraw your account using your debit card, just as you would if you "bounced" a check.
Or, there could be a charge if you use your debit card as an ATM card at a machine that is not operated by
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your financial institution. As with other bank products, your financial institution must provide disclosures
explaining the possible fees associated with a debit card. Be sure to read the disclosures to avoid an
unexpected fee.
As with similar financial products, rewards-linked debit cards are designed to encourage people to use a
certain bank and its services. Before opening a new account or changing financial institutions just to get a
different perk, study the fine print. Start by reading the disclosures that explain the account terms and fees to
understand the potential benefits as well as the costs.
The payments are electronic and are deducted from accounts more quickly than when using a paper check.
Often, a debit card purchase is posted within 24 hours instead of days, as may be the case with a paper
check. That means there would be little time to make a deposit to cover a purchase, if necessary. In addition,
even though a transaction was approved, you may overdraw your account because the bank won't know
what other withdrawals you have made that day until it settles all transactions later that day.
In certain circumstances with debit cards, merchants can take these steps as protection against fraud, errors
or other losses. One common situation involves a hotel putting a hold on a certain amount when you use a
debit card (or credit card) to reserve a room. Another example is when you use your debit card at the gas
pump. Typically, the gas station will create two transactions the first to get approval from your bank or
credit union for an estimated purchase amount (let's say $90) when you swipe your card before pumping gas,
the second for the actual charges when you're done. Until the first ($90) transaction is cancelled by the bank
or credit union, usually within 48 hours, you wouldn't have access to that amount in your account.
Because funds are deducted from your account very quickly, don't expect to have the option to stop payment
or obtain a refund. If the transaction cannot be cancelled, you may be able to work out other arrangements
with the store such as a store credit or a gift card. If you are concerned about that the merchant may not
deliver as promised, consider using a credit card. Consumer protections are stronger for returning
merchandise with credit cards. The Fair Credit Billing Act, which applies to credit cards but not debit cards,
gives you the ability, under certain circumstances, to withhold payment on defective goods until the problem
has been corrected.
Sometimes you're asked to enter a PIN to approve a debit card transaction, other times you can sign your
name. If you use a PIN at a merchant's sales counter, you also may be able to get cash back, and that can
save you a trip to the ATM. However, be aware that some financial institutions charge consumers a fee for a
PIN-based transaction. There also may be differences in how quickly the transaction is posted to your
account, depending on how your bank processes PIN vs. signature debits.
Debit cards are frequently used for foreign travel as their fees can be less than for credit cards. Typically you
have to notify the bank or credit union that you will be traveling abroad. Otherwise, you risk a chance the
bank or credit union may reject your foreign transactions or close your account under automatic security
measures designed to protect against identity theft and fraud. Also, you may want to inquire whether there
may be lower fees if you use partner banking institutions in foreign countries. Be sure to check out all the
fees for foreign use of your debit card before you leave.
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Your Rights
A financial institution may send you a debit (EFT) card that is VALID FOR USE only if you ask for one, or to
replace or renew an expiring card. The financial institution must also give you the following information about
your rights and responsibilities:
A notice of your liability in case the card is lost or stolen
A telephone number for reporting loss or theft of the card or an unauthorized transfer
A description of its error resolution procedures
The kinds of electronic fund transfers you may make and any limits on the frequency or dollar
amounts of such transfers
Any charge by the institution for using EFT services
Your right to receive records of electronic fund transfers
How to stop payment of a pre-authorized transfer
The financial institutions liability to you for any failure to make or to stop transfers and
The conditions under which a financial institution will give information to third parties about your
account.
Generally, you must also get advance notice of any change in the account that would increase your costs or
liability, or would limit transfers.
A financial institution may send you a card that you did not request only if the card is NOT VALID FOR USE.
An unsolicited card can be validated only at your request and only after the institution makes sure that you
are the person whose name is on the card. It must also be sent with instructions on how to dispose of an
unwanted card.
You may stop any preauthorized payment by calling or writing the financial institution, but your order must be
received at least three business days before the payment date. Written confirmation of a telephone notice to
stop payment may be required. You should also contact the merchant or organization you authorized to debit
your account and some contracts require your notification to be in writing. If the payments you preauthorize
vary in amount from month to month, you have the right to be notified of all varying payments at least 10
days in advance. Or you may choose to specify a range of amounts and to be told only when a transfer falls
outside that range. You may also choose to be told only when a transfer differs by a certain amount from the
previous payment to the same company.
The EFT Act which protects you with electronic funds transfer does not apply to automatic transfers from
your account to the institution that holds your account or vice versa. For example, they do not apply to
automatic payments made on a mortgage held by the financial institution where you have your debit card
(EFT) account. The EFT Act also does not apply to automatic transfers among your accounts at one financial
institution.
Protect Your Debit Card

Protect your debit card as well as the account number, expiration date, security code on the back, and the
PIN. While in many cases you are not responsible for unauthorized transactions, it can be a hassle to resolve
the situation. Here's how to avoid becoming a victim:
Never write your PIN on or near your card. Memorize it instead.
Don't give out bank account information over the phone or the Internet unless you have initiated the
contact or you know the person is who he or she claims to be. Dont give your PIN over the
telephone unless you initiated the call and know it is the financial institution.
Don't share your debit card PIN, security code and other account information with friends or relatives
who aren't co-owners of your account.
Take precautions at the checkout counter, ATM and gas pump. Always stand so that no one can see
the keypad where you enter your PIN. At retail establishments, it's best to use do-it-yourself
scanners. A dishonest employee may run your card through two scanners instead of one. The
Personal Savings
55
second scanner could be capturing your account information to make a counterfeit card. In general,
be alert for suspicious-looking devices that may be used to "skim" information from your card.
If you use your debit card to shop online, consider extra precautions with your personal computer.
Experts advise installing and periodically updating virus and spyware protection and a "personal
firewall" to stop thieves from secretly installing malicious software on your personal computer
remotely that can be used to spy on your computer use and obtain account information.
Look at your bank statements as soon as they arrive. Or, better yet, review your account each week
by phone or the Internet. Promptly report any discrepancy, such as a missing payment or an
unauthorized transaction, to your bank or credit union. Your quick attention to the problem may help
limit your liability and give law enforcement authorities a head start on stopping the thief.
QUESTION 6:
What actions you should take to safeguard your debit card or any electronic transfers made into and
out of your bank account.
Lost or Stolen ATM or Debit (Check) Cards

In the case of a lost or stolen credit card, you cannot lose more than $50 (Truth in Lending Act). However, in
the case of a lost or stolen debit (ATM, Check) card) the amount you can lose is much more. It depends on
when you report it missing.
According to the federal Electronic Fund Transfer Act (EFTA):
If you report the debit card missing, before it is used without your permission, you cannot be held
responsible for any unauthorized withdrawals
You will not be responsible for more than $50 of unauthorized use if you notify the bank within two
business days after discovering the theft.
If you fail to report the loss within two business days after discovering the theft, but do report its loss
within 60 days after your statement is mailed to you, you could lose as much as $500 for unauthorized
use.
In the worst-case scenario if you receive a bank statement that includes an unauthorized debit-card
withdrawal and you wait more than 60 days to alert your bank you could be liable for any amounts
from transactions made after that 60-day period.
The good news is that many banks don't hold a consumer responsible for unauthorized transactions if he or
she notifies the institution in a timely fashion. But remember that with a debit card, the money tapped by the
thief has already been taken out of your account.
QUESTION 1:
You dont realize you have only $100 in your bank account and you want to use your debit card to
buy a $200 item. What will happen to your account?
QUESTION 2:
Questions about debit cards--True or False
1. Your liability on a debit card is the same or less as a credit card ______
2. The bank has 10 days to investigate any errors you bring to their attention ___
3. If you dont notify your bank you lost your debit card you could be liable for $500 _____
QUESTION 3:
You are buying a product from a merchant you havent dealt with before. Should you use a debit or
credit card? Why?
QUESTION 4:
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On Monday, Johns debit card and PIN were stolen. On Tuesday, the thief withdrew $250, all the
money John had in his checking account. Five days later, the thief withdrew another $500, triggering
Johns overdraft line of credit. John did not realize his card was stolen until he received his bank
statement, showing withdrawals of $750 he did not make. He called the bank right away. What is
Johns liability?
QUESTION 5:
When John got his bank statement he didnt look at it and didnt call the bank. Seventy days after the
statement was mailed to John, the thief withdrew another $1,000, reaching the limit on Johns line of
credit. What is Johns liability?
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Activity 14: Compare ATM/ Debit/ Check Cards

ATM/Debit/Check Card Comparison Worksheet
Complete this Worksheet to compare two ATM/debit/check cards (one bank and one credit union) to consider.
Features
Bank Debit Card name:
Credit Union Debit Card name:
Institution:
Card Name:
Card Type:
Fees:
ATM surcharges
Bank-owned ATM fees
Annual Card Fee
Annual Rewards Fee
Late Payment Fee
NSF fees
Overdraft fee
Fees for foreign use
Perks and rewards:
Rebates
Points
Frequent flier miles
Cash back
Other:
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Unit 5: Savings Vehicles

Why do we need savings?
After establishing your financial goals, developing a savings plan is the next step to success. You put money
away to accumulate funds for emergency needs (3-6 months of expenses), future needs such as a car down
payment, college expenses, trip expenses, wedding expenses, house down payment and retirement. You
can save money, earn more money with that money, and maintain access to your money if you need it.
Checking accounts at banks and credit unions are for everyday money needs and so are not generally
thought of as savings vehicles. This unit and the next few talk about with what to do with the extra cash, cash
you may need to use within the next 5 years. For things needed beyond 5 years from now, continue to
consider these types of savings vehicles, but also add other investment vehicles to the mix.
What form of savings is right for you?

The table below gives an overview of a variety of savings vehicles. What are some things should you
consider when choosing where to park your money? Everyone wants to make more money with their money,
so the interest rate you make on your savings should be a factor in your decision.
How much do you have? Some of the vehicles below require you deposit a large amount of money to open
an account. Some of them have no minimum deposit.
Liquidity is another important consideration. Liquidity is how quickly something can be converted to cash.
Money in a checking account or savings account, for instance, is very liquid because you can withdraw the
money right away with no penalty. Money you put into a CD or bond, however, is not as liquid because there
might be penalties for withdrawal or your money might be locked in for a given period of time (term).
Emergency money should be put into a very liquid account. Generally speaking, the more liquid a savings
vehicle, the less the interest you make on it.
Another factor is if you are willing to lose money. If you are not willing to lose any of your savings, stick with
vehicles that are FDIC/NCUA insured or vehicles which are backed by the US government. Savings vehicles
that are riskier tend to offer more interest.
Comparing Saving Vehicles

Vehicle
Advantages (+)
Disadvantages ()
Savings Accounts
usually no minimum amount

usually very liquid unlimited withdrawals
very safe - FDIC insured
higher rate than savings account
somewhat liquid can make withdrawals

Money Market
Accounts
Certificates of
Deposit (CDs)
Term: 3 months to 5 years or even longer

Savings Bonds
(bonds issued by the
U.S. government to
help pay its
expenses)
Treasury Bills and

Personal Savings
safe- guaranteed by US government

small minimum purchase of $25;
can purchase directly from Treasury
interest may be tax-exempt if used for
education
Term time: 20 30 years
Safe guaranteed by US government
lower interest rate
minimum deposit required,

often $1,000 to $2,500
6 withdrawals per month
without penalty
minimum deposit required,
often $500 to $2,500
illiquid - penalty for early
withdrawal
Lower interest rates than
Treasuries
Illiquid cannot cash out in
first year
Penalty for withdrawal within
five years
Minimums of $100
59
Bonds
Money Market
Mutual Funds
Higher interest than savings account and

saving bonds
Noncallable
Liquid can be sold on secondary market
Capital gain possible if interest rates fall
Choices of many maturities up to 30 years
Not taxed at state or local level
Term: 90 days to 30 years

Higher interest than savings account
Tax exempt interest available
May result in capital loss if

interest rates rise
Not FDIC insured
Savings Accounts
The most common type of bank account, and probably the first account you had, is a savings account.
Savings accounts allow you to keep your money in a safe place while it earns a small amount of interest
each month. These accounts usually require no minimum balance, or a low minimum balance, like $25, or
$100 to avoid a monthly maintenance fee. This depends on the bank or credit union and the type of account.
If you put your money in a savings account you will be less likely to spend it. It is also is safer because it is
FDIC/NCUA insured. If your home is robbed or has a fire, your money may be lost forever. The main benefit
of using a saving account is liquidity (access to money when you need it), preservation of principal, (you
wont lose your deposit amount due to market risk) and interest on your account balances.
Currently, most banks or credit unions offer primarily statement savings accounts. You receive a statement,
usually once a month listing your transactions. These statements may be paper statements mailed to you,
online statements sent to your e-mail address and/or available on the financial institutions website. Here are
the savings account factors to consider:
Minimum Account Balance Requirements
Fees and Service Charges
Interest Rate
Availability of electronic banking
Most banks and credit unions pay low interest on savings accounts. You may do much better by using one of
the higher-interest-rate money market accounts. Some high-yield savings accounts allow you to link to your
checking account to make deposits and withdrawals.
Evaluate your savings account needs by asking the following questions:
What is the minimum balance amount to avoid fees?
What are the fees if the minimum balance is not maintained?
What is the interest rate? Does it change with different balances?
Are account statements mailed every month? If not, how often?
Can you access the account online?
Can you pay bills, transfer funds and pay loans online?
Can you use direct deposit for pay checks, social security, etc.?
Can you automatically allocate money to the savings account?
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Money Market Accounts

Money market accounts, also called NOW accounts, are interest-earning checking accounts. A money
market account, MMA, is a type of checking account that earns interest which is offered by banks and credit
unions. The difference is that they usually pay higher interest but that comes with higher minimum balance
requirements (sometimes $1000-$2500). By federal regulation MMAs only allow six preauthorized, electronic
or telephone transactions by per month, of those no more than three by check, draft or debit card per month.
Banks or credit unions may charge a fee (typically around $5) if you don't maintain a certain balance in your
money market account. There may also be a fee (around $5-10) for every withdrawal that exceeds the
maximum (usually six) the bank allows each month.
Money market accounts are insured by the FDIC or NCUA up to $250,000. A great way to make your
savings grow faster is to set up an automatic deposit or regular deposits to transfer automatically from your
checking account into your money market account.
Because of possible fees, you should always shop around and compare what different banks and credit
unions are offering. Things you should look at include:
Interest rates
Fees and services charges
Minimum balance requirements
Interest rate paid on your balance
Money Market Mutual Funds

Banks, mutual fund companies and brokerages offer money market mutual funds or money market funds
(MMFs). They earn a higher rate than bank money market accounts (MMAs) and are considered liquid
savings, too. MMFs are made up of short-term debt securities, such as certificates of deposit and U.S.
Treasury bills. People with mutual fund and brokerage accounts use money market funds as the account to
deposit/withdraw money before and after buying or selling stocks, mutual funds or bonds. MMFs are also
used to accumulate money for an emergency fund (three to six months of living expenses) or other shortterm goals.
Money market mutual funds are not insured by the FDIC, even if you open the account at a bank. Theres
no guarantee a money market mutual fund will maintain its share price. However, problems with MMFs are
very, very rare. Features to look at include:
Interest rates
Withdrawals fees
Safe, secure and regulated short-term debt securities
Check writing and money transfer privileges (many have minimum requirements, limitations and fees.)
By federal regulation MMFs only allow six preauthorized, electronic or telephone transactions by per
month, of those no more than three by check, draft or debit card per month.
Fees (expense ratios) are included in yield to cover the money market fund management costs.
There are taxable and tax-fee funds. Taxable funds pay a higher yield, but if you are in higher tax
brackets it may be worthwhile to invest in tax-free money market mutual funds.
Look for lower expense ratio (management costs/fees) since the expense ratio reduces the yield to
you. You will find expense ratio information in the prospectus for each MMF and on the brokerage
website
QUESTION 1:
How are money market accounts different than money market mutual funds?
QUESTION 2:
Why would you keep money in a savings or money market accounts?
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Activity 15: Ask a Bank or Credit Union.

Prepare a list of questions you would ask a banker. Focus on what types of accounts you should open-checking, savings, money market accounts, money market funds? How can you reduce bank fees? How
should you protect your wealth? Other questions you think about for your money?
1.
2.
3.
4.
5.
6. Optional Extra Credit (5 pts): Write up the answers from asking a bank/credit union employee.
Resources:
CDs and Investing Basics, Bankrte.com,
http://www.bankrate.com/gookeyword/news/news_investing_home.asp
Money Market Accounts with the Highest Rates, RateCatcher.com, http://www.ratecatcher.com/
Money Market Rates, MoneyRates.com, http://www.money-rates.com/market.htm
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Unit 6: Certificates of Deposit

When your liquid savings account(s) has grown to build up an emergency fund of three to six months of living
expenses, you should consider a longer-term investment with a higher yield. A common fixed income
investment is a certificate of deposit or a CD, which earns higher interest rate than most money market
investments. It is FDIC insured. CDs pay higher yields than most liquid savings accounts, money market
accounts and money market mutual funds. But, to earn the higher yield you must give up access to your
money for a specified period of time called a term.
Common features about CDs are:
You invest a fixed amount of money for a period of time called term and the ending date called maturity
date.
CDs are not liquid, since your money is committed for a period of time, and will incur penalty fees for
withdrawing your money early before the term expires (before it reaches maturity).
Youre guaranteed your principal (deposit amount) plus a fixed amount of interest, which you can receive
periodically throughout the term and you have the option to withdraw the interest payments as they are
paid by the bank or credit union.
When the term expires you can cash out the principal and interest, or roll over (start the term again) the
CD for another term with a new interest rate.
CDs are usually short to medium-term investments. They can be purchased for almost any time duration
with the most popular CDs between three months and five years. Usually, the longer you allow the bank
or credit union to use your money, the higher your interest rate, however longer terms can be subject to
more interest rate fluctuations.
CDs are issued by banks and credit unions but can be purchased through banks, credit unions or
brokerages in their offices or online over the internet. CD considerations are:
o Interest rate
o Interest yield This includes the effect of compounding interest rate and is higher than the
interest rate.
o Time-based fixed income with a set maturity date.
o Penalties fees for cashing out the CD before the maturity date
o Interest payments may be withdrawn as they are paid by the bank.
o CDs are insured by the FDIC
Types of Certificates of Deposit (CDs)

The terms of a CD can range from one month to five years or more. How do you decide whether to buy a
short-term or long-term CD? Consider the interest rate environment. Take a look at the next graph. In 1981
interest rates for 3-month CDs were almost 16%. In 2009 they were less than 1%. You should understand
that the interest rates for CDs and other investments are ever changing and depend on many factors, like the
economic environment, inflation and government intervention. In 2009, for instance, the federal government
implemented monetary policies to keep borrowing costs low to stimulate the economy. This affected savings
rates, too.
Are rates extremely low right now and expected to go higher? If so, go for the shorter term so your money is
not tied up if rates rise in the near term. Its very frustrating locking up your money in a long-term CD at 1%
interest if you firmly believe CD interest rates could increase a lot more in the near future.
Are rates high or expected to drop? Go for the longer term to lock-in the high rate for as long as possible.
Your goal is to try to balance risk (the chance that your money will be tied up at a lower interest rate than
what's available elsewhere) and return (the longer the term, the higher the interest rate).
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6- Month Bank Certificate of Deposit

Source: http://www.federalreserve.gov/releases/h15/data.htm
18
16
14
12
10
8
6
4
2
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
There are many types of CDs you might find for sale. Here is a survey of the more popular types:
Traditional CD
A Traditional CD is a deposit of a fixed amount of money for a specific term and earns a set interest rate. At
the end of the term you can cash out the CD or roll over the CD for another term (earns a new rate of
interest). There are stiff penalties for early withdrawal of you money, which will cause you to lose interest and
possibly principal. Each financial institution determines the penalties and they must tell you (disclose) when
the CD account is opened.
Bump-up CD
This CD allows you to take advantage of rising interest rates. For example, say you bought a 3-year term CD
at a set interest rate and six months into the term the financial institution now offers a quarter point (1/4% )
more interest on new CDs. With a bump-up CD you have the option to tell the bank you want to earn the
higher interest rate for the rest of the term of your CD. Financial institutions that offer this option generally
allow one bump-up per term. A disadvantage is that you may earn a lower initial interest rate than on a
traditional CD. Be realistic about the interest rate situation and expectations before you buy a bump-up CD.
Liquid CD
You can withdraw money from a Liquid CD without incurring a penalty, but you may have to maintain a
minimum balance in the CD account to earn that opportunity. The liquid CD interest rate should be higher
than the financial institutions money market account interest rate, but is usually lower than a traditional CD
of the same term and minimum. How soon after opening the liquid CD account will you need to make a
withdrawal? Money must stay in the liquid CD account for seven days before it can be withdrawn without
penalty according to Federal law. Financial institutions can establish the penalty-fee withdrawal for any
period beyond the seven day period.
Zero-coupon CD
You buy a zero-coupon CD at a deep discount to the amount of money you get when the CD matures (the
par value). For example, you might spend $5,000 up front buy a zero-coupon 7% 10-year CD whose par
value is $10,000. So you spend $5,000 now and get back a full $10,000 in 10 years. The interest you get is
considered the difference between its purchase price ($5,000) and its par value ($10,000) and you do not
receive this interest until the 10-year term is up.
From tax purposes, however, you are earning phantom interest income each year and so you may have to
report and pay federal income taxes (if applicable) on the increased value (interest) of the CD each year. In
this example, after the first year, youd owe tax on $350 if interest you havent actually received yet.
Therefore, be sure you have the money to cover the taxes you may owe.
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Callable CDs
When you own a Callable CD, the bank can give you your money back before the CD term ends (maturity).
For example, if you bought a $1000 3-year CD with a six-month call protection period, the bank could give
you your money back ($1000 plus any interest owed to you) after the first six months up to the three year
maturity date. A bank might call a CD if interest rates for new CDs are now much lower.
A callable CD usually earns a higher interest rate than a traditional CD. The disadvantage for you is if the CD
is called, you may have to re-invest your money in a lower interest rate environment.
Brokerage CD
Brokerage CDs are sold through a brokerage (stock brokerage firm) but usually issued from a bank. Banks
may use brokers as sales representatives to locate investors willing to purchase CDs from their banks. CDs
from brokerages pay higher rates than CDs from your local bank or credit union since banks use brokered
CDs to compete in the national markets. The brokerage CDs are more liquid than bank CDs since they can
be traded like bonds on the national secondary market, but there is no guarantee that you wont take a loss if
you sell them before maturity in the national secondary market. Brokerage CDs may be also be callable CDs.
If the brokered CD originally comes from an FDIC insured bank, then the CD is FDIC insured. However,
remember from earlier discussions that FDIC insurance is limited to an aggregate amount of $250,000 per
depositor per institution. When you buy a CD from a brokerage, make sure you know what financial
institution the CD is really from. If you already have money in that institution, make sure the aggregate
amount of the CD and your other deposits is below the $250,000 limit.
CD Investing Strategies
When you decide to invest in CDs, you have a lot of choices. You can put all your money into one CD or
divide it up in to several CDs. You can buy CDs that mature at different times and buy CDs of different
interest rates. What should you do? It depends on when you need your money to be available and what
kind of interest rates you expect. If you tie your money up for a longer period of time, you generally get a
higher interest rate. Below are some CD investing strategies for you to consider.
CD Ladder Strategy
If you have a sum of money that you dont need to use for a set period of time, or are waiting for the
economy to get better, or the stock market to settle down, then laddering CDs may be a good choice. Using
this strategy allows you to have money available at different times and yet increase your return/interest rate.
To create a CD ladder you split up your money and buy several CDs and that mature on different dates.
There are countless ways to create a ladder, but here is an example of how you might create one.
Assume you have $3,000 sitting in a statement savings or money market account and you are anxious every
time you receive your bank statement and see the low interest your money is earning. You explore CD rates
and identify the bank with the best rates and terms that meet your needs. You decide to create a 3-rung CD
ladder.
To create the three year CD ladder, you split your money among three CDs, buying a $1000 CD maturing in
one year (CD #1), a $1000 CD maturing in two years (CD #2) and a $1000 CD maturing in three years (CD
#3). When any of your CDs mature, you take all that money and roll it into another CD of a three year term.
Eventually you will have 3 three year CDs earning a higher rate of interest than if you had put all into 1 oneyear CD which you renewed each year. The other big benefit is that you have one-third of your money
coming available each year to use in case you need it.
CD laddering is a great way to protect yourself against the ups and downs in interest rates, while providing
you the safety of being able to access some of your money within a reasonably short time period. When you
replace the longest maturity, the top rung of the ladder, you are reaping the benefit of earning higher interest
rates, while only reinvesting only a portion of your investment when rates are low. Check out Bankrate.coms
CD laddering calculator. http://www.bankrate.com/brm/calsystem2/calculators/cdladder/default.aspx
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The most important factor to keep in mind for laddering CDs is to be sure the CD maturities match up with
your need for cash, to avoid the need to cash in a CD early and pay the early withdrawal penalty.
Bullet Strategy
With a bullet strategy, your CD purchase is concentrated in one specific maturity time period. Your
purchases of CDs are staggered but the maturities are about the same time period. When you stagger the
CD purchase you lower the risk of purchasing your CDs when rates are low.
This strategy is a good one when you are saving money for a particular goal, such as a car purchase or
college expenses that you know you will need at a certain time. For example if you are saving for a car
purchase in 2017 and have $1000 to put away now, you might buy a $1000 CD this year that matures in
2017 and then buy another CD next year that matures in 2017 when you get additional money to put towards
your car.
Barbell Strategy
With a barbell strategy, you buy CDs of long-term and CDs of short-term maturities. A barbell strategy helps
you benefit from high yields (or rates) or on the yield curve, while also covering another alternative, like
hedging your bet. For example, you might buy CDs with longer maturities, if they were paying the higher
interest. And, you might also buy short-term CDs to have liquidity (access) to benefit from possible rate
changes.
Early Withdrawal Penalties

Early withdrawal penalties can be costly. Federal law requires that all CDs cashed out early be subject to a
minimum penalty of at least seven days interest on money withdrawn within the first six days after deposit.
Beyond that time period banks are free to determine their own penalties. Examples of penalties for early
withdrawal are:
CD term period
Interest penalty
30 days
All interest
Two to 12 months Three months
13 to 36 months
Six months
The penalties are more costly the earlier you withdraw (or cash out) your money. Using the
example table above, if you bought a two month CD and cashed out after 1 month, you would
have to pay 3 months of interest when you had only earned 1 month. This means you would need
to pay some withdrawal penalty from principal. It is best to buy a CD when you have a sufficient
emergency fund in a savings account, so you wont need to cash out your CD.
QUESTION 1:
Why invest in CDs?
QUESTION 2:
Which CD allows you to increase the interest rate during the term of the CD?
A. Traditional CD
B. Bump-up CD
C. Liquid CD
D. Zero-coupon CD
QUESTION 3:
Why would you invest in a CD?
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Activity 16: Class Contest for highest CD rate:

Competitive, higher rate CD interest rates are offered by many financial institutions to attract money to their
institution. Check out your local banks, credit unions, brokerage firms, online banks or BankRates survey for
the list of the highest CD rates offered by financial institutions, www.bankrate.com.
Go online into any banks or credit unions, websites, or www.bankrate.com to find what CD types, minimums
and rates they offer. Write out the information about the CDs information for two financial institutions,
and highlight the type of information listed below to compare CDs at two financial institutions.
Bank/Credit
Union
CD
Type
Minimum
Deposit
CD
Rate
Term
Compounding
Method
Annual
Percentage
Yield
Comments/
Description
Present your findings in Discussions and judge who found the highest rate.
Resources:
CDs Introduction and CD calculators from Bankrate.com at
http://www.bankrate.com/brm/green/investing/investing2-intro.asp?caret=36
Laddering CDs from About.com at http://financialplan.about.com/cs/investing/a/LadderingCDs.htm
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Unit 7: Bonds
Bonds are interest-bearing certificates or IOUs issued by a government, government agency, or
business (called the issuer) promising to pay you, the bondholder, a specified amount of money
(based on a coupon rate also called coupon interest rate) within a specified period of time (term
or maturity) on a specified date (called a maturity date). When you buy a bond, you are loaning
money to the bond issuer. You are a creditor. When you get interest depends on the type of bond.
For example, interest may be paid quarterly, yearly, or all at the end of the term.
Bonds come in many shapes and sizes. Several types of bonds are appropriate to consider for
your savings portfolio. These include US government savings bonds and short-term US Treasury
issued securities. Other types of bonds, such as long-term US Treasury issued securities,
corporate bonds and municipal bonds, are more suited for investment portfolios.
Bonds generally give higher returns than CDs but may be more risky and may lose value. Some
bonds are backed by the government and some are insured so you do not lose money. By the end
of this unit, you should understand if and how bonds can contribute to your savings or investing
portfolio.
High-quality bonds are great in that they can give you a fixed stream of incomeunlike stocks,
which don't always pay dividends and can be pretty finicky about giving you a return at all. If you
invest in a 10-year $1,000 Treasury bond issued by the US Treasury with a 6% coupon, you know
you will get $60 in interest every year for 10 years and at the end of the 10 years, you will get your
$1000 or face value (also known as par value) back. What defines a high quality bond? That is
discussed later in this chapter.
Bond income allows you to schedule when funds will become available to you. For anyone who's
retired, bond income is handy to have. Say you have a $500,000 nest egg, and you want to travel
the world for a few years. If you put your money in the stock market, there's no guarantee what
you'll get on a year-to-year basis. But put it in high-quality bonds with an 8% coupon, and you know
that you'll get $40,000 per year no matter what. Yes, you'll miss out on the 25% that you might get
in the stock market some years but you'll also miss out on years when the market returns nothing
at all or years like 2008 when the market fell over 30%. It can also be used to plan for other term
goals such as education and home purchases.
Different bonds work in different ways, but for an example of how a traditional bond works, look at
the diagram below. Greatest Computer Company (GCC) wants to borrow money and so it issues
bonds. Bonds are issued in $1000 increments. The investor in the diagram buys a $1000 GCC
bond. That is, he gives GCC $1000. GCC bonds pay a coupon rate of 6% and have a maturity
date of 2010. This means anyone holding a bond will receive $60 each year and in 2010, whoever
holds a bond will receive $1000, the face value (par value) of the bond.
GCCs bond has a call feature. This means GCC has the option of giving a bondholder back his
$1000 anytime after the call date, which in this case is 2006. Why might this happen? Say in 2007
GCC can borrow money from someplace else for 3%. It is more cost effective for GCC to the pay
off 6% bonds and borrow the money again at 3%. The reasoning is similar to you deciding to
refinance your mortgage when mortgage rates go down.
Personal Savings
68
Bond Issuer
= Greatest
Computer
Company (GCC)
Par Value or
Face Value
= $1,000
What GCC will pay
back at maturity.
Coupon rate
= 6%
GCC will pay 6% of
$1,000 ($60) to you
every year in
interest until the
bond comes due.
Used with permission of

Leslie Lum
You buy a $1,000 GCC

bond in 2000
Bond
Greatest Computer Co.
(I.O.U.)
$1,000 to be paid back in
2010 plus 6% every year.
We promise not to pay
you back before
1/1/2005.
Bondholde
r
Maturity date =
2010
So this is a 10-year bond. GCC
will pay back the $1,000 in 10
years.
Call Date = 1/1/2005

GCC can call (pay back) the bond on or after this
date. They are likely to do this if interest rates go
down.
How have bonds done compared to stocks?

The graph below shows the difference between long term government bonds and large company stock
returns (assuming that both dividends and interest are reinvested and accounting for gains in bonds) from
1980 to 2008. You can see from this graph that bonds outperformed stocks in a number of years (and some
years by quite a bit). In 2008, stocks lost value and stock returns were about -35%. On the other hand, bond
returns were over 25%. In some years bonds do better and some years stocks do better.
Personal Savings
69
Bond and Stock Total Returns

50%
40%
20%
10%
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
-10%
1982
0%
1980
Total Return (%)
30%
-20%
Bond Returns
-30%
Stock Returns
-40%
-50%
Year
Source: Ibbotson SBBI Classic Yearbook 2009
How Do You Make Money From Bonds?

Most people assume that there is only one way to make money on bonds: You collect interest and
that's that. Well, they're wrong. There are two ways you can make money on bonds. The first is to
collect the yield (interest). The second is to realize a gain (or loss) when interest rates fall (or
rise).
(1) Collect the YieldBuy and Hold

You buy a government bond for $1000 with a 6% coupon and a 10-year maturity. You then get $60
every year for 10 years and your $1000 back at the end. This is the "what you see is what you get"
strategy (see the graphic below). You buy the bond when it's issued and hold it until maturity, you
get interest or yield on your bond, and that's the extent of your return.
Many investors buy bonds exclusively for their yield. For high-quality bonds or Treasuries where
there is little chance of the issuer going under, you can depend on the interest coming in as agreed.
In 2000 you buy a $1000
bond with a 10-year maturity
and a 6% coupon.
2000
2001 2002
Each year for 10 years you get

$60 interest from the bond issuer.
2003
2004
2005
2006
Bondholder
2007
2008
2009
At the end of 10 years

the issuer pays your
$1000 back.
2010

Leslie Lum
(2) Gain (or Loss) on Selling or Buying

Personal Savings
70
If you own a bond, you can sell it. If you want to buy a bond you can buy it from someone else
who owns it. How much would you buy or sell the bond for?
If you buy or sell the bond on the secondary market before the maturity date, things get
complicated. Remember, interest rates go up and down. A bond is priced on the going market
interest rate (which changes often). At any one time, a $1000 bond may be worth more than
$1000 or less than $1000, depending on interest rates on that buy/sell date.
Maybe coupon interest rates were 6% last year when you bought your bond, then interest rates
went down to 5%. You have a $1000 par value bond that pays $60/year and other people are
selling bonds which pay $50/year. Do you want just $1000 for your bond? No. There's no reason
why you should give more interest than the market.
So you should sell it so that it yields the buyer 5% instead of 6%. You should sell it for more than
$1000 (at a premium) so the buyer will have the equivalent yield of 5%.
An important concept with bonds is:
If interest rates go down, the price of your bond goes up.
Say you sell it for $1044. You made a $44 capital gain and you are done with ownership of the
bond. The new bondholder now gets the $60/year from GCC and gets the $1000 on the maturity
date. See the related picture.
In 2000 you buy $1000 bond
with a 10-year maturity and a
6% coupon.
2000
2001
2002
2003
At the end of 10 years the

issuer pays current
bondholder $1000 back.
Each year for 10 years bond issuer

pays current bondholder $60 in
interest.
2004
2005
2006
2007
2008
2009
2010
Bondholder 1
You hold for 5
years and decide
to sell.
Used with permission of Leslie

Lum
Interest rates
have gone
down 1%.
Bondholder 1 sells
bond for $1044 to
give the going market
rate of 6%.
Bondholder 2
New bondholder
receives the interest
after sale and is paid
back $1000 upon
maturity.
But the opposite can also happenwhen interest rates rise what happens to bonds?
What if interest rates go up to 7% and you had the same $1000 par value bond with a 6% coupon?
Well, the investor who buys it will want 7%; otherwise, they will pass on your bond and go
elsewhere. To give the buyer 7%, you have to sell the bond at a discount, or for less than what
you paid. Now you have a capital loss. Here's the matching bookend to the previous example:
If interest rates go up, the price of your bond goes down.
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71
Why Buy Bonds?

There are risks with bonds that may cause people to avoid them. If you purchase a bond with a low
interest rate and long maturity, you could lose out when interest rates rise. One of the worse cases
is if inflation rises higher than the interest rate you are getting. Then you will lose purchasing power
as well. A bond with a call feature can hurt you when interest rates go down. You will lose your
higher return if the issuer redeems the bond. Bonds issued by corporations can also go down in
value if the company hits hard times.
But, for most individual investors who buy high-quality bonds and hold them to maturity, bonds can
be an effective part of their portfolios. Bond interest can provide a steady stream of income for
those who are relying on their investments to live. They tend to provide higher interest rates than
saving accounts. They can offset the downturns in stock investments. They can provide capital
gains if interest rates go down.
Bond Rating, Credit Rating, Quality

Remember that a bond is basically a loan and the bond issuer performs by paying you interest and
then your principal back when agreed upon. Sometimes, however, bond issuers fall on hard times
and may not be able to pay interest or return the principal. This is called defaulting. Before you
buy a bond, evaluate its quality by looking at its bond rating (credit rating, quality). The table
below shows ratings for two common credit rating services, Moodys and Standard and Poors.
Note that the rating of a bond may change over time since it depends on the strength of its issuer.
With regards to credit ratings, the key distinction is between investment-grade and junk bonds
(also known as high-yield bonds). Investment-grade bonds are more credit worthy and less risky.
They have lower returns. Junk bonds may have very high interest rates but they are extremely
risky.
Personal Savings
72
Bond Ratings
Moody'
s
Standard
and Poor's
Quality
Best quality. Interest payments are protected by

earnings and principal is secure.
Aaa
AAA
High grade
Protection on interest is not as high as Aaa but still

high quality.
Aa
AA
High grade
Over the long term, some risk to investment.
Medium
Baa
BBB
Medium
Ba
BB
B
Caa
Ca
C
B
CCC
CC
Investment Grade:
Adequate for now but may be unreliable over time.
Non-Investment Grade:
Future is not certain. Moderate protection of interest
and principal. Some speculation.
Small protection of interest and principal.
Poor standing. May be in default.
Often in default. Highly speculative.
Extremely poor prospects. In default.
C
D
Speculative
Speculative
Default
Default
Lowest rated class
in Moodys list
No interest being
paid
In default
Bond Types by Issuer

U.S. Treasury Issues
In order to finance the U.S. federal deficit, our government borrows money from investors. As of
the beginning of 2013, the government had $17 trillion in outstanding debt. The government issues
treasury instruments to finance this debt.
Government bonds are the easiest to buy or sell and the safest ones as well because they are
backed by the full taxing authority of the US government. Since the federal government can raise
taxes to pay interest and pay back principal on bonds, there is not much chance of default on the
bond. Because of this, U.S. Treasuries pay lower interest rates compared to other kinds of bonds.
U.S. Treasury bills, notes, and bonds, in addition to the U.S. savings bonds are less risky than
other types of bonds but they are still subject to inflation and interest rate risk.
The primary advantage of Treasury securities is safety. They have the strongest guarantee
of payment of interest and return of principal. As such many folks use these to start their
investments portfolios or fund financial goals such as education.
Because there are so many Treasuries issued, you can buy them for any maturity. They are
extremely liquid (traded in large volumes every day) so you can sell them at any time for a
fair market price.
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73
Treasuries are not callable so investors are certain that they will have the income for the life
of the bond. They dont have to worry that they will lose their income stream when interest
rates fall as may happen in mortgage-backed securities or with corporate bonds.
Treasury interest is exempt from state and local income taxes (but not federal taxes) and
may be a benefit to those in high-tax states (but Washington State does not have income
tax.)
The main difference between various Treasury issues is the maturity. The longer the maturity,
the more risk. If a friend borrows money from you and says that he will return it in a week, it is a
lot less risky than returning the money in ten years. Many things can happen in ten years that
jeopardize return of your money.
Maturity with a bond works in the same way. There may be short periods in time when this
relationship doesnt hold, but the longer the maturity, the riskier the bond, so the more return is
needed to compensate for that risk. This is demonstrated in the chart above where 5-year
treasuries give more interest than 90-day treasury bills because of their longer maturity.
Historical Interest Rates

Source: http://www.federalreserve.gov/releases/h15/data.htm
16
14
12
10
8
6
4
2
-2
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
30-year
6-Month
10-year TIP
10-year Treasury
Here are the different types of U.S Treasury issues which are classified by maturity.
Treasury Bills
Treasury bills are debt issued for terms of less than one year. The 90-day or 3-month interest rate
is an important financial benchmark. Treasury bills (T-bill) are sold at a discount to face value or
par. A Treasury Bill is a zero coupon bond because it pays interest at maturity.
Personal Savings
74
Let's say 9-month interest rates are 7%. You buy a T-bill for $946.72 that has a face value of
$1000. You hold it for nine months, after which the Treasury pays you $1000 at maturity. This
$1000 payment includes the amount you originally lent plus the interest at 7%.
Treasury Notes
Treasury Notes offer terms to maturity from 2, 3, 5, or 10 years. It is issued in denominations of

$1,000. However, the original price of a Treasury Note may be more or less than $1000 because
the price and interest rate of the note are determined when the Treasury auctions them off. The
price and interest rate depend on the current interest rate environment.
Treasury Bonds
Treasury Bonds have terms to maturity between 10-30 years, in denominations of $1,000. Its
original price and interest from the Treasury are determined as with Treasury Notes.
Treasury Inflation Protected Securities or TIPS
TIPS are bonds with maturities of 5, 10 and 20 years in denominations of $1,000 and are sold at
auction like Treasury Notes. TIPS are inflation-indexed. Every six months the Treasury adjusts the
principal by the Consumer Price Index (CPI) for inflation. Interest is then paid on the adjusted
principal. When the bond is redeemed, it is redeemed at the adjusted principal or the original price
whichever is higher.
For more information on TIPs, go to
http://www.treasurydirect.gov/instit/statreg/auctreg/auctreg_gsrlist.htm.
Type
Maturity
T-Bills
3, 6, or 12
months
T-Bonds
2, 3, 5, or 10
years
11-30 years
TIPS
5, 10, 20 years
T-Notes
Features
Sold at a discount to face value. The interest paid at maturity is the
difference between what you paid and the face value (what you get
at maturity).
Pays interest semiannually.
Pays interest semiannually.
Inflation protection-the principal is adjusted every six months by the
CPI times the fixed interest rate.
Treasury instruments can be purchased directly at Treasury auctions (see www.savingsbonds.gov).

Treasuries can also be purchased on the secondary market through a broker or dealer.
Savings Bonds
Savings bonds are issued by the U.S. government. The types are: EE Bonds and Series I-Bonds.
These bonds typically have lower interest rates than comparable treasury bonds; however, the
minimum purchase is much lower.
They may be purchased through payroll savings or online at TreasuryDirect.
http://www.savingsbonds.gov/indiv/products/products.htm
Series EE Bonds
Series EE Bonds are safe, low-risk savings bonds issued by the US government. The advantage is
that you can purchase these for as little as $25 while the minimum for Treasuries is $1000. EE
bonds can only be sold to the person to whom they are registered, so you cannot resell them, but
you can cash them in.
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75
The interest rates for future issues are set each May 1 and November 1 for new bonds.
With a fixed rate of interest EE-Bonds do not have inflation protection. Interest accrues
monthly and compounds semiannually. The US government guarantees the bond will
double in 20 years.
Savings bonds are not as liquid as treasuries. Bonds held less than five years are subject
to a three-month interest penalty. EE bonds have an original maturity of 20 years, and
pay interest for 30 years. They must be held a minimum of one year.
Paper bonds are sold at half the face value, i.e., you pay $25 for a $50 bond. Electronic
bonds, purchased via TreasuryDirect (http://www.savingsbonds.gov/), are sold at face
value.
The interest on these bonds is not taxable at the state and local level. At the federal level,
you can choose to pay your tax when it is redeemed. The interest may be tax exempt
when you use the proceeds for higher education at a qualified institution.
I-Bonds
I-Bonds are inflation-indexed savings bonds with a fixed rate of interest plus an inflation premium.
I-Bonds are purchased at face value. You pay $50 for a $50 bond.
Bonds re-priced semi-annually (May and November) by the Treasury Department. The
rate is determined as a composite of the fixed rate and the semi-annual inflation rate.
Bonds increase in value monthly, and the interest is compounded semiannually. The
interest accrues (builds up the value of the bond) and is paid at the maturity date. Savings
bonds earn interest for up to 30 years, but they can be cashed in after one year with a
penalty.
For federal tax purposes you may choose to report interest each year as it builds up or
you may defer federal tax payment on the interest until the I-Bond is cashed.
If an I-Bond is redeemed before five years, there is a three-month interest penalty.
If I-Bonds are used to pay for college tuition and fees in the same year as it is redeemed,
up to 100 percent of the interest may be exempt from federal taxes.
True or False
Question
If you buy a 12-month Treasury bill (T-bill), will you be paid interest twice a year?
Answer
False, T-bill interest in only paid annually.
Question
Is it true that, T-bills, notes or bonds are not as safe as other types of bonds because you never
know when the government will start overspending again and the government will stop paying the
interest on the bonds?
Answer
False. Government bonds are guaranteed by the U.S. Government. They are the most secure of
investments.
Activity: Compare Current Treasury Issue Rates
Personal Savings
76
Compare the rates, terms and minimum purchase of T-Bills, or TIPS, T-Notesprint out and
highlight the information to compare the 3-month T-bill with the 3-year Treasury Note or TIPS:
Go to TreasuryDirect to check out the latest Treasury rates, terms and price per $100 of purchase.
http://www.savingsbonds.gov/RI/OFBills
Treasury Security Watch at Bankrate.com
http://www.bankrate.com/gookeyword/ratewatch/treasury.asp or any other website where
you can find this information.
Explain the difference in interest rates using your knowledge about bonds.
Corporate Bonds
Corporations raise money by selling corporate bonds. Corporate bonds are issued by large
corporations to finance their business operations. Smaller corporations don't have access to the
bond markets. When you buy a corporate bond you are loaning money to a corporation.
Corporate bonds can vary in quality and interest rates. Generally issuers such as the federal
government are safer than corporations so there is less return with a government bond as can be
seen in the figure below. Generally corporate bonds pay higher interest rates than Treasuries
because more risk is involved. A company is more likely to defaultnot pay back some or even all
the money it's borrowed.
Comparative Rates
18
16
14
12
10
8
6
4
2
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
10-year Treasury
BAA Corporate Bond
AAA Corporate Bond
Corporate bonds are concentrated in four industry groups.

Types of Bonds
Industrial
Personal Savings
Companies
Influencing Factors
Manufacturers, retailers, mining, energy, service Business cycle
77
Financial Services Banks, brokerage, insurance

Public Utilities
Telephone, electric, gas, water
Transportation
Airlines, railroads, trucking
Interest rates
Regulations, legislation
Oil prices
Corporate bonds are usually issued by corporations and sold by their investment bankers to
institutional investors. This is known as the primary market for bonds. Afterwards, the bonds can be
sold on the secondary market, either through the New York Stock Exchange where they are listed
in $1000 denominations or more likely on the over the counter market between brokers/dealers.
Corporations typically issue a term bond with the company paying interest twice a year and repay
the principal at an agreed date in the future. Just as in Treasuries, the interest rate is called the
coupon rate and the length of the time the loan is outstanding is the term. The term is also referred
to as the maturity of the loan. For corporations, the term period can range from a few years to 100
years. Corporate bonds can have call dates that are earlier than the maturity date when the
company has the option to pay back the loan in its entirety. Corporations use the call date as an
out when interest rates fall.
Corporations are dependent on the earnings to pay back the money they borrow. A financially
healthy company with good earnings is what you want. Most new investors would do better sticking
with higher quality bonds.
Check out the company's credit rating. The higher the credit rating, the less risk of default.
Higher credit ratings also mean lower yields.

Know what the company is borrowing money for. Sometimes, companies borrow money to
acquire or merge with another company. They may issue lower quality or junk bonds to
accomplish this. To compensate the investor for taking on this risk, junk bond interest rates
are always higher. Despite their high yields, junk bonds are not as easily traded as highquality bonds.
As an investor, you need to evaluate the issuer, credit rating, yield relative to historical interest
rates, yield relative to similar bonds and treasuries, plus maturity (including call date). These all
help you select the right bond.
Municipal Bonds
Municipal bonds are bonds issued by local governments. For example, a city may issue a bond to
build new schools. The interest on these bonds may be exempt from federal and local income
taxes and therefore offer lower rates than Treasuries. About a third of muni bonds is held by
individuals because of their tax exempt status. Municipal bonds are often sold in $5000
denominations.
Be aware that different municipalities can have different credit ratings. Unlike the federal
government which can tax the whole nation, local governments are dependent on local taxes.
Some municipal bonds are dependent on the revenues generated from the project financed. If the
local economy is not healthy, there may not be a strong base to tax. Municipal bonds can be
insured to make them safer.
Mortgage-backed bonds
Mortgage-backed bonds are formed by pooling mortgages together and selling them to investors.
They provide the benefit of monthly payments. These bonds have call risk because people can
prepay their mortgages or redeem them before maturity especially in times of declining interest
rates.
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78
In the past, investors have looked on mortgage-backed bonds as relatively safe investments,
especially when they were backed by Ginnie Mae, the government agency. However, the 2008
meltdown showed that there can be substantial credit risk in mortgage-backed bonds, particularly
in sub-prime mortgages. With sub-primes, many homeowners were unable to support interest rate
increases have gone into foreclosure.
Other Bond Types and Groupings

Zero-Coupon Bonds
With a traditional bond, interest is paid all through the term of the bond. Zero-coupon bonds are
a special kind of bond where all interest is paid at redemption. For example, if you bought a 10year zero-coupon $1000 par value at 6%, you would pay $553.68 for it. At the end of 10 years, you
would receive $1000 back which would cover both the principal and interest.
You buy a 6% $1000 10-year
zero coupon bond from
issuer for $553.68.
2000
2001 2002

Leslie Lum
2003
At the end of 10 years the issuer pays

you back $1000 which includes principal
and interest.
For ten years the

issuer pays NO
interest.
2004
2005
2006
2007
2008
2009
2010
Bondholder
Zero-coupon bonds are helpful if you dont have much cash but want to purchase a bond for a
financial goal at a set time. Because so much time passes before you are paid, you want to buy
only very safe zero-coupon bonds. Some investors buy zero-coupon Treasuries. Also, another
disadvantage is that you have to pay taxes on the interest every year even though you dont
receive it until the end of 10 years. Investors get around this by putting their zero-coupon bonds in
tax-advantaged savings plans such as IRAs or they may purchase zero-coupon municipal bonds
with tax-exempt interest.
High-Yield Bonds
High-yield is a classification of bonds which alludes to their credit rating and return. Other names
for these are junk bonds and non-investment grade bonds. From the table Bond Ratings in
this chapter, you can see these bonds are much less safe, and so they must provide a higher yield
return for investors to consider them.
Bond funds
Investing in bond funds allows you to invest in a variety of bonds which will help with diversification.
Bond funds may be managed by professional managers or they may follow a bond index. With
bond funds, you can invest in various maturities, Treasuries, foreign bonds, corporate bonds of
various credit ratings, and mortgage-backed bonds. Before you invest in a bond fund, make
sure that you understand the objective of the fund and the type of selections it makes. Some
bond funds invest in derivatives which can be very risky. You can check out the portfolio of a bond
fund with a fund rating company such as Morningstar www.morningstar.com.
Personal Savings
79
Bond Ladder Strategy

Bonds can provide your investment portfolio with a degree of stability, but rising and falling interest rates can
disrupt your investment strategy. Normally the longer the maturity time period, the higher a bonds yield since
longer maturities give the bond to greater risk of interest rate ups and downs over a longer period of time.
From previous graphs, you can see that the interest rates when you buy a bond really matter. From 1982 to
2009 5-year Treasury bond interest rates ranged from about 2 to 13%.
You can use the same strategies for bonds that you can for CDs. Bond laddering is a strategy to protect
you from the risks of interest rate ups and downs and at the same time manage the cash flow (yield or
interest payments) from your bond investments. Similar to the CD ladder, a bond ladder involves buying
several bonds with varying maturities over a several year period.
Say you had $100,000 you did not need for 5 to 10 years. You could buy one lump sum $100,000 bond
which matures in 5 years which would lock in your interest rate at the current rate. Another alternative would
be to create a bond ladder. There are many ways to create a ladder, but here is one. Separate your money
into $20,000 increments and buy one $20,000 5-year bond every year. With the lump sum investment, you
have one your bond maturing at one time. With laddered bond investing, you would have a bond maturing
every year for five years. This is considered a 5-rung ladder.
Looking at early 1980, this is what would have happened. With the lump sum investment, you would have
$153,700 after five years. Although interest rates were high in 1980, you missed the even higher interest
rates in 1981 and 1982. With bond laddering, you would have $190,490. (As a caveat, this analysis doesnt
take into consideration the time value of money.)
1980
1981
1982
1983
1984
1985
10.7%
12.8%
14.7%
10.0%
11.4%
10.9%
At maturity
Lump sum
$100,000
$153,700
Ladder
$20,000
20,000
20,000
20,000
20,000
20,000
$190,490
The advantages of a bond ladder are:

You will have a mixed yield portfolio of bonds coming due in the short and long term, which will
give you an appealing current bond yield.
If interest rates go up, you will have a bond maturing shortly that you can reinvest at a higher
interest rate for another five year term.
If interest rates drop, only a small portion of your portfolio (the one-year bond maturing) would be
reinvested at the lower rate.
You can match your cash needs with how long you make the bond ladder by deciding the type of
bond for the ladder.
Be careful how you build your bond ladder. Here are some suggestions to keep in mind:
Your bond ladder can have a different time frame than the five year example above. However, the
longer the maturity, the higher your yield but the risk will also be greater.
The more rungs on your ladder, the more diversified your investment portfolio will be.
QUESTION 3:
What is difference in the interest if you had invested $100,000 lump sum versus laddering $20,000 in 5-year
Treasuries for each year for the beginning of the 1970s? Try starting your ladder on different years. Your
interest is the rate times your investment times 5 years.
Personal Savings
80
Year
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
Personal Savings
Rate
8.2%
5.9%
5.6%
6.3%
7.0%
7.4%
7.5%
6.6%
7.8%
9.2%
10.7%
81
Activity 18-Create a Bond Ladder:

Go to www.fidelity.com. Click on Investment Products, then Fixed Income and finally Individual Bonds.
Select bonds from the Secondary Market. Click on a corporate bond. This will bring up a query functionality.
Just click Search and a chart will come up with all the corporate bond offerings. If you mouse over any one of
the points, you will see the bond issuer. Click on the point and all the details will come up for the bond.
Check out corporate, mortgage, and zero coupon bonds to see how they work.
Choose 5 corporate bonds with AAA ratings, 5-20 year maturities-spread out about every 5 years, at
$1,000 each for a total of $5,000 to create a Bond Ladder below.
Bond Ladder
Bond Issuer
Bond maturity (year)
Coupon (Interest) Rate
Bond Price
Moodys Rating
Resources:
CDs and Investing, Bankrate.com. http://www.bankrate.com/brm/green/investing/basics-toc.asp
www.bondclass.com The website of electronic bond trader www.bondstation.com
www.investinginbonds.com The website of the Securities Industry and Financial Market Association
Decoding Bond Jargon, Morningstar,
http://news.morningstar.com/articlenet/article.aspx?id=96587&_QSBPA=Y
Little, Ken, A Bond Ladder to Success at About.com,
http://stocks.about.com/od/bonds/a/Bondlad012005.htm?p=1
Lum, Leslie, Personal Investing, Module 4: Bonds,
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Unit 8: Tax-Advantaged Savings

When you earn a return on savings and investments, you pay the government taxes on the interest,
dividends and gains you make each year. If you are saving for education or retirement, the government has
several types of programs which generally enable you to pay less in taxes on money you earn and so put
more towards education and retirement.
The U.S. government has authorized financial institutions to offer a variety of tax-advantaged vehicles to
encourage Americans to save more money. These include education-savings plans, Individual Retirement
Accounts (IRAs) and 401(k)s.
Education-Savings Plans
There are a number of investment accounts you can use to help save for a child's college education which
differ in features and benefits. Families should consider these two types of accounts:
529 Qualified Tuition Programs (QTP)

Many states have set up qualified tuition programs (also known as a 529 plan) that allow you to either
prepay or contribute to an account for a student's qualified education expenses (tuition, fees, books, supplies,
room and board) at an eligible educational institution (which is just about any accredited college). The
student (designated beneficiary) can be changed and is not limited to any age.
The nice thing about 529s is the returns on your contribution are not taxable when you take them out for
qualified expenses. Contributions to a 529 cannot be more than the amount necessary to provide for the
qualified education expenses of the beneficiary. Unlike a Coverdell Education Savings Account, there are no
income restrictions on the individual who contribute. You can contribute to both a 529 and a Coverdell ESA
in the same year for the same designated beneficiary.
Assets can be rolled over or transferred from one 529 to another. In addition, the designated beneficiary can
be changed without transferring accounts. Any amount distributed from a 529 is not taxable if it is rolled over
to another 529 for the benefit of the same beneficiary or for the benefit of a member of the beneficiary's
family (including the beneficiary's spouse). For more information on 529s and all education savings and
credits see Publication 970-Tax Benefits for Education which you can get from the IRS website at
http://www.irs.gov/.
Washington states Guaranteed Education Tuition Program works in a different way. If you buy one year
of college tuition today (100 GET units), it will be worth one year of college tuition when your child is ready
for college, no matter what the cost of college at the time. One hundred GET units are equal to one year of
resident undergraduate tuition and state-mandated fees at the most expensive public university in
Washington. This type of account takes out the uncertainty in the return on your QTP.
Although the value of GET units is tied to tuition at a Washington public university, you can use your units at
nearly any qualified educational institution in the country. If your school costs more, you pay the difference.
If it costs less, you can use the extra units to pay for other higher education costs. This program is open to
residents of the state of Washington. For more information, go to http://www.get.wa.gov/index.shtml.
Coverdell Education Savings Account

A Coverdell ESA can also be used to save for qualified higher education expenses. There are more
restrictions, though. The student must be under age 18 when the account is set up and the account must be
used when the student reaches age 30 (unless the student has special needs). There is no limit to the
number of Coverdell ESAs that can be established for one beneficiary but total contributions made to all
Coverdell ESAs for any beneficiary in one tax year cannot be greater than $2,000. There are income
restrictions for the contributors. Generally speaking, any individual (including the beneficiary) whose modified
adjusted gross income for the year is less than $110,000 ($220,000 in the case of a joint return) can
contribute.
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Individual Retirement Accounts (IRAs)

An individual retirement account (IRA) is an account that lets you put away money for retirement and gives
you tax breaks. Money put in an IRA can be invested in a variety of investment vehicles like CDs, stocks,
bonds, and mutual funds. The money you put in an IRA grows tax-free until you retire and are ready to
withdraw it. Investments in tax-advantaged accounts can compound more quickly than those in taxable
accounts. You can open an IRA at a bank, brokerage firm, mutual fund or insurance company. IRAs are
subject to certain income limitations and other requirements that are listed at the IRS website.
Why Should I Invest in an IRA?

Over time, compounding can be a powerful ally in saving for your retirement. For example, if you contributed
$4,000 annually to an IRA starting at age 40 and ending at age 65, you would have contributed $100,000 in
your account. But, your earnings at 7% would be $253,000 giving you a grand total of $353,000. That seems
like a sizable amount. If you started early at age 25, you would contribute $60,000 more but your earnings
would be about $500,000 more. It pays to start as soon as possible.
Earning 7%
Number of
years
25-65 years
30-65 years
35-65 years
40-65 years
40
35
30
25
Savings
per year
Total
contributions
$4,000
4,000
4,000
4,000
$160,000
140,000
120,000
100,000
Earnings
$798,540.45
$552,947.51
$377,843.15
$252,996.15
Total
$958,540.45
$692,947.51
$497,843.15
$352,996.15
Start early and let your money work for you

Retirement account balances
900000
800000
Contributions
700000
Earnings
600000
500000
400000
300000
200000
100000
0
25-65 years
30-65 years
35-65 years
40-65 years
There are several types of IRAs and these are described below.
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Traditional IRA's
A traditional IRAs main advantage is tax deferral. If you meet requirements, your contribution may be made
pretax. That is, the amount you contribute will not be included in your taxable income today. Any earnings
you make may grow tax deferred until retirement.
In 2011, you could contribute up to $5,000 a year to a traditional IRA, as long as you earned $5,000 a year
or more. A married couple with only one person working outside the home may contribute a combined total
of $10,000 to an IRA and a spousal IRA. (Up to $5,000 in each IRA.) Individuals 50 years of age or older
may make an additional catch-up contribution of $1,000 a year, for a total annual contribution of $6,000.
Money invested in an IRA is deductible from current-year taxes if you are not covered by a retirement plan
where you work and your income is below a certain limit. (Check the IRS website www.irs.gov Publication
590 for your deductibility income.) In 2012, contribution limits will be indexed with inflation.
You dont pay taxes on the money in a traditional IRA until it is withdrawn. All withdrawals are taxable, and
there generally are penalties on money withdrawn before age 59. However, after age 59 you can
withdraw the principal and any interest or appreciated value with a penalty. And, you can make certain
withdrawals without penalty, such as to pay for higher education, to purchase your first home, to cover
certain unreimbursed medical expenses or to pay medical insurance premiums if you are out of work. One
disadvantage is that when you withdraw from your traditional IRA, your earnings will be taxed as ordinary
income so you will not have the advantage of a lower capital gain tax.
Roth IRA
A Roth IRA is funded by after-tax earnings. There are income limits as to who can contribute to a Roth IRA.
Why would anyone want to contribute? Well, the distributions are tax-free. This benefits those who are young
and will accumulate large returns on their accounts. You do not deduct the money you pay into the Roth IRA
from your current income, and any earnings grow free of federal tax, which means you don't get a tax
deduction now, but you won't need to pay taxes on the earnings later. The contribution limits are the same as
with the traditional IRA. However, those eligible to contribute must be within the income limits shown below.
Roth IRAs have another advantage in that they are not subject to minimum distribution requirements.
The following table compares the two types of IRAs and also compares 401ks which is covered in a different
section
Traditional IRA
Roth IRA
401K
Who is
eligible
Anyone up with age

70 with income
from working and his
or her nonworking
spouse. There are
no income limits.
Determined by employer.
Maximum
you can
contribute
2015
$5,500 each with

$1000 catch-up
contributions for
those over 50.
Anyone who had

income from working
and his or her
nonworking spouse.
There are income
limits.
$5,500 each with
$1000 catch-up
contributions for
those over 50.
Tax status of
contributions
Contributions may
be pretax up to
certain income limits.
Earnings are tax
deferred. You pay
Tax status of
earnings
Personal Savings
Contributions must
be after-tax.
Earnings are tax
free.
$18,000 or maximum set

by employer. $6000
catch-up contribution for
those 50 and over.
Your employer may
contribute a match
which makes this
attractive.
Contributions are pretax.
Earnings are tax

deferred. You pay
85
Withdrawals
Mandatory
age for
withdrawals
ordinary income tax

when you take the
money out therefore
missing out on lower
capital gains tax.
Withdrawals made
before age 59 will
be subject to a
penalty of 10% in
addition to tax.
70 1/2
ordinary income tax

when you take the
money out therefore
missing out on lower
capital gains tax.
Contributions may
Withdrawals made
be withdrawn without before age 59 will be
penalty.
subject to a penalty of
10% in addition to tax.
Earnings can be
withdrawn without
penalty for some
expenses.
None
70 1/2
Go to this website for a calculator to compare Roth IRA and Traditional IRAs:
http://screen.morningstar.com/IRA/IRACalculator.html
Self Employed: SEP-IRA

If youre self-employed, dont worry. There is a retirement plan for you. A qualified plan now called SEP-IRA
(formerly referred to as a Keogh plan) is a tax-deferred plan designed to help self-employed workers save for
retirement. The most attractive feature of a qualified plan is the high maximum contribution of the lesser of
25% or $49,000 (for 2010 check IRS publication 560 for latest information) annually.
The contributions and investment earnings grow tax-free until they are withdrawn, when they are taxed as
ordinary income. Withdrawals before age 59 are subject to a penalty. Check the IRS web site for IRS
Publication 560www.irs.gov Retirement Plans for Small Business.
Rollover IRA
A Rollover IRA is a type of Individual Retirement Account that is often used by people who have changed
jobs or retired and have assets accumulated in their employer-sponsored retirement plan.
There are two ways to roll over your assets from your former employer-sponsored retirement plan to a
Rollover IRA or Traditional IRA, and the tax implications may be different depending on which you choose to
do.
Direct Rollover. In this situation, the distributions go directly from your employer-sponsored retirement
plan to the IRA via a trustee-to-trustee transfer.
60-Day Rollover. You can withdraw your former employer-sponsored retirement plan assets and then roll
them over into an IRA. You must complete the rollover within 60 days of receiving the distribution to
avoid current income taxes. You will be subject to mandatory 20% withholding for federal income tax,
which you would have to replace if you want to roll over your entire distribution to your IRA. If you hold
the assets for more than 60 days, your distribution will be subject to current income taxes and a 10%
early withdrawal penalty if you are under age 59.
Both ways will allow your assets to continue to grow tax-deferred until withdrawal.
Savings and Thrift Plan - 401K Plans (Contributory Retirement Plans)

Many folks save for retirement through company-sponsored contributory plans. Most of these are structured
as 401K (named after the IRS code that established them in 1981) company plans where employees can
make pretax contributions to their own accounts. According to the Investment Company Institute, in 2006
there were 43 million participants in 457,830 plans with $2.1 trillion in assets. Depending on the plan,
employees may also make after-tax contributions where tax on the investment income is deferred until
retirement.
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If you contribute to a 401K, your money is put in before taxes--that means your salary is reduced for tax
purposes. The maximum contribution is $16,500 (2011) with an additional catch-up of .$5500 for those over
50 years old. To encourage saving, some plans will automatically make you a participant, contributing 3% of
your salary unless you opt out. About 82% of employees contribute and on average participants put in 6.8%
of salary.
Employers may match all or part of this contribution. This means that they will put in some money for each
dollar that you put in. If your employer matches your contribution, the 401K is the best way to save for your
retirement.
Many employers require that an employee work for a certain period of time to earn the right to keep the
employer match. This is called a vesting schedule. Lets say you make $50,000 a year and contribute 3%
or $1500 to your 401K every year. Your employer contributes $0.50 for every $1 you put in, contributing
$750 a year. There is a five year vesting schedule, at 20% a year.
Year
1
2
3
4
5
Cumulative
contribution at
$1500 a year
1500
3000
4500
6000
7500
Cumulative
Employer Match
at $750 a year
750
1500
2250
3000
3750
Vested
Employer match that you can

take with you if you leave
20%
40%
60%
80%
100%
150
600
1350
2400
3750
If you leave after two years, you would only be 40% vested meaning you could only take 40% of the total
company match of $1500. You could, of course, take your contribution of $3000 for a total of $3600. If you
leave after 4 years, you could take 80% of the total employer match of $3000. This with your contribution of
$6000 would total to $8400. Sometimes the vesting schedule is based on the number of hours worked, or a
calendar date, or an anniversary of hire date. An employee should be knowledgeable about her plans vesting
schedule. Each plan can be different.
Most 401Ks allow employees to make their own decisions among investment selections. Many companies
offer 10 or more selections. Most allow changes at any time and the rest allow at least 4 changes a year.
About 82% of plans allow loans to the employee. Depending on the company plan, employees may borrow
up to a maximum of 50% of the account balance or $50,000. Where permitted, about 25% of participants
have loans for an average balance of about $6000. The loan must be repaid with after-tax payroll
deductions. Most plans have restrictions on what you can borrow for. Home purchase, education, and
medical expenses top the list.
You can start withdrawing money when you hit age 59 and no later than age 70. You can withdraw
before age 59, but only for hardship reasons defined by the government, and you may still have to pay
10% penalty tax on these withdrawals. If you quit your job and your account is more than $5000, you can
leave your money with the company plan. You also have the option of moving your money to your new
companys plan or moving your money into a Rollover IRA. Even though you have 60 days to decide, its
best to make these arrangements ahead of time. If the check is made out to you for a later decision, 20% will
be withheld for taxes (which you dont get back until you file your return). There is a 10% penalty for
withdrawing before age 59 and you have to pay taxes on your withdrawal on top of that.
Here is an example of how a 401K works. Jill is single and makes $30,000 a year gross salary. She usually
pays about 15% tax on her salary. Her employer will match her 401K contributions by 50 cents for every
dollar that she puts in up to a maximum of 6%. Jill puts in $1800 or 6% of her salary. Her employer matches
50 cents on her dollar so it puts in $900. Her salary for tax purposes has been reduced to $28,200 so if she
stays at the same tax rate, she would save an additional $270 in taxes (15% of $1800). (Her taxes are
deferred until she draws the income from the IRA.) If her employers continue to contribute in the same way
and she receives a 8% return, that is over $100,000 that she would not have otherwise. In actual case, Jills
salary will increase and so will her employers contributions so the amount could be substantially more.
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When setting up your 401K investments, figure out what your mix of stocks and bonds should be. This is also
known as asset allocation. Two factors influence this decision: your time horizon until retirement and your
risk tolerance. When you're limited to the investments your employer chooses for your 401K plan, if you don't
like many of the selections, keep your choices simple by investing, in a broad-based index fund. Don't skip
the 401Kplan--if you do, you will lose out on tax-advantaged earnings growth and matching contributions.
One key point to make about 401Ks is that the taxes do not disappear. They are deferred, meaning when
you take the money out at retirement, you will have to pay taxes on the distributions. Also, another
disadvantage is that you will pay taxes at ordinary income tax rates which would be higher than the capital
gains tax rate that may be applicable to some of your investments. This reason may make a Roth IRA
attractive since the contributions to Roth IRAs are made after tax, the distributions are tax-free.
There is a very helpful online financial education series called Understanding and Controlling Your
Finances by Marshall Brain. This series covers goal setting, expense and cash flow calculators, balanced
financial life, insurance, investments (tax and non-tax compounding calculators), retirement planning and
401K calculators, buying a first home and frugality. http://www.bygpub.com/finance/finance0.htm
Activity 19: Maximize your tax savings.

Go to: http://www.bygpub.com/finance/TaxFixedAmtCalc.htm Use the Tax and Non-Taxed Compounding
Calculator to identify which savings vehicles would be best for your financial situation.
1. Assume you will have accumulated 3-6months of emergency money, list the savings vehicles you
would use for this.
2. If you have a 401K plan, list the details of your employer match and list what funds you can
contribute to. Even if you do not have a 401K at work, assume you make $45,000 and make 401K
contributionsHow much will you contribute per year?
a. Calculate what you save in taxes now and how much return you get from the employer
match (50% for every $1 you contribute). Make sure you maximize your employer match, i.e.,
if your employer matches 3% then take action to contribute the full 3% match level.
3. Are you eligible to start a Roth IRA? Give reasons why or why not. If you are eligible, investigate
where you can start one. Take action to contribute to your Roth IRA.
Resources:
Investor Education BookletsInvestments. Stocks, Bonds, Mutual Funds, College Money and Retirement,
http://www.dfi.wa.gov/sd/investor_education.htm
Investing Basics: CDs and Investing Basics, Bankrate.com,
http://www.bankrate.com/brm/green/investing/basics-toc.asp
Building Wealth: A Beginners Guide to Securing Your Financial Future, Federal Reserve Bank of Dallas,
http://www.dallasfed.org/ca/wealth/pdfs/wealth.pdf
How to invest in a 401K, http://money.cnn.com/magazines/moneymag/money101/lesson23/index3.htm
Retirement Basics>Understanding the Fundamentals, http://www.bankrate.com/brm/green/retirement/basicstoc.asp
Bankrate: Retirement Calculators, http://www.bankrate.com/brm/calculators/retirement.asp
Understanding and Controlling Your Finances by Marshall Brain, BYG Publishing, Inc.
http://www.bygpub.com/finance/finance0.htm
Financial Links on the web. http://www.bygpub.com/finance/FinanceLinks.htm
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Glossary
Automated Teller Machine (ATM)
Is a machine that allows account holders to make deposits or withdrawals and perform other
transactions 24 hours a day at most locations. To use an ATM, you need an ATM card and a
Personal Identification Number (PIN).
Automated Teller Machine (ATM) Card
A plastic card with a magnetic strip. With an ATM card and a PIN, you can make deposits or
withdrawals from ATMs.
Automated Teller Machine (ATM) Network
A regional, national or international network that enables consumers to do transactions at ATMs.
Your financial institution must belong to the network for you to use the network ATM.
Automatic Savings
Money that you ask your employer to take from your paycheck and automatically put into an account
at your financial institution. Also called allotments.
Balance Inquiry
The act of finding how much money is in your account.
Balance
The amount of money you have in your deposit account.
Balancing
Comparing your account records to the monthly or quarterly statement provided by your financial
institution, adding any interest earned and subtracting any fees charged. When you have finished,
the closing balance on the institutions statement should equal the balance shown in your records,
after taking into consideration any outstanding transactions.
Banks
Financial institutions are businesses operating under Federal and state regulations. They offer a
variety of services such as savings accounts, checking accounts, the ETASM Electronic Transfer
Account, safe deposit boxes, loans and investments. Accounts in most banks are insured against
loss by the Federal Deposit Insurance Corporation (FDIC).
Basic Checking Account
A checking account that usually allows a limited number of deposits and withdrawals for a minimum
fee.
Bounced Checks
When a check you wrote reaches the financial institution and there is not enough money in your
account to cover it, your institution returns the check to the person or business you wrote it to, and
charges you a fee (often as much as $25). Checks returned to the person or business you wrote are
said to bounce. Put money in your account to cover the check, as it will be run through again for
deduction by the person or business.
Branch
Financial institutions may have several locations: a central or main location and others. Other
locations are called branches.
Cashier's Check
You provide cash or money from your account in the amount of the check plus a service charge
(usually from $2 to $5), and tell the institution for whom the check is intended. The financial
institution writes a check (also called a bank check or tellers check) for you that is guaranteed not to
bounce.
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Certificate of Deposit (CD)

A specialized savings account that involves depositing money for a fixed period of time (such as
three or six months, one or five years). Money usually earns more interest in a CD than in a regular
savings account. Longer periods may result in higher interest rates. Taking out money sooner than
you promised means paying penalties and possibly losing any interest you may have earned.
Certified Check
A check you write and take to your financial institution. The institution will mark it certified for a fee
(usually from $2 to $5) and place a hold on the funds in your account until the check clears. A
certified check is guaranteed not to bounce.
Checks
Forms from your financial institution or available through mail-order companies. Checks allow you to
send money from your checking account through the mail or pay at stores without the risk of losing
cash, and serve as receipts for payments you make in person or by mail.
Checkbook
A plastic folder with pockets for holding checks and your checkbook register.
Checkbook Register
A booklet for keeping track of deposits, withdrawals and checks written on your checking account,
essential for making sure you always know how much money is in your account.
Checking Account
A deposit account that allows you to write checks, to pay bills or for purchases. The checks are
drawn on money you deposit.
Clears
A check you write clears when the amount of the check has been withdrawn from your checking
account by the financial institution.
Closing Balance
On your monthly or quarterly statement, the closing balance is the amount of money in your account
at the end of the statement time period. The closing balance reflects any fees or service charges and
withdrawals taken from your account, plus all deposits and interest added to your account during the
statement time period.
Credit Unions
Non-profit financial institutions owned by members who have something in common. To join a credit
union all individuals must share a common bond with one another either in a group or a community
credit union. There are three types of common bonds. 1) Work-related: If your employer belongs to a
credit union, you should be eligible to join. 2) Mutual interest: Your house of worship or local
community group may have started or may belong to a credit union you can join. 3) Where you live:
Your neighborhood or county may have established a community credit union for all people living
within your geographic area. Credit unions operate under Federal or state laws. Many offer a variety
of services such as share (savings) accounts, share draft (checking) accounts, the ETASM
Electronic Transfer Account and ATM cards. Accounts in credit unions are insured. Most credit
unions have their accounts insured by the Federal government, NCUA. Some state-chartered credit
unions have private insurance.
Debit Card
A plastic card sometimes called a Check Card that looks like a credit card and is embedded with a
magnetic strip. With a debit card you can make deposits to, or withdrawals from, your checking
account at ATMs, or pay for goods and services at stores and other businesses. You can also make
withdrawals from your ETASMElectronic Transfer Account. Some debit card transactions require a
Personal Identification Number (PIN), and the money comes out of your account immediately.
Personal Savings
90
Deposit
Cash or checks you add to your checking or savings account. Also, the act of adding money to your
checking or savings account.
Deposit Account
An account (checking, share draft, savings or ETASMElectronic Transfer Account) at a financial
institution to which you or your Federal Government paying agency can add money.
Direct Deposit
The automatic deposit of your salary, government benefit or other payment into your checking, share
draft or savings account, or ETASMElectronic Transfer Account.
Direct Payment
Automatic withdrawals from your checking or savings account to pay bills or for other payments. Also
called automatic payment.
Dividends
A term credit unions use for interest earned on accounts.
Electronic Account
The account lets you deal with your financial institution by using a personal computer or the Internet.
Electronic Banking
See definition for Electronic Funds Transfer (EFT).
Electronic Funds Transfer (EFT)
EFT, the transfer of funds by electronic means, includes Direct Deposit, Fedwire, debit card,
Automated Teller Machine (ATM), and Point-Of-Sale (POS) transactions.
Electronic Transactions
Deposits to your checking or savings account or ETASM Electronic Transfer Account through
Direct Deposit, ATM or automatic withdrawals from your account to pay bills.
Electronic Transfer Account (ETASM)
A low-cost, federally insured account designed by the U.S. Department of the Treasury and offered
at participating banks, savings and loans, and credit unions to receive Federal benefits and
payments electronically.
Endorse
To sign the back of a check made out to you so that it can be cashed.
Endorsement
Information added to the back of a check so that it may be cashed by the person or business to
whom the check is written.
Federal Deposit Insurance
Insurance for money deposited in financial institutions displaying the logo of the Federal Deposit
Insurance Corporation (FDIC) or National Credit Union Administration (NCUA).
Federal Deposit Insurance Corporation (FDIC)
Federal government agency that provides federal deposit insurance for member banks, and savings
and loan associations. Member institutions must display the FDIC logo. In general, accounts are
insured for up to $100,00 per account ownership for non-IRA or Keogh accounts. Individual
Retirement Accounts (IRA) and Keogh accounts are insured to $250,000 per account ownership. If
you have questions about FDIC insurance or problems with an FDIC-supervised institution, call 1800-934-3342.
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Fees
Money charged by financial institutions for various services.
Financial Institutions
Businesses, including banks, savings and loans, and credit unions, that provide services such as
checking accounts, savings accounts, ETAsSM ElectronicTransfer Accounts, loans and more.
Financial Management Software
Computer software that allows you to track your account activity using a computer.
Hold
Checks you deposit in your account may be held until the funds clear and may not be available for
one, two or five business days from the day of deposit. See fact sheets Frequently Asked Questions
or Using Deposit Accounts for more detailed information about holds.
Interest
Money you earn on funds in a savings account and on certain checking accounts.
Interest-Earning Checking Account
A type of checking account that pays interest and lets you write as many checks as you want. There
are usually minimum balance requirements on these accounts. Sometimes called NOW or money
market accounts.
Interest Rate
Financial institutions pay you for funds you deposit in savings accounts and certain checking
accounts. The money they pay you is called interest, or dividends for credit unions. The interest rate
is the percentage, usually stated as an Annual Percentage Yield (APY), they will pay. For example, a
$100 deposit in a savings account earning 5% APY would earn $5 after one year.
Minimum Balance Requirements
Some checking, share draft or savings accounts require that you keep a certain amount of money (a
minimum balance) in your account to avoid paying an account fee.
Money Orders
Similar to checks, theyre used for paying bills or making purchases in cases where cash is not
acceptable. Many businesses sell money orders for a fee.
Mortgage
A special type of long-term loan used to borrow money for a house.
National Credit Union Administration (NCUA)
The Federal agency that regulates and provides deposit insurance for Federal credit unions.
Accounts are insured at federally insured credit unions for up to $100,000 per account.
No Frills Checking Account
A basic checking account that usually allows a limited number of deposits and withdrawals for a
minimum fee.
Outstanding Transaction
A check or withdrawal that has not yet been taken from (or a deposit that has not yet been added to)
your account, or has not yet shown up on your account statement.
Overdraft Protection
A service that helps you avoid bouncing a check by providing a line of credit.
Passbook Savings Account
A type of savings account that uses a booklet, called a passbook, to keep track of transactions
deposits, withdrawals, interest earned and fees.
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Penalty
A fee you pay for taking money out of a CD or Share Certificate before the agreed upon time.
Personal Computer Software
Software provided by your financial institution that lets you access your account using a personal
computer. You must have a modem and telephone access.
Personal Identification Number (PIN)
Your own special password or set of numbers for using ATM or debit cards.
Phone Banking
Lets you use a telephone to access your accounts.
Point of Sale (POS) Terminals
Machines located at grocery stores and other businesses which accept ATM or debit cards for
purchases.
Point of Sale (POS) Transfers
Transactions carried out using POS terminals.
Postdating
The ill-advised practice of writing a check without having the money in your account by writing a
future date on the check.
Regular Checking Account
A type of checking account that does not pay interest and lets you write checks to make payments.
Safe Deposit Box
A secure place for keeping important documents and other valuables within a financial institution.
Financial institutions charge a fee for safe deposit boxes.
Savings Account
Accounts, available from financial institutions, where you deposit your money for safekeeping.
Money in a savings account usually earns interest.
Savings Account Register
A booklet used to keep track of transactions deposits, withdrawals, interest earned and fees for
statement savings accounts.
Savings & Loan Associations (S&Ls)
Financial institutions similar to banks. Federally insured S&Ls display the logo of the FDIC.
Service Charges
Fees you pay to financial institutions for processing transactions and maintaining your account.
Share Accounts
Savings accounts offered by credit unions.
Share Certificates
Certificates of Deposit (CDs) offered by credit unions.
Share Draft Accounts
Checking accounts offered by credit unions.
Signature Card
Personal Savings
93
A form you complete and sign when opening an account. The signature you provide may be used to
verify your signature on checks and withdrawals. Signing the signature card means you accept the
fees, terms and conditions of the account.
Smart Cards
Plastic cards with computer chips that can be used to make purchases. They can only be used for
mass transit or telephone calls.
Special Purpose Account
Same as a club account.
Statement
A document you receive from your financial institution on a regular basis (monthly or quarterly) that
provides details about deposits, withdrawals, checks, service charges, fees and interest earned for
the previous month or three months.
Statement Closing Date
The last date for which transactions are included on your statement.
Statement Savings Account
A type of savings account that includes a statement which you will get, usually quarterly, listing all
transactions since your last statement deposits, withdrawals, interest earned and fees charged.
Teller
Employee at a financial institution you see to make deposits and withdrawals, cash checks, or do
other business with your institution.
Teller's Check
Similar to a money order, but provided by financial institutions instead of other businesses.
Terminals ATM machines
Computer-like machines that make it possible to use ATM and debit cards at locations far from your
financial institution.
Transaction
The movement of money, including deposits and withdrawals from your account, and the exchange
of money for goods and services.
Transaction Fees
Fees you pay to financial institutions for processing transactions.
United States Savings Bonds
Certificates you buy from the Federal government for long-term savings. You lend your money to the
government and receive interest. Savings Bonds are not insured, but are backed by the full faith and
credit of the U.S. government.
Web Banking or Online Banking
Banking that involves using a personal computer and the Internet to access your account.
Wire Transfer
Electronic transfer of money, for a fee, that can be sent to people inside and outside of the United
States.
Withdrawal
Taking money out of your account, whether in person or through an ATM or debit card.
Withdrawal Slip
Form used to take money from your account in person at your financial institution.
Personal Savings
94
The above Glossary was adapted from the Financial Services Education Coalition of banks, thrifts, credit
unions and US government agencies.
Sources
Bank Insurance Limits, Federal Deposit Insurance Corporation, http://www.fdic.gov
Brain, Marshall Understanding and Controlling Your Finances by BYG Publishing, Inc.
http://www.bygpub.com/finance/finance0.htm
http://dallasfed.org/ca/wealth/index.html
CDs and Investing, Bankrate.com. http://www.bankrate.com/brm/green/investing/basics-toc.asp
CDs Introduction and CD calculators from Bankrate.com at
http://www.bankrate.com/brm/green/investing/investing2-intro.asp?caret=36
Check Card Survey 2007, Federal Reserve Bank, Bankrate.com,
http://www.bankrate.com/brm/news/check_card/20070312_check_card_analysis_a1.asp
ChexSystems, https://www.consumerdebit.com/consumerinfo/us/en/chexsystems/report/index.htm
Classify your goals as long term, intermediate term and short term.
College Board for costs for college, http://www.collegeboard.com/student/pay/add-it-up/482.html
Credit Union Insurance Limits, National Credit Union Administration, http://www.ncua.gov
Decoding Bond Jargon, Morningstar,
http://news.morningstar.com/articlenet/article.aspx?id=96587&_QSBPA=Y
Department of Financial Institutions-Washington State, Investor Education Booklets-Investments. Stocks,
Bonds, Mutual Funds, College Money and Retirement,
http://www.dfi.wa.gov/sd/investor_education.htm
Federal Reserve Bank: Consumer information about money management, budgeting, saving, investing and
credit: http://www.federalreserve.gov/consumers.htm
Financial Links on the Web from Understanding and Controlling Your Finances by Marshall Brain,
http://www.bygpub.com/finance/FinanceLinks.htm
Laddering CDs from About.com at http://financialplan.about.com/cs/investing/a/LadderingCDs.htm
Little, Ken, A Bond Ladder to Success at About.com,

http://stocks.about.com/od/bonds/a/Bondlad012005.htm?p=1
Lum, Leslie, Personal Investing, Module 4: Bonds,
Money Market Accounts with the Highest Rates, RateCatcher.com, http://www.ratecatcher.com/
Money Market Rates, MoneyRates.com, http://www.money-rates.com/market.htm
Money Market vs. Certificate of Deposit, About.com,
http://beginnersinvest.about.com/cs/banking/a/062501a.htm
National Endowment of Financial Education has information about financial planning, credit and debt, saving,
investing, retirement plus Life Events and Financial Decisions: http://www.smartaboutmoney.org/
Net Worth Calculator, http://www.youngmoney.com/calculators
Pharming, SearchSecurity.com,
http://searchsecurity.techtarget.com/sDefinition/0,290660,sid14_gci1097059,00.html
The Net Worth StatementYour Financial Snapshot,
http://financialplan.about.com/cs/personalfinance/a/NetWorthStmt.htm
Treasury Direct, http://www.savingsbonds.gov/
Young Money --Calculators for savings, retirement, personal finance, loan and mortgage, credit card and
debt management, and auto buying: http://www.youngmoney.com/calculators
Your Net WorthKnow your Value,
http://www.msmoney.com/mm/financial_health/where_stand/yournetworth.htm
Personal Savings
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BUS 103

Copyright Washington State Department of Financial Institutions.

What is online banking? ........................................................................................................................... 46

Coverdell Education Savings Account .................................................................................................... 83

About this course for instructors

About this course for students

Money management over your financial life

Identify financial goals.

Minimize student loans and use

Manage your retirement

2010 Median household

Your incom e goes up and dow n as you age

US Census, State Facts. 15 Dec 2010. <http://quickfacts.census.gov/qfd/states/53000.html>

Typical Yearly Salary by Education and

Household wealth (2004)

Median net worth

Steps to Secure your Financial Future

(1) Set goals

(2) Create a spending planand stick to it

(3) Create wealth by paying yourself first.

Personal saving as a % of disposable personal income

Source: BEA report - Personal Income and Its Disposition

2009 Household saving rates

Source: OECD Economic Outlook 87 database

1. Saving $4000 a year from 25 to

So start depositing money younger . . . The more time the

(4) Grow your wealth by investing intelligently.

(5) Conserve wealth with good credit habits.

2007 Consumer Finance Survey

Source: Federal Reserve

Compare our household debt with our disposable income as a nation.

Total Household Debt is More than Personal

Source: Federal Reserve

(6) Protect your wealth.

Do you do this now?

Activity 1: Needs and Wants

Activity 2: Spending Plan

Estimate your expenses for a month.

Where can you save?

Activity 3: Financial Goals

The Time Value of Money

(1) Future value What my savings will be worth in the future

Used with permission of Leslie Lum

$1000 (1 0.05)10 $1628.90

Future Value per $1000 Investment Now

What would be todays value?

Used with permission of Leslie Lum

Sum Needed Today

Value to set aside for $10,000 in the future

(3) Future value of an annuity Value of saving every year

Savings per Week

Savings per week

(Assumes daily compounding of interest.)

Savings per week

(Assumes daily compounding of interest.)

(4) Future value of an annuity Savings needed for future goal

Annual Savings Needed

Planning For Uncertainty

Used with permission of Leslie Lum

Used with permission of Leslie Lum

Large stocks (S&P 500)

Average Annual Return 1970-2008

Ibbotson SBBI Classic Yearbook 2009