manage your money karsten jeske, ph.d. federal reserve bank of atlanta

Manage Your MoneyManage Your Money

Karsten Jeske, Ph.D.Karsten Jeske, Ph.D.

Federal Reserve Bank of AtlantaFederal Reserve Bank of Atlanta

Purpose of This Purpose of This SessionSessionTo show:To show:

Why it’s important to saveWhy it’s important to save

How you can save moneyHow you can save money

Examples of investmentsExamples of investments

Use credit wiselyUse credit wisely

Why Save?Why Save?

How to Save MoneyHow to Save Money

From each From each paycheck.paycheck.

From gifts. From gifts.

Building up Building up loose change.loose change.

Tips to Saving MoneyTips to Saving Money

• Be realistic

• Be systematic

ExampleExample

Alice starts saving at age 25: Alice starts saving at age 25: 10% of her income10% of her income

Bea starts saving at age 30: Bea starts saving at age 30: 13.3% of her income13.3% of her income

Chris starts saving at age 35: Chris starts saving at age 35: 17.9% of his income17.9% of his income

Dan starts saving at age 40: Dan starts saving at age 40: 24.6% of his income24.6% of his income

Ellis starts saving at age 45: Ellis starts saving at age 45: 35.1% of his income35.1% of his income

At age 65: They all have the same wealth: At age 65: They all have the same wealth: Worth ~12 times their final income!Worth ~12 times their final income!

Remember…Remember…

Even lower-income people can become wealthy through good savings habits.

A lot of people who might look wealthy have no cash and are always in debt.

We are so broke!

Key Point About Saving Key Point About Saving MoneyMoney

TheThe AMOUNT AMOUNT saved saved

isn’t as important as getting intoisn’t as important as getting into

thethe HABIT!HABIT!

Examples of Examples of InvestmentsInvestments

– Savings AccountsSavings Accounts– Interest CheckingInterest Checking– Money MarketMoney Market– Certificate of DepositCertificate of Deposit– StocksStocks– BondsBonds– Mutual FundsMutual Funds– Real Estate (& R/E Real Estate (& R/E

Funds)Funds)

Risk and ReturnRisk and Return

StocksStocks BondsBonds Certificate of DepositCertificate of Deposit Money Market FundMoney Market Fund Savings AccountSavings Account

Higher ReturnHigher Risk

Lower ReturnLower Risk

Compound InterestCompound Interest

Year 1Year 1

$100 x 10% = $10$100 x 10% = $10

$100 + $10 = $100 + $10 = $110$110

Year 2Year 2

$110 x 10% = $11$110 x 10% = $11

$110 + $11 = $110 + $11 = $121$121

Comparison ShopComparison Shop

Consider things like the following:

• Minimum balance requirements

• Interest rate

• How interest is calculated

• Fees, charges, penalties, etc.

• Convenience

• Risk

Don’t Be a Victim of Don’t Be a Victim of Fraud!Fraud! Know who you’re Know who you’re

investing withinvesting with– Do your Do your

researchresearch Be wary of get rich Be wary of get rich

quick schemesquick schemes Protect yourselfProtect yourself

– www.ftc.govwww.ftc.gov– www.fraud.orgwww.fraud.org– www.nasaa.orgwww.nasaa.org

Use of CreditUse of Credit

Advantages:Advantages:– Able to buy needed items nowAble to buy needed items now– Don’t have to carry cashDon’t have to carry cash– Creates record of purchasesCreates record of purchases– More convenient than writing checkMore convenient than writing check

Disadvantages:Disadvantages:– InterestInterest– May require additional feesMay require additional fees– Increased impulse buying may occurIncreased impulse buying may occur– May loose track of how much one spends May loose track of how much one spends

in a monthin a month

Use of CreditUse of Credit

Distinguish “wants” vs. “needs”Distinguish “wants” vs. “needs”

Books for school?Books for school? ““need”need”

Caribbean Cruise?Caribbean Cruise? ““want”want”

A new car?A new car? dependsdepends

Jewelry?Jewelry? ““want”want”

Roof repair?Roof repair? ““need”need”

Use of CreditUse of Credit

Never buy “wants” on creditNever buy “wants” on credit Buy “needs” on credit if necessary.Buy “needs” on credit if necessary. But follow the 20-10 rule:But follow the 20-10 rule:

– Don’t carry more than 20% of annual Don’t carry more than 20% of annual income in debt (outside of home income in debt (outside of home mortgage).mortgage).

– Don’t carry debt that makes you pay Don’t carry debt that makes you pay more than 10% of monthly income in more than 10% of monthly income in debt service (outside of home debt service (outside of home mortgage).mortgage).

SummarySummary

Get in the habit of saving: The Get in the habit of saving: The earlier you start the easier it isearlier you start the easier it is

If you use credit , do so only for If you use credit , do so only for “needs”“needs”

Keep a lid on debt: 20-10 rule!Keep a lid on debt: 20-10 rule!