Putting Your Money to Work

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Putting Your Money to Work

  1. 1. Putting yourmoney to work:A simple guide to financial education 1
  2. 2. Putting your money to work: A simple guide to financial education This booklet is meant to provide general financial information; it is not meant to substitute for, or to supersede, professional, legal, or medical advice. Note: The content areas in this material are believed to be current as of this printing, but, over time, legislative and regulatory changes, as well as new developments, may date this material. ©2003 National Endowment for Financial Education. All rights reserved.2
  3. 3. Table of ContentsIntroduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4Manage your money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6 Make a budget . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6 Banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10Getting help with your finances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12 Earned income credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12 Child and dependent care credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13 Supplemental security income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13 More help . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13Buy a home for you and your family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14 A mortgage is a loan to buy a home . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14 How to get a loan to buy a home . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14 You also will pay insurances and taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .14 Learn more about buying your own home . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15Build good credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16 Pay your bills on time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16 Order your credit report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16 Use a credit card to help build good credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16 Avoid predators that lend money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .17To meet your goals, save your money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18 Ways to start saving your money . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19 Open a savings account . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .19Start saving for retirement now . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22 3
  4. 4. Introduction Welcome to life and culture in the United to write down what you want to achieve. States and welcome to the U.S. system of Research shows that people who write down money. This booklet has been created by the their goals usually save twice as much money International Association of Jewish Vocational toward those goals as people who do not write Services (IAJVS), the National Endowment for them down. To meet your goals or realize your Financial Education (NEFE), and Bank of dreams, find the cost of what you want to buy America to give you basic information on how or achieve. For example, if you want to buy a to use the U.S. dollar and banking system to house, you will have to pay not only the your advantage. We are excited to help you purchase price, but homeowners’ insurance, learn how to achieve your financial goals. We property taxes, and the cost of improving and also encourage you to understand that most maintaining the home. Literally keep your goal people in the United States go through a in front of you. For example, cut a picture of a process of working hard, saving money, and house that you like from a magazine and place carefully planning to buy homes, cars, and an it where you will see it often. Do not be education for themselves and their children. discouraged if you cannot do at once This process often takes years, if not everything you are determined to do. Saving generations. even $5 from a paycheck will help you move toward success. Use the following table to Take time to think of your dreams and goals. begin to plan. The first step to making your dreams a reality is4
  5. 5. My goal $ needed By what date? $ I will save weeklyNow that you have written down your goals, it is time to learn how to manage your money soyou can begin to achieve your goals. 5
  6. 6. Manage your money The best place to learn how to manage your Make a budget money is by writing down how much money Use the following tables to record your monthly you earn and comparing it to the expenses you income and expenses. In the second table, note must pay. This is called budgeting. that the first “expense” is for savings. This is because it is important to “pay” yourself first in order to achieve your goals.6
  7. 7. Monthly income Current income Anticipated incomeTake-home pay after taxesCommissions/tips/bonusesChild support/maintenanceUnemploymentSocial Security or SSIPublic assistanceFood programsTax refundGiftsInterest and dividendsOtherTotal monthly income 7
  8. 8. Monthly expenses Current expenses Anticipated expenses Savings Rent or mortgage Electricity Gas/heating oil Telephone Groceries Transportation (bus fare, car payments, repairs, gas) Insurance (auto, homeowners/renters) Insurance (life, health, disability) Child care Child support/maintenance Support to other relatives Medical bills Taxes8
  9. 9. Monthly expenses Current expenses Anticipated expenses Union or other dues Charitable donations Credit card/other loan payments Personal expenses (toiletries, clothing) Miscellaneous (Internet, continuing education) Other Total monthly expensesNow compare your expenses with your income. Your total monthly income $ _____________When there is money left at the end of the Your total monthly expenses - _____________month, you have more to save toward achievingyour goals. If your expenses exceed your Amount after you subtractincome, examine how small changes in your expenses from income = _____________spending can help you balance your budget. Forexample, if you have to take a lower-paying job,can you limit buying clothes and subscribing tocable television? Most people, from time totime, must make such choices. 9
  10. 10. Banking you open a checking account, your bank will Banking in the United States is a helpful way give you examples that will show you how to to manage and grow your money. It is also use a register to record transactions. You also very safe. The funds you deposit in a bank are will receive a monthly statement of your insured, and your accounts are secure. Banking account, with instructions on how to balance in the United States includes making deposits it. Study these examples and keep good and withdrawals using an automatic teller records. Also, carefully read the bank’s machine (ATM). Your counselor will help you information on the fees you may be charged choose the best financial institution for your each month on the account. Record any fees as banking needs, based, for example, on deductions in your register. location, the people available to help you, and types of banking services offered. For now, After you have an account, find out if your there are two basic types of accounts: a employer offers direct deposit of your checking account and a savings account. You paycheck. This is a fast, safe way to can open both accounts at the same financial automatically deposit money into your institution. Information on a basic savings account. If you must deposit your money in account is on page 19. person, endorse the check by signing your name on the back of the check. Endorse the A checking account is a convenient way to pay check only after you have arrived at the bank. your expenses. A check is a legal instrument If you deposit your check using an ATM, write that tells your bank how much money is to be “for deposit only” and your account number paid from your account to the person or below your signature. company to whom you wrote the check. When10
  11. 11. Your name and address The amount, in words, to be Check number deducted from your account The name of the person or company that The date you are is to receive money from your account writing the check JOHN SMITH 001 123 CENTER STREET ANYTOWN, USA 12345 Date Pay to the Order of $ Dollars FIRST STATE BANK, N.A. BRANCH LOCATION 123 MAINSTREET ANYTOWN, USA 12345 800-555-1212 Memo 1234567890 ❖ 12345678901 ❖ 0001A note to tell you what The bank’s routing number, your The amount of money in the purchase is for account number, and the check number numerals, you are paying The bank’s address Your signature and phone number 11
  12. 12. Getting help with your finances Sometimes life events can be personally and • You were single or married and worked full- financially demanding. Fortunately, programs or part-time at some point during the year. exist that can help make your money go farther • You were not raising children in your home, and ease the stress you may feel over not were between the ages of 25 and 64 on Dec. having enough to take care of your family and 31, 2002, and your income was less than yourself. When you face challenges such as $11,060 if you were single or $12,060 if you having to work at a lower-paying job, were married. (Subject to change - Check remember that your situation does not with your counselor.) represent who you are. The important measure of a person is not money, but how one handles • You were raising one child in your home for life. For those tougher times, here are resources more than six months of the year and your on which to rely until your finances improve. income was less than $29,201 if you were single or $30,201 if you were married. Earned income credit • You were raising more than one child in your The Earned Income Credit (EIC) is for working home for more than six months and your people who earn a low to moderate income. It income was less than $33,178 if you were reduces taxes, supplements wages, and makes single or $34,178 if you were married. going to work even more attractive. In addition to a tax refund, workers may receive extra cash Workers raising children in their homes can from the Internal Revenue Service (IRS). Even get part of their EIC in their paychecks workers whose earnings are too small to owe throughout the year. They receive the second income tax may receive the EIC. (Talk to your part after they file their tax returns. The Center counselor on earned income credit.) For on Budget and Policy Priorities in Washington, example, you qualified for an EIC for the 2002 D.C., has clear information on how EIC works, tax year if: how to apply, and who qualifies for EIC. Their Web address is www.cbpp.org. Click “Earned Income Credit,” then “Earned Income Tax12
  13. 13. Credit Outreach Kit” for the current tax year. Supplemental security incomeAlso, see IRS publication 596 Earned Income Supplemental Security Income (SSI) pays aCredit at www.irs.gov. Click on Formspubs for monthly benefit to people with minimalthis specific form. income and resources who are at least 65 years old or who are blind or disabled. Benefits canChild and dependent care apply to children as well as adults. If eligible,credit you may receive both SSI and Social Security,If you pay someone to care for a child, spouse, which is a program of the federal government.or dependent so you can work, you may be In most states, a person who receives SSI isable to reduce the amount of federal tax you eligible for health benefits under Medicaid, apay. In general, a tax credit is available to health insurance program funded by both thepeople who, in order to work, must pay for the state and federal government. For clearcare of children younger than 13 or a spouse information on eligibility, visit the Americanor dependent who is physically or mentally Association of Retired Persons Web site,unable to care for himself or herself. In www.aarp.org, and type “SSI” into the searchaddition, certain other requirements must be feature near the top of the screen. Click “AARPmet. Most states participate in this new service Webplace | Supplemental Security Income.”program. To learn if you qualify for the Childand Dependent Care Credit, visit More helpwww.cbpp.org and follow these links: “Earned Your IAJVS counselor, the Internet, and theIncome Credit,” “Earned Income Tax Credit public library will have information on otherOutreach Kit,” and “Facts About the New programs, including the Low Income HomeChild Tax Credit.” Also, see IRS publication Energy Assistance Program, the Summer Food504, Child and Dependent Care Expenses at Service Program for Children, the Nationalwww.irs.gov. Click on Formspubs for more School Lunch Program, and the Specialinformation about this credit. Supplemental Nutrition Program for Women, Infants and Children. 13
  14. 14. Buy a home for you and your family A mortgage is a loan are a serious buyer who, when you make an offer to buy, is able to complete the purchase. to buy a home There are several different types of mortgages. Your options for financing a home include an These include a fixed-rate 30-year mortgage, a arrangement called “owner-carry,” whereby fixed-rate 15-year mortgage, a fixed-rate, 10- the seller of a piece of property agrees to year mortgage, and an adjustable-rate finance the loan for the buyer. In effect, the mortgage. Fixed-rate refers to the single interest buyer borrows money from the seller instead rate at which your loan will be financed. An of, or in addition to, a financial institution. interest rate is the money you pay for Another option is to receive financing through borrowing money and using a loan. To qualify a mortgage broker, a business or person who for a good rate of interest, usually 5 to 8 works with more than one bank or financial percent, you will need to build a good credit institution. A broker will work with you to history. (You will learn about credit in the next find the best loan based on your individual section of this booklet.) A healthy credit rating finances. A third option, the most widely helps you get a loan and lets you choose how known, is to obtain a mortgage from a bank to finance a home. or financial institution. How to get a loan You also will pay to buy a home insurances and taxes When you decide it is time to buy a home, it is Conventional mortgages require homeowners best to apply and be prequalified for a to insure their property for at least the amount mortgage. This means that when you find the of money owed on a mortgage. If the house you want to buy, you will already know insurance is cancelled or lapses, a mortgage the amount of money you can borrow. When company will obtain a separate insurance you are prequalified, the seller will know you policy on the property and charge the cost to14
  15. 15. the person who holds the mortgage. When you There is an easy way to pay your insurance andbuy insurance, it would be wise to get a policy taxes. When you get your mortgage, thethat will pay the cost of replacing your home. principle amount you owe, the interest on theIt would also be wise to reread your insurance mortgage, the taxes, and the insurance, or PITI,policy every one to two years and increase your can be included in your regular mortgagecoverage so it is up to date with the actual cost payment. PITI is an abbreviation for principle,to rebuild or repair your home in case of interest, taxes, and insurance.damage. Homeowners’ insurance also coversthe belongings in your home and Learn more abouthomeowner’s liability insurance protects youin case there is an accident and someone is buying your own homehurt on your property. A guide from the Fannie Mae Foundation that explains more about buying a home, includingEach year, the county in which you live will information on financing and mortgages, isassess taxes on your property. If you do not Opening the Door to a Home of Your Own. Toagree with the tax amount, you may appeal the receive a free copy of the booklet in English orassessment. Your counselor can advise you on Russian, phone 1-800-688-4663.this process. If you do not pay your taxes, thegovernment can place a lien on your property, Understanding a mortgagewhich means the government, to secure A mortgage, besides referring to the loan forpayment of the taxes owed, has a claim on buying a home, is your pledging the propertyyour house. If you continue to not pay, the you are buying as the security for the moneygovernment will foreclose on your home and you now owe. The word also refers to the deed,sell it to collect the taxes. or legal document, by which the pledge is made. 15
  16. 16. Build good credit You will build good credit by paying your bills Order your credit report on or before the dates they are due. Having a The following companies each have a report of good credit record makes it easier for you to your credit. Order your report from each obtain a loan from a financial institution to company every year and review it to make sure buy a home, for example, or to fund your the information is correct. To order, you will children’s education. A positive credit record need your Social Security number, year of shows lenders that you are able to keep your birth, and mailing address. promise to repay a loan. You will also pay a lower interest rate on your loan than you • Equifax, 1-800-685-1111, www.equifax.com. would with a poor credit rating. Building good • Experian, 1-888-397-3742, credit also is important to your eligibility to www.experian.com. work for certain employers. • Trans Union Corporation, 1-800-916-8800, Pay your bills on time www.transunion.com. Mark on a calendar when you must mail or Your counselor can help you take the steps to pay your bills online so creditors can process correct your report, as necessary. your payments before the due dates. Have your telephone, electric, gas, and insurance bills Use a credit card to help automatically paid by electronic transfer from your checking account. (Remember to record build good credit automatic payments in your check register.) You can get into debt by overusing credit cards, For example, to pay your phone bill by but using them wisely can show that you can electronic transfer, ask the phone company for manage credit well. Compare card offers and the form to fill out to establish this payment choose the one with the lowest interest rate arrangement. Remember, automatic payments and annual fee. Be sure to read and from and deposits to your account are a fast, understand the terms and conditions of the safe way of managing money. card agreement. Open no more than two credit16
  17. 17. card accounts. If you want to use a credit cardto begin to build a credit history, but do notyet qualify for a major card such as MasterCardor Visa, apply for a secured credit card or acard offered by a department store. A securedcredit card account is one in which youdeposit money. Your credit limit for theaccount usually is the same as or one-half ofthe amount you deposit. You will be requiredto pay off the credit charges each month. A listof reputable secured card issuers is atwww.bankrate.com. Be sure to pay off theaccount every month or keep the balancevery low.Avoid predators that lendmoneyThough it may seem like an easy way to getmoney quickly, check-cashing stores, paydaylenders, pawnshops, and car-title loans willcost you money you cannot afford. Be smartabout where you spend and avoid “lenders”that are in business to take advantage of you. 17
  18. 18. To meet your goals, save your money In coming to the United States, you have When you save money, you are also ready for followed the way of millions of immigrants. an emergency. Emergencies may not be part of For more than 400 years people have come to the expenses you budget for each month. Your the United States to create opportunities for savings, however, can help pay for unexpected themselves. As you read in the introduction, expenses. A good guideline is to save enough whatever opportunity you seek, saving money money to cover all of your expenses for at least will help you find it. Even saving a small three months. This amount will help you amount every month will help you achieve a manage larger emergencies, such as someone goal such as owning your own home. in your household losing his or her job. Imagine that you save $30 every month. Also imagine that every year your savings earn an You need to save to meet long-term goals. interest rate of 5 percent. This means that for Remember the goals you wrote down in the every $100 you save, you earn about an extra introduction to this booklet? When you make $5. Your monthly savings would add up over plans for your future, you motivate yourself to 20, 30, and 40 years to the following amounts. save. Consider some long-term goals you want to achieve. Write down the goals that you want to reach in one year. Then, write down goals 20 years 30 years 40 years that you want to reach in 10 years. $12,382 $25,072 $45,791 The goals I plan to reach with my savings in one year are: So, what could you do with this money? You could buy a second-hand vehicle in good condition for $12,000 or less. In 30 years, you might use $24,000 to start a business or make a down payment on a home.18 The goals I plan to reach with my savings in 10
  19. 19. years are: You can open a savings account with as little as $100. Some financial institutions may require less than this amount. One benefit of a savings account is that you can quickly withdraw money in case of an emergency. Once you are in the practice of saving and have accumulated money, you can choose a savings plan that earns more interest than a basic savingsWays to start saving your account. As your money grows, you will have additional choices for saving and investing.money• Every day put at least $1 and any loose coins in a can or jar. At the end of each month put this money into a savings account.• Ask your employer if you can have money put into your savings account directly from your paycheck.• Are you paying off a loan? Once you have paid off the loan, continue to make the same payment each month to your savings account.• Do your habits cost money? Give up costly habits, such as smoking. Save the money you would spend on these habits.Open a savings account 19
  20. 20. Start saving for retirement now In the United States, people look forward to 100 percent of your present income. Your retirement as a reward for many years of hard counselor or a financial planner can help you work. Americans see retirement as a time for determine the inflation for your retirement making a priority of personal interests, such as years. Inflation is an increase in the cost of travel, hobbies, and spending time with family. living, which may rise, for example, 4 percent To do such things, one must finance his or her each year from now until you retire. retirement, even when it is many years away. Importantly, some employers mandate a Your employer may sponsor a retirement plan. retirement age of 65 years old. Such a If so, carefully choose your benefit plan and requirement makes it necessary to save money understand how the money will be disbursed for those years when you may not be working and when you will pay taxes on it. (Remember, full time. taxes are a percentage of income or property you are required to pay in support of the It does not take a lot of money to start saving government.) In addition, Social Security, a for retirement. If you begin now, you will have program of the U.S. federal government, gives the money you need during your later years. some retirement income. Look at the pay stub Start by setting retirement goals. For example, from your paycheck and you will see that some ask yourself the following questions. How of your earnings have gone to Social Security. many years until I want to retire? Where will I You will begin receiving this money back when live after retirement? How many years do I you retire. For an estimate of the Social anticipate being retired? What activities and Security benefits you will receive in retirement, lifestyle will I want to pursue? Use the budget ask your counselor to help you obtain Form worksheet from pages 7-9 to plan a budget for SSA-7004 (available from www.ssa.gov (click your retirement. To keep living your current “forms” and enter “7004” in the search box) or lifestyle during retirement, you will need 80 to by phoning toll free 1-800-772-1213).20
  21. 21. Glossaryassets. Assets are the tangible and intangible Corporation (a fictitious company) announcedresources of a person or business and include an annual dividend of $5 per share of its stock,such things as cash, real estate, material goods, and you own 100 shares, you would earn $500skills, and education. each year, or $125 paid quarterly. The Bell Corporation’s board of directors would decidecharitable contribution. A charitable how large a dividend the company would paycontribution is an amount of money you freely or if it would pay one at all. The larger andgive away, ideally to an organization whose more mature a company is, the more likely itsmission has deep meaning for you and that board of directors will be to issue dividends.operates solely as a result of people’scontributions of money and volunteer time. Internal Revenue Service, or IRS. The InternalYou may choose to make a charitable Revenue Service (IRS) is the agency of thecontribution on a regular basis, such as once United States Government that collects federaleach month or each year. taxes on one’s income. Internal revenue is the income the government receives by taxing itscommission. A commission is a fee or citizens’ income, profits, luxuries, andpercentage of the proceeds of a sale that is paid amusements. Your federal income tax return,to a worker, such as a salesperson or broker, in which is the paperwork you submit to the IRSaddition to or in place of a salary or wages. showing how much tax you owe, is due eachdependent. A dependent is a person who relies year. The annual date for filing taxeson another person or organization for customarily is April 15.financial support and well-being. liability. A liability is a debt owed by a persondividend. A dividend is a portion of a or business, often to the disadvantage of thecompany’s profit that is paid to its individual or organization owing the debt.shareholders. For example, if the Bell 21
  22. 22. Acknowledgments Putting Your Money to Work: A Simple Guide to association that links 28 non-sectarian health Financial Education was written and produced and human services agencies in the United for the International Association of Jewish States, Canada, Israel, and Argentina. Each year, Vocational Services as a public service by the the IAJVS network provides a diverse range of Denver-based National Endowment for educational, vocational, and rehabilitation Financial Education®, or NEFE®; William L. services to more than 320,000 individuals from Anthes, Ph.D., President; Brent A. Neiser, CFP, across the social strata, and works with over Director of Collaborative Programs; and Jeannette 40,000 employer organizations. Herreria, Project Manager. The IAJVS network is guided by a common NEFE is an independent nonprofit mission set forth by the medieval Jewish organization committed to educating philosopher Moses Maimonides: the greatest Americans about personal finance and charity lies in helping people to become self- empowering them to make positive, sound sufficient. To realize our shared mission, IAJVS decisions to reach their financial goals. The provides its member agencies with services that National Endowment for Financial Education, strengthen local capacity. IAJVS serves as the NEFE, and the NEFE logo are federally collective voice, representing the network registered service marks of the National nationally and internationally, and promoting Endowment for Financial Education. For more the important work of its local agencies, both information about the National Endowment here and abroad. For more information on for Financial Education, visit www.nefe.org. IAJVS and its members, visit www.iajvs.org The International Association of Jewish One of the world’s leading financial services Vocational Services (IAJVS) is a not-for-profit companies, Bank of America is committed to22
  23. 23. making banking work for customers like it The company enables customers to do theirnever has before. Through innovative banking and investing whenever, wherever,technologies and the ingenuity of its people, and however they choose through the nation’sBank of America provides individuals, small largest financial services network, includingbusinesses and commercial, corporate, and approximately 4,400 domestic offices andinstitutional clients across the United States 13,000 ATMs, as well as 38 internationaland around the world new and better ways to offices and an Internet Web site that providesmanage their financial lives. The bank’s online access for more than 3 millionnational initiative, America/Banks, seeks to customers. For more information, visitpromote financial literacy to help people move www.bankofamerica.com.from poverty to self-sufficiency. Design: Steve Stremsterfer, Fierce Design Illustrations: R. Gregory Michaels 23
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