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A Beginner’s Guide to Securing Your Financial Future

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Save and Invest


Do you know how to set a budget?

If you haven’t yet, read about budgeting to save in Chapter 2, before learning about saving and investing.

You have budgeted and identified an amount to save monthly.

Where are you going to put your savings?

Investing is putting the money you save to work, increasing your wealth. An investment is anything you acquire for future income or benefit. Investments increase by generating income (interest or dividends) or by growing (appreciating) in value. Income earned from your investments and any appreciation in the value of your investments increase your wealth.

Get Guidance

There is an art to choosing ways to invest your savings. Good investments will make money; bad investments will cost money.

Do your homework. Gather as much information as you can. Seek advice from licensed or registered advisers. States require licensing or registration for brokers, investment advisers and insurance salespeople, so check with your state securities regulator before trusting any investment adviser.

Also, check out the Wealth-Building Resource Guide for helpful sites.

Take Advantage of Compound Interest

Compound interest helps you build wealth faster. Interest is paid on previously earned interest as well as on the original deposit or investment. For example, a $5,000 investment earning six percent interest for a year earns $308 if the interest is compounded monthly. In just five years, the $5,000 will grow to $6,744.

How does interest compound on Gabby’s savings?

Assume that Gabby saves $125 a month for 30 years and the interest on her savings is compounded monthly.

The Compound Interest Advantage

After 5 years of $125 monthly deposits…

After 5 years of $125 monthly deposits

After 15 years of $125 deposits and compounding interest…

After 15 years of $125 monthly deposits

After 30 years…

After 30 years of $125 monthly deposits

The charts show how compound interest at various rates would increase Gabby’s savings compared with simply putting the money in a shoebox. This is compound interest that you earn. And as you can see from Gabby’s investment, compounding has a greater effect after the investment and interest have increased over a longer period.

There is a flip side to compound interest. That is compound interest you are charged. This compound interest is charged for purchases on your credit card.

Understanding the Risk-Return Relationship

When you are saving and investing, the amount of expected return is based on the amount of risk you take with your money. Generally, the higher the expected return, the higher the risk of losing money. For less risk, an investor will expect a smaller return.

For example, a savings account at a financial institution is fully insured by the Federal Deposit Insurance Corp. up to $250,000. The return—or interest paid on your savings—will generally be less than the expected return on other types of investments.

On the other hand, an investment in a stock is not insured. The money you invest may be lost or the value reduced if the investment doesn’t perform as expected.

After deciding how much risk you are able to take, you can use the investment pyramid to help balance your savings and investments. You should move up the pyramid only after you have built a strong foundation.

The Investment Pyramid: How Much Risk Do You Want to Take?

Here are some things to think about when determining the amount of risk that best suits you.

Investment Pyramid

NOTE: Information not intended as specific individual investment advice.

SOURCES: Adapted from National Institute for Consumer Education, Eastern Michigan University; AIG VALIC.

Financial Goals

How much money do you want to accumulate over a certain period of time? Your investment decisions should reflect your wealth-creation goals.

Time Horizon

How long can you leave your money invested? If you will need your money in one year, you may want to take less risk than you would if you won’t need your money for 20 years.

Financial Risk Tolerance

Are you in a financial position to invest in riskier alternatives? You should take less risk if you cannot afford to lose your investment or have its value fall.

Inflation Risk

This reflects savings’ and investments’ sensitivity to the inflation rate. For example, while some investments such as a savings account have no risk of default, there is the risk that inflation will rise above the interest rate on the account. If the account earns 5 percent interest, inflation must remain lower than 5 percent a year for you to realize a profit.

Tools for Saving

A good first step toward saving is to open a savings account at a bank or credit union. With a savings account, you can:

  • Save money on check cashing fees and money orders.
  • Take advantage of compound interest, with no risk.
  • Keep your money safer than in your pocket or at home.
  • Take advantage of direct deposit of your paycheck.
  • Monitor your balance online (and on your smartphone).
  • Access your money from anywhere at any time.
  • Easily move money from one account to another.
  • Build a banking relationship, which is important to your credit history.
  • Have your savings insured by the FDIC (NCUA for credit unions) up to $250,000.

Financial institutions offer a variety of insured savings accounts, each of which pays a different interest rate. Among them are:

  • General savings accounts, which earn interest and allow access to funds at any time and movement of money from account to account.
  • Money market accounts, which earn interest, may offer check-writing services and impose no fees with a minimum balance.
  • Certificates of deposit (CDs), which are purchased for a specified term and return principal and interest at the end of the term (early withdrawal penalties apply).


Tools for Investing

Once you have a good savings foundation, you may want to diversify your assets among different types of investments. Diversification can help smooth out potential ups and downs of your investment returns. Investing is not a get-rich-quick scheme. Smart investors take a long-term view, putting money into investments regularly and keeping it invested for five, 10, 15, 20 or more years.

Here are some options for investing your money.

Bonds—Lending Your Money

When you buy bonds, you are lending your money to a federal or state agency, municipality or other issuer, such as a corporation. A bond is like an IOU. The issuer promises to pay a stated rate of interest during the life of the bond and repay the entire face value when the bond comes due or reaches maturity. The interest a bond pays is based primarily on the credit quality of the issuer and current interest rates. Firms like Moody’s Investor Service and Standard & Poor’s rate bonds. With corporate bonds, the company’s bond rating is based on its financial picture. The rating for municipal bonds is based on its financial picture. The rating for municipal bonds is based on the creditworthiness of the government or other public entity that issues it. Issuers with the greatest likelihood of paying back the money have the highest ratings, and their bonds will pay an investor a lower interest rate. Remember, the lower the risk, the lower the expected return.

A bond may be sold at face value (called par value) or at a premium or discount. For example, when prevailing interest rates are lower than the bond’s stated rate, the selling price of the bond rises above its face value. It is sold at a premium. Conversely, when prevailing interest rates are higher than the bond’s stated rate, the selling price of the bond is discounted below face value. When bonds are purchased, they may be held to maturity or traded.

U.S. savings bonds

U.S. savings bonds are government-issued and government-backed. Unlike other investments, you can’t get back less than you put in. Savings bonds can be purchased in denominations ranging from $50 to $10,000. There are different types of savings bonds, each with slightly different features and advantages. Series I bonds are indexed for inflation. The earnings rate on this type of bond combines a fixed rate of return with the annualized rate of inflation.

If you have paper U.S. savings bonds, you can register them online at TreasuryDirect, Then, you won’t have to worry about losing the paper copy.

Treasury bills, bonds, notes and TIPS

The bonds the U.S. Treasury issues are sold to pay for an array of government activities and are backed by the full faith and credit of the federal government.

Bills, bonds and notes are sold in increments of $1,000. These securities, along with U.S. savings bonds, can be purchased directly from the U.S. Department of the Treasury through Treasury Direct at

Some government-issued bonds offer special tax advantages. There is no state or local income tax on the interest earned from Treasury and savings bonds. And in most cases, interest earned from municipal bonds is exempt from federal and state income tax. Typically, higher income investors buy these bonds for their tax benefits.

Stocks—Owning Part of a Company

When you buy common stock, you become a part owner of the company and are known as a stockholder, or shareholder. Stockholders can make money in two ways—receiving dividend payments and selling stock that has appreciated.

  • A dividend is an income distribution by a corporation to its shareholders, usually made quarterly.
  • Stock appreciation is an increase in the value of stock in the company, generally based on its ability to make money and pay a dividend. However, if the company doesn’t perform as expected, the stock’s value may go down.

There is no guarantee you will make money as a stockholder. In purchasing shares of stock, you take a risk on the company making a profit and paying a dividend or seeing the value of its stock go up. Before investing in a company, learn about its past financial performance, management, products and how the stock has been valued in the past. Learn what the experts say about the company and the relationship of its financial performance and stock price. Successful investors are well-informed.


Mutual Funds—Investing in Many Companies

Mutual funds are established to invest many people’s money in many firms. When you buy mutual fund shares, you become a shareholder of a fund that has invested in many other companies. By diversifying, a mutual fund spreads risk across numerous companies rather than relying on just one to perform well. Mutual funds have varying degrees of risk. They also have costs associated with owning them, such as management fees, that will vary depending on the type of investments the fund makes.

Before investing in a mutual fund, learn about its past performance, the companies it invests in, how it is managed and the fees investors are charged. Learn what the experts say about the fund and its competitors.

Stocks, bonds and mutual funds can be purchased through a full-service broker if you need investment advice, or from a discount broker or even directly from some companies and mutual funds.

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Rule of 72

The Rule of 72 can help you estimate how your investment will grow over time. Simply divide the number 72 by your investment’s expected rate of return to find out approximately how many years it will take for your investment to double in value.

Example: Invest $5,000 today at 8 percent interest. Divide 72 by 8 and you get 9. Your investment will double every nine years. In nine years, your $5,000 investment will be worth about $10,000, in 18 years about $20,000 and in 27 years, $40,000.

The Rule of 72 also works if you want to find out the rate of return you need to make your money double. For example, if you have some money to invest and you want it to double in 10 years, what rate of return would you need? Divide 72 by 10 and you get 7.2. Your money will double in 10 years if your average rate of return is 7.2 percent.

Invest for Retirement

Have you ever thought about how much money you will need when you retire? Will you save enough today to meet your future needs at prices higher than today’s due to inflation? Many people don’t save enough for retirement.

This chart illustrates why it’s better to start saving and investing for retirement early in your career. A 20-year-old who begins investing $3,000 each year toward retirement will have a nest egg over $1.2 million at age 65 if that investment earns an average annual rate of return of 8 percent. If you wait until you are 40 to start investing, the results are much lower.

Invest in an IRA: The Sooner You Start, the Better

Invest for retirement

Here are some options for how you can invest for retirement.

Individual retirement accounts

An individual retirement account (IRA) lets you build wealth and retirement security. The money you invest in an IRA grows tax-free until you retire and are ready to withdraw it. 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 you will need to learn more about, but here is an overview of what they offer, with the maximum tax-free annual contributions as of 2021.

Traditional IRA

You can contribute up to $6,000 a year to a traditional IRA, as long as you earn $6,000 a year or more.

  • A married couple with only one person working outside the home may contribute a combined total of $12,000 to an IRA and a spousal 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 $7,000. 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.

A traditional IRA is tax-deferred, meaning you don’t pay taxes on the money until it is withdrawn. All withdrawals are taxable, and there generally are penalties on money withdrawn before age 59½.

However, 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.

Roth IRA

A Roth IRA is funded by after-tax earnings; you do not deduct the money you pay in from your current income. However, after age 59½ you can withdraw the principal and any interest or appreciated value tax-free.

401(k) plans

Many companies offer a 401(k) plan for employees’ retirement. Participants authorize a certain percentage of their before-tax salary to be deducted from their paycheck and put into a 401(k). Many times, 401(k) funds are professionally managed and employees have a choice of investments that vary in risk. Employees are responsible for learning about the investment choices offered.

By putting a percentage of your salary into a 401(k), you reduce the amount of pay subject to federal and state income tax. Tax-deferred contributions and earnings make up the best one-two punch in investing. In addition, your employer may match a portion of every dollar you invest in the 401(k), up to a certain percentage or dollar amount.

As long as the money remains in your 410(k), it’s tax-deferred. Withdrawals for any purpose are taxable, and withdrawals before age 59½ are subject to penalty. Take full advantage of the retirement savings programs your company offers—and understand thoroughly how they work. They are great ways to build wealth.

Qualified plans

If you’re self-employed, don’t worry. There is a retirement plan for you.

A qualified plan (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—up to $58,000 annually. The contributions and investment earnings grow tax-free until they are withdrawn, when they are taxed as ordinary income. Withdrawals before age 59½ are subject to a penalty.

Check the IRS website——for current information on tax-deferred investments.

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How Much Extra Savings Is a Tax-Deferred Investment Worth?

If you pay taxes, which most of us do, a tax-deferred investment will be worth the amount you invest multiplied by the tax rate you pay. For example, if your federal tax rate is 15 percent and you invest $3,000 in an IRA, you’ll save $450 in taxes. So in effect, you will have spent only $2,550 for a $3,000 investment on which you will earn money. A good wealth-creation plan maximizes tax-deferred investments.

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Tip: Investing

Remember, when investing:

  • Make sure you know and understand all the costs associated with buying, selling and managing your investments.
  • Have savings automatically deducted from your paycheck or checking account.
  • Beware of investments that seem too good to be true; they probably are.
  • Investigate financial professionals before you invest. Your state securities board provides free services to check credentials.

In other words, get on automatic pilot and stay there.

Investing in Your House

Remember Anthony in Chapter 1, who started reading this guide to create wealth? Practicing what he read, Anthony reduced his debt, increased his savings and is now ready to buy a house. He has a sizable down payment saved, so right from the beginning he will have equity in his home.

Equity, in this case, is the difference between the market value of the house and the balance on Anthony’s mortgage. As Anthony pays his mortgage, he increases his equity. Plus, over time, his house may rise in value—giving him more money if he chooses to sell it. Knowing that the more equity he has in his house, the wealthier he will be, Anthony takes a 15-year mortgage rather than the more traditional 30-year mortgage. This will enable him to own his house in 15 years. Of course, Anthony will make higher monthly payments on his mortgage than he would have, but he will build equity quicker and ultimately pay less interest.

By making higher monthly payments, Anthony not only will own his house outright in 15 years, but he will save $56,126 in interest payments. Making higher monthly payments, of course, means budgeting. Anthony chose to budget extra money each month out of his paycheck—and make wise spending choices—so he can do just that.

Start Your Own Small Business

You can also start and invest in your own business as part of a wealth-creation plan. This requires planning, know-how, savings and an entrepreneurial spirit. Starting a small business can be risky, but it is one of the most significant ways individuals have to create personal wealth.

David had a dream—he wanted to own a business. After serving in the military, he knew that with a little extra training, he could use his skills to start a heating, ventilation and air conditioning company. He and his wife saved every month until they reached their savings goal to start their business.

When they felt the timing was right, they bought a van, tools and equipment and set up shop in an old warehouse. David’s wife kept her job so they would have steady income and benefits while the business got off the ground.

For the next five years, David worked long hours and put all the income back into the business to help it grow. He gave his customers good service, attracted more customers and paid close attention to his expenses. By the sixth year, the business was profitable and David and his wife were well on the way to owning a successful, ongoing enterprise that will increase their personal wealth.

None of this would have been possible without budgeting and saving. David was able to use the couple’s savings to invest in his talents and entrepreneurial spirit.

Plan your investment strategy.

Consider the investment options you’d like to learn more about and weigh them against your wealth-creation goals, time frame and risk tolerance.

See how the people of Building Wealth planned their investment strategies.

Anthony realized he could be smarter about how he was investing his money.

He decided to:

  1. Schedule a meeting with his company’s benefits representative about his 401(k).
  2. Meet with a financial planner about college planning tools.
  3. Investigate options for investing outside of work.
  4. Learn about a Roth IRA.

Plan your investment strategy.

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Using Anthony’s investment strategy as an example, complete your own online or download a PDF. List the investment options you are going to learn more about and weigh them against your wealth-creation goals, time frame and risk tolerance.

example web pdf

Bess realized that she had made some poor financial decisions in the past and wants to be sure she manages her money wisely from now on.

She decided to:

  1. Avoid putting her money in any long-term investment that she can’t get to in an emergency.
  2. Keep her money safe and steer clear of any risky money deals; meet with a reputable financial counselor to discuss her options.
  3. Consider putting money she won’t need near-term in U.S. savings bonds.

Plan your investment strategy.

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Using Bess’s investment strategy as an example, complete your own online or download a PDF. List the investment options you are going to learn more about and weigh them against your wealth-creation goals, time frame and risk tolerance.

example web pdf

David and his wife decided the first steps to reaching their investment goals were to:

  1. Meet with the local Small Business Development Center about creating a business plan.
  2. Talk to a financial planner or accountant about setting up a self-employed qualified plan so they can increase their tax advantages on their savings contributions.

Plan your investment strategy.

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Using David’s investment strategy as an example, complete your own online or download a PDF. List the investment options you are going to learn more about and weigh them against your wealth-creation goals, time frame and risk tolerance.

example web pdf

Gabby realized she needed to be more proactive about investing her money.

She decided to:

  1. Save at least half of her tax refund next year in a savings bond.
  2. Learn more about the 401(k) plan at her company.
  3. Start investing in wealth-creating assets.

Plan your investment strategy.

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Using Gabby’s investment strategy as an example, complete your own online or download a PDF. List the investment options you are going to learn more about and weigh them against your wealth-creation goals, time frame and risk tolerance.

example web pdf

Sonya realized that although she has continually made wise financial decisions, she still had room to improve.

She decided to:

  1. Talk with a financial planner about saving for her son’s college.
  2. Talk with a benefits representative about maximizing her retirement plan.

Plan your investment strategy.

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Using Sonya’s investment strategy as an example, complete your own online or download a PDF. List the investment options you are going to learn more about and weigh them against your wealth-creation goals, time frame and risk tolerance.

example web pdf

Vince realized if he wanted to have enough money to invest, he needed to make some changes.

He decided to:

  1. Look for a new full-time job with benefits and a retirement plan.
  2. Start saving with each paycheck.

Plan your investment strategy.

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Using Vince’s investment strategy as an example, complete your own online or download a PDF. List the investment options you are going to learn more about and weigh them against your wealth-creation goals, time frame and risk tolerance.

example web pdf

Complete your own online

You budget, save and invest to build your wealth.
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