Advisers recommend that you save 15% of your income or more.
Diversify
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Savings Accounts
Savings Account – safest and least lucrative (emergency fund)
CD’s – savings account that pays higher interest in exchange for an agreement that the money will be left in the account for a specified length of time, usually 10 years. You may pull the money out early, but you will not receive the higher interest rate.
Money Market Account – Pays interest like savings, but allows easy access to your money when you have an emergency. This is a good place to have your emergency fund.
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Savings Accounts
Emergency fund – you should have enough money saved in a savings account to pay 3 to 6 months worth of your bills for financial security. So that bad things (rainy days) become small set backs instead of major crisis.
When you are getting started, at least keep 1,000 to 2,000 in savings for emergencies.
Things you should expect and plan for are not emergencies. You should plan for example to need new tires periodically. Christmas is not an emergency.
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Retirement
Pensions through work
Social Security (it will not be enough, and it may not even exist for your generation)
Bonds (see previous notes) a loan to a company that pays interest to the investor.
Mutual Funds, diversified managed stock portfolio, safe and lucrative, average of 12% return over the last 100 years
Stocks, individual companies, most risky and most lucrative
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Tax Shelters
401K – tax shelter through which the government allows you to save pre-tax. You do not pay taxes on the money that you save in the 401K. You pay taxes on it when you take it out later. Allows you to benefit to a greater degree from the compound interest. Many companies will do a dollar for dollar match up to a limit.
403B – same concept as a 401K, but this is for government workers. Usually do not get a match from the employer.
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Tax Shelters
Roth IRA – tax shelter….you do pay taxes on the money before you save it in the Roth IRA. The money grows tax free and can be withdrawn tax free at a later date. There is a yearly limit that you are allowed in your Roth IRA. The limit changes year to year.
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Other Things to Know
The Rule of 72
You divide 72 by an interest rate and it tells you how long it will take your money to double (ex: 72 divided by 12% = 6 years for your money to double
Equations, handout later
What is the benefit of saving earlier in life (compound interest), discussed previously.