ASSOCIATES (vol. 1, no. 3, March 1995) - associates.ucr.edu
DARE TO BE RICH!!!!
STRATEGIES FOR SUCCESSFUL MONEY MANAGEMENT
by
Evelyn Blake
Bindery Supervisor
Medical University of South Carolina
INTRODUCTION
The issue of low salaries is certainly prevalent among library
support staff. Some support staff workers have been stuck in low
paying positions for years with no hope of ever achieving a
substantial increase in pay. I do not mean to infer that working
in a library is unsatisfactory. I believe that most support
staff enjoy their jobs. Unfortunately, it is often difficult to
manage on such low salaries. Many library support staff work two
jobs just to make ends meet. The purpose of this article is to
inform library support staff that anyone can achieve financial
security no matter what salary you make. Financial security does
not depend on the amount of money made. Instead, financial
security depends on the amount of money _saved_. You must get in
the habit of paying yourself first, before paying any bills. The
amount of money you save out of each paycheck is irrelevant.
What is important is that you not touch that money, except in
cases of emergencies. Of course, the aggressiveness of your
savings depends on your age. For example, a person 45 or older
will have to save a considerable amount more a month than a
person 20 to 30 years old in order to reach a particular goal for
retirement. I will list a few general investment options for the
novice investor and offer some money saving tips that could make
your resources go a little further. I am not an expert financial
advisor. Therefore, you should seek professional advice before
making any investment decisions.
WHERE ARE YOU NOW?
Before you can make any kind of financial decisions, you must
figure out where you are now. First, in order to take a good
look at your financial situation, you need to figure out your net
worth. You can easily compute your net worth on a balance sheet
(see Chart 1). The bottom line on the balance sheet will tell
you your net worth. The balance sheet measures financial
position and is a snapshot of what you own (assets) and what you
owe (liabilities).
Second, use the income statement form (see Chart 2). The income
statement will show your profitability. In other words, the
bottom line on the income statement is your profit (use the
analogy of your personal finances as a business). What you
decide to do with your profit is up to you. Effective use of
your profits requires good financial decisions. Many people use
their profits to pay credit card bills. Having a wallet full of
credit cards is no longer a status symbol. Having three or four
major credit cards, along with various department store cards and
gasoline cards, is a waste of money. For example, a $2000
balance with a 16% interest rate will cost you $320 a year!
Amazingly, most department store cards carry an interest rate of
over 20%.
Third, get a copy of your credit report. TRW Information Systems
will provide one free copy of your credit record a year. Check
your report for errors or information you would like to dispute.
To receive your free copy of your credit report, write:
TRW Consumer Assistance
P.O.Box 2350
Chatsworth, CA 91313-2350
You will need verification of your full name and present address
(a copy of your drivers license or a utility bill), all previous
addresses for the past five years, social security number, date
of birth, and spouse's first name.
Now that you've figured out your financial position, it is time
to make some investment decisions. Write down your goals. There
are many types of investment vehicles, each with different
objectives designed to suit different savers' needs. If you are
drowning in debt, plan to eliminate most of the debt before
starting to invest. Your income tax refund could be used as a
source to reduce debt. Debt consolidation is another good
option.
TYPES OF INVESTMENTS
1. Savings Account: Use this vehicle as a means to save
enough money to invest elsewhere. Interest rates on savings
accounts average about 2.5% interest. Thus, you should not let
large amounts of money set in a savings account. Instead, make a
goal to save $500 to $1000 in one year. Shop around for the best
interest rates. Also, ask different banks how the interest is
compounded (annually, monthly, quarterly, weekly, or daily). The
more often the interest is compounded, the better because you
will earn interest on the interest more frequently. Table 1
shows how the different methods of compounding can increase your
savings.
2. Bonds: A bond is a long-term debt instrument. Bonds
are assigned a rating based on the probability of their firm's
default (risk factor). Bonds with the lowest risk are rated AAA
and carry the lowest interest rates. Bonds rated A carry a
higher interest rate, which compensates for the higher risk.
There are many types of bonds. For the most secure investment,
purchase US Treasury securities. The most common type of bonds
purchased by people on limited incomes are U.S. Savings Bonds.
These bonds are very safe because they are backed by the
government. Series EE are common and can usually be purchased
from your employer through payroll deduction. You purchase a
bond at one-half of the face value. After six months, you can
redeem it for the purchase price. The bond will be worth its
face value at maturity. Most mature in 7 to 10 years. According
to the "Wall Street Journal" (11/6/94), savings bonds issued on
or after March 1, 1993, and held 5 years or longer, currently
earn the market-base rate of 5.92%. One good thing about U.S.
Savings Bonds is that taxable interest is deferred until maturity
or until you redeem the bond.
3. Mutual Funds: Many types of mutual funds are also
available, each designed to meet the needs of different
investors. Buying mutual fund shares is an excellent investment
choice. Interest rates are generally higher than rates on
regular savings accounts. Mutual funds pool your money with that
of other investors to purchase stocks and/or bonds. The
advantages are that mutual funds offer professional management,
less risk through diversification, and liquidity (easy access to
your money). Most funds require a minimum deposit of $500 to
$1000. A professional financial advisor can help you decide
which mutual fund is best for you.
4. Certificates of deposit (CDs): CDs will generally pay a
higher interest rate than mutual funds, but they are less liquid.
CDs will lock in your money for the term of the CD. You can buy
a CD with different terms ranging from 90 days to 10 years. Like
Series EE savings bonds, interest is tax deferred until maturity.
5. Stocks: You do not have to be wealthy or rich to buy
stocks. This option is available to anyone regardless of income.
Stocks must be purchased through a licensed broker. Common
stockholders are the owners of the company; therefore, they
receive dividend payments from the stock based on the company's
profits. When trying to decide on a company, you may want to
consult the New York Stock exchange (NYSE). Stocks of small
publicly owned companies are not generally listed on an exchange.
Usually companies are first listed on a regional exchange then
move up to the American Exchange (AMEX). Finally they are listed
in the NYSE. Both the NYSE and the AMEX listings are printed in
the business section of most local newspapers.
6. A House: A home is probably the biggest investment most
of us will ever make. It is also a big tax break. When buying a
home, choose it carefully. Consider the neighborhood, the
schools, the availability of shopping centers and grocery stores.
Your home is an important source of cash. You can use the equity
in your home to finance many things, including your child's
education.
TIPS THAT COULD SAVE YOU MONEY
Pay yourself first and eliminate or reduce existing debt. Debt
can dramatically eat up your cash flow. Cut up those credit
cards and be a smart shopper. Decide on an amount of cash that
you can save each month. Set a goal to save a certain amount by
the end of the year. For example, you may decide to save $500 by
the end of the year. A savings of $500 will only cost you $41.67
per month; $1000 in one year is only $83.33 per month. The key
to successful savings is consistency and commitment. Consider
having your savings automatically deducted from your paycheck.
And do _NOT_ get an automatic teller machine card for your
savings account. If you have one, do not carry it in your purse
or wallet.
Once you have saved $500 to $1000, consider making an investment
in another option. For example, deposit $1000 in a mutual fund.
Remember, never let large sums of money set around in a regular
savings account. If you continue making your monthly deposits
toward savings (paying yourself), the amount of money you will
have to invest will increase. Gradually you will work your way
up to buying stocks! When you have $2000 to $2500 saved, buy
some stocks. Always diversify your investments. Never risk all
your money in one investment. Consider making a lump sum
investment and just letting it accumulate interest over the
years. Table 2 shows how a lump-sum deposit of $1500 at 6% and
4% interest will grow over time. You can see that it is
important to shop around for the best interest rates.
In addition, it is a good idea to develop a monthly budget. A
budget will help you to plan carefully where to allocate money
based on previous spending habits. A budget will help you live
within your income. You must, however, stick to your budget and
follow it carefully in order to be successful. Each month you
will be able to see where too much money is being spent and where
it may be wasted.
Despite the fixed expenses beyond our control (e.g. the mortgage),
we can still find ways to cut spending. For example, find ways to
cut your electric bill or phone bill; car pool to work to cut
gasoline costs; don't let the water run while brushing your teeth;
bring your lunch from home; and buy only the things you need (don't
impulse shop).
Another nifty idea involves checkbook transactions. Whenever you
write down a check, round UP to the nearest dollar amount. For
example, if you write a check for $32.25, record $33.00. When you
make a deposit, round DOWN to the nearest $10 amount. If you
deposit $367.46, for example, record $360 in your register. If you
are paid biweekly and $367.46 is automatically deposited into your
checking account, you could save $191.36 in one year by recording
$360 in your checkbook! Continue to balance your checkbook
monthly. If you have free checking, transfer funds to your savings
account or another account to earn more interest when you see a
surplus of about $200. Or, you may choose to use the money to
purchase a needed household item without having to finance the
purchase.
CONCLUSION
Achieving financial security takes much commitment and planning.
It also takes time. You must make a plan and stick to it. Also,
be a smart investor by shopping around for the best interest
rates. Bank personnel are always willing to sit down and talk to
people about the different investment opportunities that are
available.
You're probably saying that this is all easier said than done.
Well, you're right. But before you abandon the idea, please
think about the future. Because tantamount to having a plan is
having a PURPOSE to save. You must consider the possibility of
becoming disabled, laid-off, or any number of emergencies that
could cause devastation to your life without the proper savings.
You must also consider your retirement years, or colleges
expenses for yourself or your children. Start your investment
plan today. Remember, as long as you draw a paycheck, there is
always money to save.
TAKE YOUR TIME AND ENJOY YOUR PROFITS!
Sources
Brigham, Eugene. _Fundamentals of Financial Management_. 3rd
edition. 1993.
Brown, Carolyn M. "Investing the right mix". _Black
Enterprise_. v.24, no.9. p.46.
Carey, Patricia. "Putting your tax refund to work". _Black
Enterprise_. v.24, no.11. p.57
----- "Tax strategies: good tax planning begins at home".
_Black Enterprise_. v.25, no.2. p.46
The Hume Group, Inc. _Successful Investing and Money Management:
The Money Course_. 1994.
"Investments: diversification is the key to profits in '89".
_Money_. v.18 (Jan. '89). p.36.
National Association for Female Executives. _Guide to Personal
Money Management: Get Ahead Guide #4_.
Picchione, Nicholas. _Dome Simplified Home Budget Book_. Dome
Publishing Co. Inc. no. 840. 1994.
Weberman, Ben. "No pain, no gain". _Forbes_. v.148, no.7,
1991. p.191.
Chart 1
Sample Balance Sheet
ASSETS LIABILITIES
Cash: Total Current Bills:
Cash on hand [$ ] Medical [$ ]
Checking account [$ ] Dental [$ ]
Savings account [$ ] Rent [$ ]
Utilities [$ ]
Investments: Credit cards [$ ]
Mutual funds [$ ]
Stocks [$ ] Installment Debt:
Savings bonds [$ ] Charge accts [$ ]
CDs [$ ] Personal loans[$ ]
Other [$ ] Car loans [$ ]
Other [$ ]
Personal Property (market value)
Home(s) [$ ] Taxes:
Furniture [$ ] Income tax [$ ]
Automobiles [$ ] Property tax [$ ]
Jewelry [$ ] Other [$ ]
Art, antiques [$ ]
Other [$ ] Mortgage Debt:
Home (balance)[$ ]
Pension or Retirement Plans: Home equity
Life insurance loans [$ ]
(cash value) [$ ] Other [$ ]
IRA/Keogh [$ ]
Company pension
plan [$ ]
Annuities [$ ]
Other [$ ]
Total Assets: [$ ] Total Liabilities:
[$ ]
Total Assets [$ ]
minus
Total Liabilities [$ ]
equals
NET WORTH [$ ]
Chart 2
Sample Income Statement
Income:
Salary [$ ]
Interest [$ ]
Dividends [$ ]
Other [$ ]
Total Income: [$ ]
Expenses:
Social Security [$ ]
Taxes [$ ]
Insurance expenses [$ ]
Mortgage (payment
- amortization) [$ ]
Utilities [$ ]
Telephone [$ ]
Depreciation of
automobiles [$ ]
Maintenance of
automobiles
(incl gas) [$ ]
Food [$ ]
Clothing [$ ]
Medical/dental [$ ]
Entertainment [$ ]
Other [$ ]
Total Expenses: [$ ]
Total Income [$ ]
minus
Total Expenses [$ ]
equals
PROFIT [$ ]
Table 1
Frequency of Compounding
Deposit of $500 at 6% Interest
Frequency End of Year 1 End of Year 10
Daily $530.92 $911.01
Monthly $530.84 $909.70
Quarterly $530.86 $907.01
Semiannually $530.45 $903.06
Annually $530.00 $895.42
Table 2
Lump Sum Investment
of $1500
Year 6% Interest 4% Interest
1 $1,590.00 $1,561.21
2 $1,691.23 $1,624.92
3 $1,795.80 $1,691.23
4 $1,906.84 $1,760.25
5 $2,024.74 $1,832.08
6 $2,282.86 $1,906.85
7 $2,424.02 $1,984.66
8 $2,573.90 $2,065.66
9 $2,573.90 $2,149.95
10 $2,733.04 $2,237.69