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Savings & Investing Are: Savings & Investing Are:

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Savings & Investing Are: - PPT Presentation

Safe Liquid Used For Large Purchases Emergencies Financial Security Savings Tools Are Checking Account Savings Account Money Market Account Certificate of Deposit U S Savings Bond ID: 683374

investment interest money savings interest investment savings money 000 rate account return investing amount time risk tools years earned

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Slide1

Savings & InvestingSlide2

Are:

Safe

LiquidUsed For: Large Purchases Emergencies Financial Security

Savings ToolsSlide3

Are:

Checking Account

Savings AccountMoney Market AccountCertificate of DepositU. S. Savings Bond

5 Savings ToolsSlide4

Savings Tools are Safe

Why?

Government Insured/GuaranteedWith the Exception of US Savings BondsFDIC-Federal Depository Insurance Corporation up to $250,000 Federal government agency that insures depository institutions Slide5

Choosing a Savings Tool

By understanding the features of different savings tools, an individual can choose which tools will help them reach their financial goals.Slide6

Depository Institutions

Features of savings tools vary between different depository institutions

Interest ratesAccessibility optionsFees PenaltiesMinimum balance requirementsSlide7

Depository Institutions

Research and compare savings tools at different depository institutions in order to find the best option

Not limited to one depository institutionCan have different savings tools at different depository institutionsSlide8

DEFINITION

Account used to transfer funds electronically and by writing checks

INTERESTMay or may not earn interestIf does earn Interest, rate will be the lowest of the savings tools

Checking AccountSlide9

ACCESSIBILITY

Most liquid of all the savings tools

Funds are easily accessed by:ChecksAutomated teller machines (ATMs)Debit cardsTelephone

Internet

Checking AccountSlide10

FEATURES

Can have minimum balance requirements

Can charge transaction feesCan have a limit on the number of checks written monthlyReduces the need to carry large amounts of cash

Checking Account

Before opening a checking account, learn all of the requirements and restrictions.Slide11

ADDITIONAL INFORMATION

If interest is earned on the account, you must report it on your income taxes (unearned

income) in the year it was earnedYou will receive a form 1099 that tells you the total interest you earned for the year

Checking AccountSlide12

DEFINITION

Account to safely hold money you don’t want to spend

INTERESTInterest earningHigher interest rates than checking accounts

Savings AccountSlide13

Savings Account

ACCESSIBILITY

More liquid than all savings tools except a checking accountFunds may be accessed or transferred between accounts through:Automated teller machinesTelephones

Internet

Debit CardSlide14

Savings Account

FEATURES

Allows for frequent deposits or withdrawalsEasily accessible (the same as checking except no checks)Money storage for financial securityAvailable at depository institutionsMay require a minimum balance or have a limited number of withdrawals per monthSlide15

ADDITIONAL INFORMATION

Interest earned on the account must be reported on your income taxes (unearned

income) in the year it was

earned

You will receive a form 1099 that tells you the total interest

you earned for the year

Savings

AccountSlide16

DEFINITION

This is a kind of combination checking/savings account.

Money Market Deposit AccountSlide17

Money Market Deposit Account

INTEREST

Minimum balance requirement with tiered interest ratesThe amount of interest earned depends on the account balance

For example: a balance of $10,000 will earn a 4% interest rate while a balance of $2,500 would only earn 3%

$1,000-$5,000 3%

$5,001-$10,000 4%

$10,001-$15,000 5%

$15,001-$20,000 6%Slide18

Money Market Deposit Account

ACCESSIBILITY

Less liquid than checking and savings accountsAccessibility is limited to a certain number of transactions per month (usually 3-6)Slide19

Money Market Deposit Account

FEATURES

Minimum amount required to open the account, often $1,000If the average monthly balance falls below a specified amount, the account will earn a lower interest rate for the entire monthSlide20

ADDITIONAL INFORMATION

Interest earned on the account must be reported on your income taxes (unearned income) in the year it was earned

You will receive a form 1099 that tells you the total interest you earned for the year

Money Market Deposit

AccountSlide21

DEFINITION

An insured interest earning savings tool that allows restricted access to the funds

Deposits have to be held for a certain length of timeUsually 7 days to 8 years

INTEREST

Varies depending upon the time length and amount of money deposited

The longer the period of time, the higher the interest rate

Certificate of DepositSlide22

Certificate of Deposit

ACCESSIBILITY

Less liquid than checking, savings, and money market deposit accountsLarge fees are assessed if funds are withdrawn before the end of the designated time periodSlide23

Certificate of Deposit

FEATURES

Minimum deposits range from $100-$250,000Low risk and no fees if funds are held for the designated time periodSlide24

ADDITIONAL INFORMATION

Interest earned on the account must be reported on your income taxes (unearned

income) in the year it was earned even if you don’t touch the moneyYou will receive a form 1099 that tells you the total interest you earned for the year

Certificate of DepositSlide25

US Savings BondE now EE

DEFINITION

Current bonds purchased for face value from the U.S. Government Loan given to the governmentAs of 2012, all bonds are electronic—no paperSlide26

US Savings Bond

INTEREST

Earns interest up to 30 years then mature (stops)Slide27

US Savings Bond

ACCESSIBILITY

Least liquid of all the savings toolsAccess to funds is restrictedCan only be redeemed after 1 year with a substantial penaltyCan be redeemed after 5 years with 3 months of interest penalty

After that

no penaltySlide28

Savings Bond

FEATURES

Cannot be transferred; whoever owns it must cash it in—if die, goes to estatePurchased for $25 - $10,000Any one SS# is allowed a total yearly bond purchase of no more than $10,000Slide29

Savings Bond

ADDITIONAL INFORMATION

TaxesInterest earned on a bond is tax exempt until redeemed (cashed in)Once cashed in or when bond matures (30 years), interest earned on the bond must be reported on your income taxes (unearned income)

If the bond

and

its interest are used to pay for

higher education

the interest it earned will be tax exempt when redeemedSlide30

Liquidity

Examples of Assets

Cash

Automobiles

Houses

Furniture

Assets

: Everything an individual owns with monetary value.

Liquidity

: How quickly and easily an asset can be converted to cash.

Clothing

Electronics

Savings AccountsSlide31

Liquidity

Checking Account

Savings Account

Money Market Deposit Account

Certificate of Deposit

Savings Bond

Most

Liquid

Least

Liquid

Lowest Interest

Highest InterestSlide32

Choosing a Savings Tool

Different savings tools can be utilized to assist in reaching personal financial goals

Higher interest rates are a trade-off for lower liquiditySlide33

Choosing a Savings Tool

When and how often access is needed to funds helps determine which savings tool to use

An individual wants to develop an emergency savings fund

They need a very liquid account

A savings account is very liquid and accessible in emergency situations

Additional info savingsSlide34

Savings Tools Scenarios

Read each Savings Tool Scenario

Discuss which savings tool would be recommended for each scenarioSlide35

Savings Tools Scenario #1

Sean is a high school student that just received his first paycheck from his new part-time job at the local grocery store. He currently has no expenses to pay, and his goal is to save every paycheck from his job to buy a new car in two years. He needs to find a savings tool that will help him reach his financial goal. Which savings tool would you recommend Sean utilize and why? Slide36

Savings Tools Scenario #2

Brittany recently moved into her first apartment. Before, she was living with her parents and had very few expenses to keep track of. Now that she has to pay rent and utilities for her apartment, she needs to find a savings tool that will help her manage her money and ensure she can pay her bills every month. Which savings tool would you recommend Brittany utilize and why?

 Slide37

Savings Tools Scenario #3

Bryan has a goal to become financially secure by developing an emergency fund. He has been saving twenty percent of his net income for the past year and now has $2,000. He plans to maintain this balance and only use this money for emergency expenses. Which savings tool would you recommend Bryan utilize and why? Slide38

Saving vs. Investing

Portion of current income not spent on consumption

Savings

Purchase of assets with the goal of increasing future

income or wealth used for long-term goals

InvestingSlide39

Savings vs. Investing

Emergencies

Large Purchases

Financial Security

Money

saved

is used to pay for:

Higher Education

Buying a Home

Retirement

Money

invested

is used to pay for:Slide40

Liquid Assets

Savings are known as liquid assets, because they are easily accessible

(turned into cash) in emergency situations.In most cases, investments are not as liquid as savings.

Of your assets,

which are the most liquid? Slide41

Savings

Investing

Why are Saving & Investing Important?

Provides the foundation for

financial security

Enhances and helps build

wealthSlide42

Saving vs. Investing Activity

Directions:

A characteristic of saving or investing will be identifiedDecide which you think is correctDiscuss the answerSlide43

Saving vs. Investing Activity

Characteristic:

Builds Wealth

Saving or Investing:

InvestingSlide44

Saving vs. Investing Activity

Characteristic:

More Liquid

Saving or Investing:

SavingSlide45

Saving vs. Investing Activity

Characteristic:

Used to pay for emergencies

Saving or Investing:

SavingSlide46

How is Wealth Measured?

The components include:

Assets – Everything a person owns with monetary value Liabilities – Debts (what is owed to others) Net Worth – the amount of money left when liabilities are subtracted from assets (indicates wealth)

Net worth statement -

Describes an individual or family’s overall financial condition on a specified dateSlide47

The Choices You Make Today Impact Your Future!

Increased Wealth!

Saving and investing…

Increase Assets

Decrease

LiabilitiesSlide48

True or False?

Identify if each statement is true or false…

If Janie

makes a

one time

investment of $500 at age 20 in a tool that earns the historic 12% average, by age 60 the $500 will become $46,525.

If Samuel

invests $3,000 annually from ages 22-31 (a

total

of $30,000 invested) in a tool earning 10% interest, he will have $1.2

million

dollars by age 65.

They are both true. Now we are going to learn how!Slide49

Time Value of Money

Money paid out or received in the future is

not equivalent to money paid out or received today

Three factors affect how an investment will grow.Slide50

Interest Rate

Interest

is the price of

using money

.

Interest rate

is the percentage rate paid on the money invested or saved

Are you earning interest on any money?Slide51

How Do Interest Rates Affect Time Value of Money?

$

1,000

invested for 5 years

Interest Rate

Amount Investment is Worth

1%

$1,051.01

3%

$

1,159.27

5%

$

1,276.28

7%

$

1,402.55

9%

$

1,538.62

Interest Rate

More

MoneySlide52

Time

The longer an individual invests, the more

money he/she will make.Slide53

A Little Goes a

Long Way

Sally Saver puts away $3,000 per year for 10 years, at age 22. She earns 10% on her investment.

Sally invests a total of $30,000 and has earned $1,205,063 by the age of 65

Ed Uninformed waits until he is 28 and contributes $3,000 at 10% for 37 years

Ed invests a total of $111,000 and accumulates $1,079,856 by the age of 65

53Slide54

Amount of Money

The larger the amount of money invested, the larger the return on investment will beSlide55

Amount of Money

7% interest compounded annually for 5 years

Amount of Principal Investment

Return on Investment

$100.00

$40.26

$

1,000.00

$402.55

$

10,000.00

$4,025.52

Amount of Money

Larger ReturnSlide56

Maximizing Your Return

Time:

Invest for as long as possible!Amount of Money:

Invest as much as possible, as often as possible!

Interest:

Invest at the highest interest rate possible!

Use compounding interest that compounds as frequently (annually, semi-annually, quarterly, monthly, daily) as possible!Slide57

Smart Investing

An investment earning an interest rate of

2%

An investment earning an interest rate of

2.1%

OR

Which would you choose?Slide58

Simple Interest

Compounding Interest

Simple Interest vs. Compounding Interest

Interest earned on the principal investment

Earning interest on

the principal

AND past interest

Principal

is the original amount of money invested or savedSlide59

$1,000 x .05 x 3/12=$12.50

$1,000 + $12.50=$1,012.50

$1,012.50 x .05 x 3/12=$12.66

$1,012.50 + $12.66=$1,025.16

$1,025.16 x .05 x 3/12=$12.81

$1,025.16 + $12.81=$1,037.97

$1,037.97 x .05 x 3/12=$12.98

$

1,037.97 + $12.98=$1,050.95

$

1,000

invested at

5

%

interest rate compounded quarterly for

1 year

Return to slide 60Slide60

Compounding Interest

for a Single Sum = $1,402.55

Simple Interest = $1,350

Compounding vs. Simple interest

Why?

By reinvesting the interest earned, the interest payment keeps growing as interest is compounded

on interestSlide61

Simple Interest Equation: Step 1

$1,000 invested at 7% interest rate for 5 yearsSlide62

Simple Interest Equation: Step 2

$1,000 invested at 7% interest rate for 5 yearsSlide63

Compounding Interest Equations

There are two equations for compounding interest

Single sum of money

Money invested only once at the beginning of an investment

Equal number of investments spread over time

Equal amounts of money is invested multiple times (once a month, once a year, etc.)Slide64

Compounding Interest Equation – Single Sum

$1,000

invested at

7%

interest rate compounded quarterly for 5 years

(.07÷4) +1=1.0175

20

=1.41478 x $1,000=$1414.78

Interest Rate

# of times compounded per year

Amount Investment is Worth

+1

)

(

Total

# of times compounded

=

n; then take n

Answer from above x Principal=Slide65

Compounding Interest Equation – Single Sum

$1,000

invested at

5

%

interest rate compounded quarterly for

1 year

(.

05÷4

) +

1=1.0125

4

=

1.0509

x $1,000=$

1,050.95

Interest Rate

# of times compounded per year

Amount Investment is Worth

+1

)

(

Total

# of times compounded

=

n; then take n

Answer from above x Principal=

Go back to slide 59 for comparisonSlide66

Compounding Interest Equation- Equal Investment Amounts Over Time

$1,000

invested every year at 7%

annual interest rate for

5

years

PMT

x

(

1

+i)

n

-

1

=

A

i

Payment

x

(

1

+Interest

Rate

)

Time

Period

-

1

=

Amount

Investment is Worth

Interest

Rate

$1,000

x

(1+.07)

5

-1

=

$5,750.74

.07Slide67

Definitions

Return

is the profit or income generated by savings and investing.

Unearned income

is income derived from sources other than employment, such as interest.Slide68

Smart Investing

Which would you choose?

An investment earning

compounding

interest

An investment earning

simple

interest

ORSlide69

Single Sum vs. Investments Over Time

Compounding Interest for Investments Over Time =

$5750.74

Compounding Interest

for a Single Sum = $1402.55

To make the most of your money, utilize compounding interest and continue to invest!Slide70

Compounding Interest

The number of times interest is compounded has an effect on return

Interest compounding frequently will yield higher returns

$

1,000

invested at

7%

for

5

years

Compounding Method

Amount Investment is Worth

Daily

$1,419.02

Monthly

$1,417.63

Quartely

$1,414.78

Semi-Annually

$1,410.60

Annually

$1,402.55Slide71

Smart Investing

An investment with an interest rate compounded

monthly

An investment with an interest rate compounded

yearly

OR

Which would you choose?Slide72

Rate of Return

Investments usually earn higher rates of return than savings tools

Rate of ReturnThe total return (earned)

on

an investment

expressed

as a percentage of the amount of money invested

Remember:

Return is the profit or income generated by savings and investing.Slide73

What is Mandy’s Rate of Return?

Mandy saved $2,200 in a money market deposit account. After one year, she has a return of $110. What is Mandy’s rate of return?

Mandy’s rate of return on investment is 5%Slide74

What is Derek’s Rate of Return?

Derek invested $900. When he withdrew his money from the investment, he had a total of $1,050. What is Derek’s rate of return?

Derek’s rate of return on investment is 16.7%

$1,050 $900 $150 ReturnSlide75

Risk

POTENTIAL

RETURN

RISK

Risk

The uncertainty regarding the outcome of a situation or event

Investment Risk

The possibility that an investment will fail to pay the expected return or fail to pay a return at allSlide76

Investment Risk

Risk is a trade-off for the potential to receive high returns

All investments carry some level of risk

Financial Risk Pyramid

Illustrates the trade-offs between risk and return for a number of saving and investing tools

What is the risk level of savings tools?Slide77

Financial Risk Pyramid

Speculation

Increasing potential for higher returns

Increasing riskSlide78

Inflation

Inflation

The rise in the general level of prices

Inflation Risk

The danger that money won’t be worth as much in the future as it is today

Inflation risk should not be a concern with savings since the goal of savings is to provide

current

financial security

The rate of return on an investment should be higher than the rate of inflation.Slide79

Investment Philosophy

Each individual has a tolerance level for the amount of risk they are willing to take on

Investment Philosophy

An individual’s general approach to investment risk

The greater the risk a person is willing to make on an investment, the greater the potential return will be.

Generally divided into three categories: conservative, moderate, and aggressiveSlide80

Portfolio Diversification

Portfolio Diversification-

reduces risk by spreading investment money among a wide array of investment tools

Creates a collection of investments that will provide an acceptable return with an acceptable exposure to risk

Assists with investment

risk reduction

Referred to as “Building a Portfolio.”Slide81

Types of Investment ToolsSlide82

Stocks

Stock

A share of ownership in a companyStockholder

or

shareholder

Owner of the stock

Usually a stockholder owns a very small part of a company.Slide83

Return on StocksSlide84

Corporate Bonds

A loan to

a company

The company

pays

annual interest to the investor until the

maturity date

is reached

The specified time in the future when the principal (or initial investment) amount of the bond is repaid to the

bondholder

If company fails, bondholders are given some money before stockholders

Bonds are less risky than stocks but do not have the potential to earn as much as a stock.Slide85

Mutual Funds

Mutual fund-

Created when a company combines the funds of many different investors and then invests that money in a diversified portfolio of stocks and bonds that is professionally managed.

Always research the fees charged by a mutual fund.

Reduces investment risk by helping people diversify their portfolio

Fees can be high

Saves investors timeSlide86

Index Fund

Index fund

A mutual fund that was designed to reduce fees by investing in the stocks that

make up an index

Index-

a group of similar stocks and bonds

Examples- Standard and Poor 500,

Nasdaq

Composite Index, Dow Jones Industrial Average

Offer high diversification with low fees

What is the difference between a mutual fund and an index fund?Slide87

Real EstateIncludes any residential or commercial property or land as well as the rights accompanying that land

A family home is

not considered an investment assetCan be risky and more time consuming but has potential for large returns

Examples of real estate investments include rental units and commercial property.Slide88

Speculative Investments

Have the potential for significant fluctuations in return over a short period of time

Examples- futures, options, commercial paper, collectiblesRecommended for people with an aggressive investment philosophy and a high level of financial securitySlide89

futuresContract

to buy a specific amount of an investment at a specific time in the future for a specific amount of money.

ExampleFarmer would sell 5000 bushels of wheat for $3.50/bushel for delivery on December 1, 2016.Slide90

Stock Option

The

right to buy or sell a specific amount of shares for a specific amount of money in a specified period of time (you don’t have to do this)ExampleAs a bonus, the company you work for gives you a stock option to purchase 100 shares of company stock at $6/share until June 30, 2016.Slide91

Commercial Paper

A short-term

loan given to a companyNot usually backed by collateral so generally purchased at a discountExampleCoca-Cola offers commercial paper with a face value of $100 for $80 that matures June 30, 2016

You pay $80 and at the end of June you get $100Slide92

Buying and Selling Investments

Investors must utilize a brokerage firm that acts as a buying and selling agent for the investor (except for when buying real estate and certain speculative investments).

Complete

investment

transactions

Offer investment advice and one-on-one attention from a broker

Only complete investment transactions

Offer no advice to investors but charge 40-60% lessSlide93

Services Offered for Investing

Retirement Planning 

Saving for Retirement  Nearing or In Retirement Life Events College Planning

Tax

Life Insurance

Estate Planning

Charitable Giving 

Financial GuidanceSlide94

Investment Companies

Goldman Sachs

JP Morgan Chase Morgan Stanley Citigroup Merrill LynchBarclays

Lazard

Credit Suisse

Deutche Bank

Wells Fargo Slide95

Taxation

Profits earned on investments are considered to be

unearned

income

Income taxes MUST be paid

on this money

Includes all forms of returns: interest, dividends, and price appreciation

Taxes are due on

most

investment returns in the year the unearned income is receivedSlide96

Tax-Sheltered Investments

The government tries to encourage certain types of investments by making them tax-sheltered

Tax-sheltered investmentsEliminate, reduce,

or defer taxes

Examples-

retirement plans (IRA),

education

expenses (529 plan),

health care

expenses (employer-funded plan)

Tax-sheltered investments are not tax-free!Slide97

Tax-Sheltered Investments

If taxes

are not eliminated, then the taxes are either paid when the money is put into the account or when the money is taken out of the accountThere are limits to the amount of money that can be investedAn individual should invest as much money as possible in tax-sheltered investments

What is the benefit of a tax-sheltered investment if taxes still have to be paid?Slide98

Employee-Sponsored Investment Accounts

Allow employees to reduce their tax liability and make investing automatic

Money is automatically taken out of an employee’s paycheckEmployers often contribute a portion of money to the investment with no additional cost from the employee

It is recommended that a person utilize these investment tools as much as possible if they are offered.Slide99

Rule of 72

Rule of 72

Allows a person to easily calculate when the future value of an investment will double the principal amountSlide100

Albert Einstein

Credited for discovering the mathematical equation for compounding interest, thus the “Rule of 72.” At 10% interest rate, money doubles every 7.2 years,

T=P(I+I/N)

YN

“It is the greatest mathematical discovery of all time.”Slide101

What Can the “Rule of 72” Determine?

How many years it will take an investment to double at a given interest rate using compounding interest

How long it will take debt to double if no payments are made

The interest rate an investment must earn to double within a specific time period

How many times money (or debt) will double in a specific time periodSlide102

“Rule of 72” FYI

The rule is only an approximation

The interest rate must remain constant

Can’t add money, pay money (loan), or take money

out

Don’t convert % to decimals or

vice versaSlide103

Doug’s Certificate of Deposit

Invested $2,500 Interest Rate is 6.5%

Doug invested $2,500 into a Certificate of Deposit earning a 6.5% interest rate. How long will it take Doug’s investment to double?

72

÷

6.5

11 Yrs

=Slide104

Jessica’s Credit Card Debt

$2,200 balance on credit card 18% interest rate

Jessica has a $2,200 balance on her credit card with an 18% interest rate. If Jessica chooses to not make any payments and does not receive late charges, how long will it take for her balance to double?

72

÷

18

4 Yrs

=Slide105

Jacob’s Car

$5,000 to invest

Wants investment to double in 5 years

Jacob currently has $5,000 to invest in a car after graduation in 5 years. What interest rate is required for him to double his investment?

5

14.4%Slide106

Julie’s College

Julie wants to save for college. She is 5 years old now and has a possible investment that earns 8% interest. She has $2,000 currently. How long will it take for her investment to double?

72

8

9 yearsSlide107

How much money would Julie have when she was 14?

Answer

the following:

How

long did she have the investment

?

How

many times will

the investment double while she had the investment?Slide108

so Question 1) How long did she have the investment?

she’s 14

yrs old now and was 5 yrs old when she started14 – 5 = 9 yrs that she had the investment

And

Question 2)

How many times will the investment double while she had the investment

?

9

yrs

that she had the investment and 9

yrs

to double

9 ÷ 9 =

1 time that it doubles

so

$2,000 x 2 (doubled)= $

4,000Slide109

23 years old?

Question 1

) How long did she have the investment?she’s 23 yrs old now and was 5 yrs old when she started23 – 5 =

18

yrs

that she had the investment

And

Question 2)

How many times will the investment double while she had the investment

?

18

yrs

that she had the investment and 9

yrs

to double

18 ÷ 9 =

2

times that it doubles so$2,000 x 2 (doubled)= $4,000$4,000 x 2 (doubled)= $8,000Slide110

42 years old?

Question 1

) How long did she have the investment? she’s 42 yrs old now and was 5 yrs old when she started42– 5 =

37

yrs

that she had the investment

And

Question 2) How many times will the investment double while she had the investment?

37

yrs

that she had the investment and 9

yrs

to double

37 ÷ 9 =4

times that it doubles (approximately)

so

$2,000 x 2 (doubled)= $4,000

$4,000 x 2 (doubled)= $8,000$8,000 x 2 (doubled)= $16,000$16,000 x 2 (doubled)= $32,000Slide111

Questions to Ask

Certification

HeartPocketbookNeed Unbiased SuggestionsAdvisor Expectations

Prepare a Needs Analysis

Won’t Make any Specific Recommendations Initially

Try to Help you Understand your Financial SituationSlide112

Advisor Expectations

Prepare a Needs Analysis

Won’t Make any Specific Recommendations Initially

Try to Help you Understand your Financial SituationSlide113

Make Saving and Investing Automatic

Saving and investing should be considered a fixed expense that is

automaticPay yourself first is a saving strategy that means to set aside a predetermined portion of money for saving before any money is used for spendingSlide114

Automatic Transfers

&/or

Payroll Deduction

How can savings and investing

become automatic?