Saving and Investing

As you switch your focus from finishing your education to achieving the goals you’ve set
for yourself, it’s time to get started on saving and investing.
When you save and invest, you take different approaches to having your money work
for you. But you benefit from both saving and investing because they complement each
other:
●​ You save by putting money into insured bank or credit union accounts that
typically grow slowly but are government insured.
●​ You invest by buying things of value, like stocks, bonds, and mutual funds, that
have more growth potential — sometimes much more — but aren’t insured. So
you could lose money, especially in the short term.

Savings work best for your short-term goals because you want to be sure the money is
available when you need it. Investments are essential for your long-term goals, which
tend to have larger price tags. To cover their costs, your assets have to grow.

The Value of Savings

The difference between what you earn and what you spend each month is the amount
you have available to save. The more you can increase that difference, by earning more
and spending less, the more you can save.
Saving has some very practical advantages:
●​ Keeping three to six months of living expenses in a savings account means
you’re prepared for unexpected expenses — whether your car breaks down,
your computer fries, or you’re temporarily between jobs.
●​ Having savings also means you can afford important extras without straining
your regular budget.

Where to Save
Bank and credit union savings accounts are simple and convenient ways to save. You
earn interest on your balance in these basic accounts, typically at a low but guaranteed
rate.
Once you get started, you might also open other savings accounts where you can earn
a slightly higher return but where your principal is still safe:
 ●​ Money market accounts tend to pay interest at a somewhat higher rate than
basic savings accounts, but they may charge fees if your balance falls below a
set minimum.
●​ Certificates of deposit (CDs) are term deposits with maturities from six months
to five years that pay interest at rates at least as high, and sometimes higher,
than money market accounts.
●​ US Treasury bills (T-bills), which you buy online with an easy-to-open
TreasuryDirect account (www.treasurydirect.gov), pay a fixed rate of interest
that’s set when you buy. They’re available with terms of 4,13, 26, or 52 weeks.

Liquid Assets
Liquidity describes how easily an investment can be converted to cash without loss in
value. Cash itself is totally liquid, whether it’s in your checking or savings account — or
in your hand.
CDs and T-bills are a little less liquid because they have maturity dates at which the full
value of the interest they pay is due. You have access to your money before the
maturity date, but there’s a cost. You usually lose some or all of the interest you
expected. With T-bills, you could potentially lose some of the principal, or purchase
price.
Liquidity is appealing. But if you keep all your money in liquid accounts for the long
term, you actually risk losing buying power. That’s because liquid investments tend to
pay interest at a lower rate than the rate of inflation.
The result is that it’s more difficult to reach your goals within a reasonable time frame.
So in addition to saving, you need to invest to make your money grow.

The Ups and Downs of Investing

You don’t have to work on Wall Street to be an investor. But you have to be willing to
spend some time choosing investments, and you have to stay tuned and be patient.
Generally speaking, the longer your money is invested, the larger your account value
will be — thanks to the power of compounding.
While your money is invested, your account value changes regularly. One month you
could see a gain in value, and another month a loss. Some investments might even be
worth less than you paid for them at various times. These price changes reflect what’s
happening overall in the investment markets, what’s happening with an individual
company, and sometimes what’s happening with both.
You can’t predict the timing of this up and down cycle, so your best strategy is to sit tight
when values are down and focus on the long-term results.

Catching the Snowball Effect

When your savings earn interest, you’re paid a percentage of your total balance each
time that interest is added to the account. As the balance grows, each interest payment
is larger than the one before because the base has increased. Of course you could
withdraw the interest and spend it, but then you’d lose the effect of compounding.
With investing, compounding can be even more powerful. Since the rate of return is
typically higher on investments than on savings, you have much more to gain by
reinvesting your earnings to increase your account balance.
One of the easiest ways to reinvest is to sign up for an automatic reinvestment plan
when one is available, as it is with many stocks and most mutual funds. A word of
caution: You won’t have a positive investment return every year, so your account value
may not grow even if you reinvest. But don’t let that discourage you.

Balancing Risk and Return

When you invest, you’re looking for a stronger return than saving provides. But the
potential for a greater return goes hand in hand with taking more risk. In fact, the larger
the potential return, the greater the risk. Just to clarify:
●​ Return is what you get back in relation to the amount you invest.
●​ Risk is another way of saying “uncertainty.”

One investment risk you face is the possibility of losing money, which happens if an
investment drops significantly in value and you sell at a loss. Another risk is not realizing
a strong enough return to meet your goals. This happens if an investment doesn’t gain
as much as you anticipated.
The good news is that the more you learn about the way investments work, the better
you’ll be at estimating the level of risk you’re taking with each investment you make —
though there’s no guarantee that the past performance of any individual investment will
be equaled or surpassed in the future.

Types of Investments
The sheer number of investments can seem overwhelming, but most of them can be
grouped into three big categories: cash, debit, and equity.
 ●​ Cash investments are savings. When you buy an insured CD or a T-bill, you
know you’ll get your principal plus interest back at the end of the term. The
trade-off is that cash investments don’t offer much return.
●​ Debt investments are bonds. When you buy a bond, you’re actually loaning
money to a company or government that issued the bond and promises to
repay you the amount of the loan plus interest. Because the market price of a
bond can drop, or a bond issuer can default and not repay, bonds are usually
more risky than cash. But they’re less risky than stocks.
●​ Stocks are equity investments. When you buy stock you have a share of
ownership in the issuing company. Stock returns are tied to the fortunes of the
company and what’s happening in the overall stock market.

While individual stocks pose different risks and returns, all stocks have similar
characteristics. The same is true of all bonds.

Mutual Funds and ETFs

Researching bonds and stocks can be fun if you’re confident about what you’re doing.
But if you’re new to investing, making these choices can be intimidating. Mutual funds
and exchange-traded funds (ETFs) make your task a lot easier.
Funds are pooled investments. They combine the money they raise from selling shares
to investors to buy portfolios of stocks (if they’re stock funds), bonds (if they’re bond
funds), or sometimes a combination of stocks and bonds. Professional managers
choose the investments, decide when to buy, and when to sell.
Each fund has an investment objective, which may be something broad, like growth or
income, or something specific, like tracking a particular index. With some research, you
can find funds with objectives that fit your investment goals.
Index mutual funds and ETFs may be a particularly good choice because they aren’t
expensive to buy, and you can get started with just a small minimum investment.

Allocating Your Assets

Asset allocation describes the way you divide the money you have to invest, on a
percentage basis, among cash investments, bonds, and stocks. Asset allocation is also
a quick indicator of the level of risk your portfolio carries:
●​ When you emphasize stocks, you focus on long-term growth, not current
income. Stocks carry more risk and are typically more volatile than bonds or
cash because their prices typically change more quickly. Portfolios with heavy
stock allocations are described as aggressive.
 ●​ When you emphasize cash and bonds, you concentrate on current income
rather than long-term growth. They carry less risk because the investments
are more liquid. Portfolios allocated largely to cash and bonds are described
as conservative.

There’s no “right” way to allocate. What’s right for you depends on the:
●​ Goals you want to meet
●​ Time you have to reach those goals, which is another way of saying how old
you are
●​ Amount of risk you’re comfortable taking

Diversification
Diversification means buying a variety of investments of each type rather than just one
or two. That might include:
●​ Stock in companies of different sizes, in different businesses, or based in
different countries
●​ Bonds from different types of issuers, with different terms, and different credit
ratings

It’s smart to diversify because no single investment or type of investment produces

strong returns all the time. When some are having a bad year, others may be doing
better. So by owning a variety, you increase the potential for keeping your average
return positive. In that way, a broadly diversified portfolio limits the risk you have to take
to achieve your goals.
Mutual funds and ETFs can be a convenient way to diversify, since each fund portfolio
is already diversified. For example, buying shares of a fund that tracks the S&P 500 is
more convenient and much more cost effective than buying shares in each of the 500
companies in the index.

What’s in Your Portfolio?

Your investment portfolio isn’t a briefcase that you carry around or some documents you
lock in a fireproof box. It’s the combination of investments that you own.
To start a portfolio that will help you meet your goals, you need to understand how each
investment you’re considering works, how much risk it carries, and how it fits in with the
rest of what you own. It’s not as hard as you might think.
 ●​ Link the investments you buy to the goals you want to reach. Don’t emphasize
safety and liquidity for long-term goals or growth potential for short-term goals.
●​ Avoid complex investments or any investments that nobody can explain in a
way you understand.
●​ Avoid investments with too many restrictions, conditions, or fees.

To expand to the next level, you don’t want to buy randomly. You need a strategy, or
plan, that involves asset allocation and diversification. For example, you’ll want to be
sure new investments make sense in relation to your portfolio as a whole. If you already
own lots of technology stocks, an index fund that owns large, established companies
might be a more suitable choice than another Internet start-up.

Don’t Get Scammed

When you invest you have to negotiate a number of hurdles. But one you can avoid is
falling victim to a scam designed to separate you from your money. Here are some tips
that will help you do that:
●​ Remember there are no shortcuts. Whether you’re investing for income or for
growth, remember that investing is a long-term strategy.
●​ Look out for scams. Hot tips — even from your best friend — and
get-rich-quick deals are almost always scams. So is any investment you’re told
you have to buy right away and can’t tell anyone about.
●​ Know that higher potential return comes with greater risk. If an investment
guarantees otherwise, the only thing you can be sure of is that you’ll lose your
money.
●​ Avoid unregistered investments.
●​ Be skeptical. If an investment sounds too good to be true, it probably is.
●​ Check the credentials of any salespeople or advisors that want to work with
you with your state securities regulator or the BrokerCheck link at
www.finra.org.

Reallocating and Rebalancing

As your life and your goals change, your portfolio needs to change to keep up.
Reallocation is the process of adjusting your portfolio to fit a new set of goals. If you’re
thinking about going to grad school in a year or two, you might want to switch to a more
conservative asset allocation to be sure you have the money you need for tuition. You
could reallocate by selling stocks and emphasizing cash investments.
Sometimes, even when your goals stay the same, you have to respond to what’s
happening in the investment markets.
Rebalancing is a way of tweaking your portfolio in response to market ups and downs. If
you have an aggressive asset allocation but your bond holdings have a great year, your
asset allocation could end up more conservative than you intended. You could
rebalance by selling off some bond investments and purchasing stocks.
You don’t have to reallocate or rebalance often. But you’ll want to give your portfolio a
yearly checkup to be sure you’re still on track.

Ready, Set, Invest

When you’re ready to save and invest — and there’s no better time than right now —
there are some useful guidelines. They don’t guarantee you’ll get rich. But they will
make the difference between making progress toward your goals and feeling as if
opportunity is getting away from you:
●​ Learn more. Good places to start are well-known financial publications, online
and in print. Check the library or a professor for references or ask a friend or
relative who invests.
●​ Find out about investment presentations on campus. If what you hear interests
you, seek out the presenter for more information.
●​ Contact your bank or credit union about investment services and information
they provide.
●​ Investigate an online brokerage or mutual fund account. Many of them provide
reliable investor education as well as a way to get started investing at a
reasonable cost.
●​ Be honest with yourself about how much risk you’re comfortable taking. That’s
called risk tolerance. To help you find out, check out this money risk quiz. It
never pays to invest too aggressively and then sell in panic if the markets
drop.

Savings are good for short-term goals because the principal is safe and it’s easy to
withdraw. But since savings accounts offer such a low rate of return, saving alone isn’t
the best strategy for your longer-term goals. Inflation will reduce the purchasing power
of your savings over time. So investing for greater returns will help you reach your goals
faster.

It’s a good idea to keep three to six months of living expenses is an easily accessible,
insured, interest-paying account. That will give you enough to cover most major
emergencies, whether you have to repair a car, replace a computer, or keep paying your
bills while you search for a new job.

Liquidity describes how quickly and easily an investment can be converted to cash
without loss in value. Since cash is already cash, it’s the most liquid form of money.
Bank accounts and money market funds are also liquid. But you shouldn’t hold all of
your money in liquid accounts, because if you do, you’ll miss out on the potential growth
provided by investing.

If you reinvest, your investment returns compound just like the interest you earn in a
savings account. And doing it automatically by signing up for a reinvestment plan makes
it easy. But that doesn’t mean growth is ensured. In fact, in some years your account
value may drop even if you reinvest. But in the past, markets have always recovered, so
your long-term prospects for growth are good.

Understanding what you’re buying is a good way to manage risk. If you understand how
investments work, you can choose those best suited to meeting your goals. You’re also
less likely to be the victim of a scam. But avoiding investing entirely, managing your
investments too actively, or failing to diversify by owning just one type of investment
instead of several, could all be problematic because each of these approaches exposes
you to significant risks.

In most situations, stocks are riskier than bonds or cash primarily because stock values
move up and down all the time, sometimes dramatically and not always for predictable
reasons. On the other hand, while stocks expose you to greater risk of loss, they have
historically provided the strongest return among these three types of investments.

An aggressive asset allocation focuses on greater risk with the potential to achieve
stronger growth rather than on current income. Aggressive portfolios are generally most
appropriate for investors with long time horizons and long-term goals. That’s true in part
because the more aggressive the allocation, the larger the short-term losses that may
result during a market downturn.

Diversification helps make your portfolio less vulnerable to a drop in value in any single
investment. When some of your investments are having a bad year, other investments
in a diversified portfolio could be providing a more positive return, helping to offset the
losses. Investing all your savings in your company’s stock poses even more risk
because if things got really bad you might also lose your job.
When you build an investment portfolio, two essential steps are deciding how to allocate
your principal on a percentage basis among stocks, bonds, and cash equivalents and
then how to diversify within each of the investment categories you’ve chosen.

You generally need to reallocate your portfolio when your goals change. If you plan to
pay graduate school tuition in a year or two, you’ll want to be sure the money is there
when you need it. So it’s probably a good idea to move some of the money you’ve
allocated to stocks into less volatile interest-paying bonds or cash equivalents.
Develop Smart Spending Habits (1/17)
Often, you can get your debt under control by developing smart spending habits and
making better choices with your money. Try taking the following steps:
●​ Avoid impulsive spending, and stick to buying only the things you need
●​ When you can, use cash instead of a credit card
●​ Limit the number of credit cards you use
●​ Pay your credit card bill on time and in full each month instead of wasting your
money on interest payments

There are times when simply adjusting your spending habits might not solve the
problem. If you’re in serious debt, you might find that your financial situation requires an
even bigger change.

Warning Signs (2/17)

The convenience of credit can make it easy to fall into debt. But if you’re able to
recognize the warning signs, you may be able to avoid a serious problem and get your
finances back on track. Watch out for these red flags:
●​ You pay only the minimum due on your credit cards
●​ You skip some card or loan payments
●​ You're maxed out on your credit limit
●​ You don’t know how much you owe
●​ Your lender lowers your credit limit

If one or more of these situations rings a bell, it’s time to get a handle on your debt.

Checking Your Credit Report (3/17)

Each year, you can get one free copy of your credit report from each of the three credit
reporting agencies—Equifax, TransUnion, and Experian. You can request the reports all
at once, but it makes sense to spread them out over the year. That way, you can spot
problems shortly after they happen.
You can request your credit reports online at www.annualcreditreport.com.
It’s not just lenders who look at your scores. Landlords do, and so do insurance
companies. And, if you give them permission, potential employers can look at your
credit report. So the way you use credit affects a lot more than being able to borrow.
Credit reports also include other publicly available information that might affect your
creditworthiness, like divorce proceedings, bankruptcies, tax problems, and court
judgments.

The Impact of a Credit Score (4/17)

Your FICO score does more than let potential lenders decide whether you’re a good or
bad credit risk. Based on your score, creditors also determine your interest rate, which
impacts your borrowing costs.
Consider the cost of a $15,000 car loan. With a good FICO score, your creditor might
offer you a 4.5% interest rate. With a poor FICO score, you’re likely to pay a higher
rate—say 15%—significantly increasing your borrowing costs.
At 4.5% interest:
●​ Loan: $15,000
●​ Loan terms: 60 months at 4.5%
●​ Payment: $280 per month
●​ Total cost of payments: $280 x 60 = $16,800
●​ Borrowing cost: $1,800

At 15% interest:
●​ Loan: $15,000
●​ Loan terms: 60 months at 15%
●​ Payment: $357 per month
●​ Total cost of payments: $357 x 60 = $21,420
●​ Borrowing cost: $6,420

With the poor FICO score—and the resulting higher interest rate—the same car costs
nearly $5,000 more.

FICO Score Components (5/17)

While there are other credit scoring systems, FICO® is the most widely used measure
of creditworthiness in the United States.
Your FICO score, which ranges from 300 to 850, is calculated using the information in
your credit report. Although the formula is complex, there are five main components:
1.​ Your credit payment history which shows how you’ve repaid what you
borrowed
 2.​ The total amount of debt you currently have
3.​ The length of your credit history
4.​ The different types of credit you use
5.​ The new credit you hope to have extended to you

When you use credit wisely, you improve your FICO score. If you exhibit poor
repayment behaviors, you’re putting your score at risk.

Building a Credit History (6/17)

Anytime you use credit, you’re adding a chapter to your credit history. All your credit
transactions are recorded in a credit report, which is available to potential lenders who
want to know how you’ve used credit in the past.
Your credit history includes all uses of credit—from student loans to everyday credit
purchases—but not other payments, like the ones you make to the utility company or
your landlord.
You’re assigned a credit score based on the details of your credit report. Your credit
score is a snapshot of your creditworthiness, which lenders use to decide if you present
a credit risk. The higher your credit score, the more creditworthy you are, and the more
likely you are to receive credit.

Getting Into Credit Trouble (7/17)

While mounting interest charges and late fees can increase your debt and make it even
harder to pay your bills on time, they aren’t the only problems caused by poor borrowing
habits. For example, with poor borrowing habits:
●​ It may be hard to find a lender who is willing to give you a credit card or make
you a loan, even if you need the money
●​ It will probably cost you more if you can borrow, since lenders usually charge
higher rates of interest to borrowers who aren’t creditworthy

Did you ever wonder how lenders know you’ve got a money problem?

How Using Credit Can Hurt (8/17)

While many people use credit wisely, the convenience of credit can sometimes lead to
big trouble.
One downside of credit cards is that many people tend to spend more when they use
credit than when they pay with cash. If that’s true for you, it can be hard to pay your bill
on time, let alone in full. Over time, interest and late fees add up, making everything you
buy on credit even more expensive.
There’s a downside to loans as well. Even if you borrow to pay for something that can
benefit you—like a student loan or a car that gets you to work—you can get in over your
head. That’s why it’s important to be honest with yourself about how much you can
afford to borrow. Keep in mind that the amount you can afford to borrow is defined by
the amount you can realistically afford to repay—not what the lender will allow you to
borrow.

Consumer Rights and Protections (9/17)

Things can go wrong even when you use your credit card responsibly. It can be lost or
stolen, or you can buy something that’s a total lemon. Fortunately, federal laws limit your
liability. That’s the amount you’re responsible to pay for charges you didn’t make.
For example, if you lose your card or if it’s stolen, and someone uses it without your
permission, the most you’ll owe is $50. But you have to report the card missing within
two days of realizing it’s gone by calling the customer service number on your
statement. If the charges show up on your bill, you have 60 days to report the problem.
If you miss the deadlines, you could owe more.
If something you buy with your credit card is defective, you have a legal right to refuse
to pay for it. Check with your card issuer about what to do if you get stuck this way.
There are also laws to protect you against unfair fees and lending practices. As a result:
●​ Grace periods are longer
●​ Penalty fees are capped
●​ Introductory interest rates must last at least six months

Avoidable Credit Card Fees and Charges (10/17)

In addition to interest, there are avoidable credit card fees and charges that can add to
your total cost of borrowing. Here are some to look out for—and to avoid.
●​ Annual fee: The cost you pay each year to use a card. Annual fees are
usually charged on cards that offer special perks and extras, like cash back or
miles. The cost of the fees often outweighs the benefits.
●​ Late payment fee: The amount you pay if you don’t pay the minimum balance
on time.
●​ Over limit fee: The amount you pay if you charge more than your credit limit.
 ●​ Cash advance fee: The amount you pay for using your card to borrow cash
using an ATM. Interest is charged from the moment you get the cash—and it’s
charged at a higher APR.

Credit with a Card (12/17)

A credit card can be a handy way to borrow if you choose the right card and are smart
about using it. Using credit this way doesn’t have to cost you a cent — provided the
card has a grace period and you always pay the full amount you owe on time.
A grace period is the minimum of 21 days you have to pay your bill after the lender
sends it to you. If you pay the whole thing in full by the day it’s due, there’s no finance
charge.
But if there’s no grace period or if you pay only part of what you owe, using this type of
credit will cost you money—potentially, big money. To figure your finance charge for the
month, the lender multiplies 1/12th of your APR times your unpaid balance. That’s the
interest you owe.

Why Use Credit? (13/17)

Credit makes it convenient to buy practically anything you need or want without having
the money in your pocket or in the bank. You can:
●​ Pay for major expenses like college tuition or a new car
●​ Finance unplanned expenses like repairing your car or replacing a damaged
laptop
●​ Buy the things you need now, like books for your courses or a winter coat
●​ Make purchases online or over the phone

What Credit Costs (14/17)

For both revolving and installment credit, the cost of borrowing depends on the same
factors:
●​ How much you’ve borrowed, called the balance or principal
●​ The annual percentage rate (APR) the lender uses to figure the finance charge
●​ How long it takes you to repay, sometimes called the term

With a credit card, the finance charge includes only interest. But with a loan, it also
includes other costs, like application fees and checks on your creditworthiness.

What’s Credit? (15/17)

Credit is the ability to borrow money.
Lenders, also called creditors, are willing to lend because they expect to get their
money back and make a profit. Different types of lenders - such as banks, investment
companies, credit unions, and even the federal government - provide different types of
credit.
You're the borrower. You qualify for credit if lenders consider you creditworthy. That
means lending to you isn’t too risky. When you borrow, you promise to repay the
amount of money you use within a certain period of time, plus a fee for using the money.
If you don't meet your legal obligation to repay what you owe on time, you'll pay
penalties and face other problems.

Loans (16/17)
There are times when a credit card isn’t the best kind of credit to use. For example, if
you want to buy something that costs more than you have available on your credit line
or that you can’t possibly pay off in a year or two, you can apply for a loan.
For example, you can use a loan to:
●​ Buy a car
●​ Pay your college tuition
●​ Buy a home
●​ Start your own business

Some loans, such as car and home loans, are secured, which means if you don’t repay,
the lender can repossess what you bought. Unsecured loans, including student loans,
are backed only by your promise to pay what you owe. But repayment isn’t an option.
It’s required.

Types of Credit (17/17)

Most people use two primary types of credit: credit cards and loans.
●​ Credit cards are a type of revolving credit. That means you can use your credit
card over and over, as long as you spend less than the credit limit your lender
sets and you pay your bills regularly. As you repay what you’ve borrowed, you
can borrow that amount again.
●​ Loans are installment credit. You borrow a fixed amount and make regular
repayments, usually once a month, until you’ve paid off the loan. If you need to
borrow more, you try to arrange another loan.
Credit cards are a type of revolving credit. You can borrow up to your credit limit, and
when you’ve repaid that amount, you’re free to borrow it again. Loans, on the other
hand, are installment credit. When you use credit this way, you borrow a fixed amount,
and make regular payments until you’ve paid off the amount you owe.

Keep in mind that potential lenders look for red flags in your borrowing past. If you have
a history of making late credit card payments or defaulting on your loans, it might be
tough for you to get the credit you need at an interest rate you can afford.

All of these things can help you avoid credit card trouble. But the only way to be sure
you won’t rack up serious debt is to pay your bill in full and on time every month.

Your APR is what credit costs you each year. To calculate your interest due on a
monthly bill, your lender multiplies your outstanding balance times 1/12 of your APR.

In this case, you wouldn’t owe any interest since you repaid the amount you borrowed in
full and on time. Interest starts to accrue only when you don’t pay the full amount due
within the grace period.

Although the monthly payments for Loan #2 are considerably lower, you’d be making
payments for an additional two years. Over time, those payments add up. The total cost
of Loan #2 would be $17,400, making it more expensive than Loan #1, which would
cost $16,922.

Your credit report records all uses of credit, but doesn’t include any other activity. When
you take out a loan or use your credit card, it’s reflected in your credit report, as is the
time it takes you to repay what you borrowed. Potential lenders and other creditors use
this information to help determine whether you present a credit risk.

Your FICO score is calculated using a complex formula, but in general, creditworthy
behavior, such as repaying on time, increases your score, while bad borrowing
decisions work against you.

While developing smart spending habits can help you stay out of trouble in the future, it
may not be enough to solve your existing debt problems. If you’re in serious debt, you
might need to do several things all at once to get back on track.

There are many ways to deal with serious debt, but the first step is to ask for help. If you
find yourself in trouble, check out what resources are offered on campus.