How protective is your emergency fund?

By Jennifer Langley

Everyone should have an emergency fund regardless of their age or financial status. Not only can one of these funds protect you in the event of an emergency, but they are also a great way to learn about the importance of saving money. Even if you are just getting ready to move out of your parents' house for the first time, you should already be considering how much money you can put into your emergency fund on a monthly basis.

How to build an emergency fund

Most people in the U.S. live paycheck to paycheck, and this can make it very difficult to put any money aside. Unfortunately, these are also the same people who will find themselves in the most financial trouble if even one thing goes wrong. Therefore, it is necessary to make some sacrifices in order to build an emergency fund.


Even if you can only afford to put aside $5 a week, it is better than nothing, and over the course of the year you will save $260. Hopefully you will not have to touch the fund for many years, but if you end up with an unexpected car repair or other issue, it will be much better to have even $260 set aside than no money at all.

Why do I need an emergency fund?

Life is unpredictable, and it is always a bad idea to use a credit card to deal with an emergency situation, especially if you have limited financial resources. Consider for a moment where you are going to get the monthly credit card payments from before you simply move forward with a credit card purchase.

If you do not have an extra $100 a month to make a credit card payment, then you are not in a good position to rely on a credit card. Instead, you should have your own emergency fund in place that will help you replace your transmission, pay for a medical bill or cover your expenses if you miss a couple of days of work due to getting the flu.

No matter how well we take care of ourselves and our possessions, things will inevitably break down and we will eventually become sick. Therefore, the only way to keep ourselves from becoming buried by debt is to dip into an emergency fund instead.

What if I really cannot afford an emergency fund?

There are very few people who actually spend every dollar that they have in a careful way. Consider what your current bills are, and whether or not you actually need to keep all of them the way that they are. For example, if you have premium cable channels, you could easily save $20 or more a month to put into an emergency fund by canceling them.

Keep in mind that there are cheaper entertainment alternatives such as Netflix Instant Streaming if you are a movie addict. Another thing that a lot of people spend money on is a daily cup of coffee. Instead of getting it from a restaurant, you should make your own. The money that you save will give you a nice start to your emergency fund.

What if my emergency fund does not cover my expenses?

There will be some instances when your emergency fund will not have enough in it to cover all of your expenses, but it is always better to cover as much of the cost as possible from your fund. That way, if you do need to get a loan or use a credit card, you will be able to pay it back more quickly and in smaller installments.

This article was written by Jennifer Langley. Jennifer is an avid finance writer who stresses the importance of protecting oneself before venturing out into any endeavor.

* All images US-PDGov

How the risk-free interest rate is determined

 US-PDGov

On the surface a risk-free interest rate is perceived to be the rate of return on an a financial allocation that has no financial risk associated with it. However, 'risk' itself is a word that has more depth to its meaning when coupled with financial instruments. This is because risk also includes the influence of variables such as devaluation from inflation, opportunity cost, and issuer default.

According to Aswath Damodaran of the New York University Stern School of Business, risk-free assets have no variance from the expected rate of return. In other words, what you see is what you get without question; an example of such being guaranteed fixed interest rates. In this sense, risk-free rates do not have to be universal or the same across financial instruments such as savings accounts and government bonds, but do have to possess a strongly assured yield. 

Risk-free interest rates do not include a 'risk premium' or an added amount of interest yield that accounts for the risk associated with investing or depositing money into a financial instrument. For example, a 5 year corporate bond from Company A offers 4.5%, whereas a 5 year bond from Company B offers 5.6% These yields differ with perceived risk as measured in part by credit ratings. These ratings are determined by credit rating agency methodologies such as those used by Moody's. 

To illustrate 'risk premium' and 'risk-free rate' further, bond issuers with lower credit ratings have more credit risk associated with them, and are not therefore 'risk free'. The risk premium is determined by market forces such as the rate of return  investors are willing to accept for financial instruments  priced at certain levels with specific levels of risk as defined by credit rating and investor valuation(s). The risk free rate is often bench-marked using a shorter-term financial instrument such as 3-month Treasury Bills according to Rutgers University. 

Even if an issuer has a very high credit rating and is considered 'risk free', that can change. A recent example of this, and as reported by Reuters, was when the Standard and Poor's Credit Rating Agency lowered of the U.S. Government's credit rating from AAA to AA. These changes are somewhat predictable via rating agency 'outlooks', but for longer-term time horizons, are not always so clear. It is for this reason that a risk-free short-term financial instrument is not actually risk free when longer loan terms exist for the same issuer and instrument. 

What constitutes a risk free rate is not constant, and multiple financial vehicles can be considered to have risk-free rates.  For example, a financial statistics class at The Wharton School of Business considers a 1-month Treasury Bill as being risk free instead of a 3-month. This difference in opinion is further highlighted in a report by the financial consulting firm Value Advisor Associates. Moreover, in the report, both 5 year and 10 year financial instruments are considered acceptable proxies for the risk-free rate due  to factors such as upward sloping 'term-structure' i.e. higher rates of return for longer duration bonds.

What The Effective Interest Rate (EIR) Is

How Effective Interest Rate is Calculated

Image attribution: Petteri Aimonen; public domain

Effective interest rate, or EIR, is the interest that actually accumulates on a balance over multiple periods of time. In other words, since annual interest rates are charged periodically, the balance of a loan will accrue interest at a faster rate than if the annual interest rate had been charged just once when the loan becomes due in full.

To illustrate further, a $1000 loan with an annual APR of 12 percent will cost $120 to borrow. If that 12 percent is  evenly charged periodically once a month over a year, one percent will be the monthly periodic interest rate. Moreover, with this periodic rate being charged monthly, the total interest on the loan will be $126.83 and not $120.

The calculation for the effective interest rate looks complicated but is actually quite simple. Moreover, according to William R. Tucker of the United Nations Capital Development Fund (UNDF), EIR is calculated using the following formula. EIR= (1+Periodic rate) to the exponent of the number of periods – 1. Essentially all this means is for each period charge the periodic interest rate on the balance plus the prior periods interest.

Using the above example to illustrate EIR = (1+1%)¹²-1 =12.68 percent. In this case 1+1percent is 1.01 percent. That number is multiplied by itself 12 times then 1 is subtracted. i.e. 1.01 x 1.01 = 1.021 x 1.01 =1.0303 and so on until the last of each calculation except the first has been multiplied by 1.01 eleven times.  The resulting number is the total amount of interest that can be applied to the beginning balance to get the same result as when the original balance is charged the periodic rate twelve times.

Another way to calculate effective interest rate is to use an online interest calculator such as the one at MoneyChimp. The result of using that calculator yields the effective interest in the form of the original balance plus total interest for a 'future value'. The original amount of the loan must be subtracted in order to find the EIR. For example, Effective interest=$1,126.83 - $1,000 = $126.83. To convert the effective interest into the effective interest rate, it must be divided by the original loan i.e. $126.83 divided by $1,000 = 1.2683 percent.

In summary effective interest rate is the amount that is really charged on a balance when that balance is charged the annual percentage rate in installments. The interest charged in those installments is known as the periodic rate and is compounded or charges interest on a balance that has been charged interest. After the total amount of periodic interest rates have been charged, a new balance with interest is determined but this new balance is higher than had the APR only been charged once.

Tips for saving money without a budget

Just because the rest of the world has a complicated life doesn’t necessarily mean you have to as well. Simplified living can be sustainable according to June, 2010 report in USA Today. Moreover, budgets are not an absolute necessity when it comes to saving money because something more important underlies the capacity to save, specifically personal cash flow.

If cash flow is consistently negative, having no budget isn’t the problem, spending too much is. With material goods comes responsibility, and responsibility costs money. The following non-budget saving tips may be of utility. Moreover, in addition to saving money, you may find yourself saving time with the following methods as budgets often require account entries in financial software or a financial record keeping system.

• Reassess expenditures

Reassessing expenditures can help save money without a budget. This involves reviewing your financial profile and seeing where the money pits and vacuums are. If there’s something like a low mileage vehicle, or high credit card debt using up most of your cash, it may be possible to approach the debt in a different way in order to increase savings. For example, with a high credit card debt, you could refinance at a lower rate, and reduce monthly payments in order to save more.

• Calculate mentally

If you can add, subtract and multiply, you can probably calculate mentally as well. Keeping a mental tally of accounts and expenditures isn’t that much different from remembering how many eggs are in your fridge, or when the milk expires. Similarly, knowing which bills are paid and which aren’t will help avoid late fees and save unnecessary charges.

• Minimize numbers

Remembering a lot of numbers takes mental capacity. Minimizing mental calculations, account balances and transactions can be helpful to the overall goal of saving money without a budget. For example, the one number method just uses a single number, the balance of your checking account. By remembering what the balance is, you will be aware of how much extra money you have for saving after all expenses are paid.

• Time finances

Another way to save money without a budget is to pre-pay your savings account. This is also referred to as paying yourself first. For example, before you spend money on anything, transfer money to your savings account, and you’re done. The reason why this method works is timing. By transferring money before paying bills, buying things or investing, savings can consistently increase if this practice is periodically continued without withdrawals.

By reducing the amount of goods and services in your life, costs go down regardless of whether or not you have a budget. For example, more expensive cars can cost more in property insurance, and too many paid memberships or services lower balances. To save money without a budget it can help to avoid overspending and increase savings.

Why Keeping Money In A Bank Can Actually Lose You Money

Keeping money in your bank is actually losing you money because the majority of banks often offer interest rates lower than the rate of inflation, and competing financial products that offer better rates. That's before any fees you might get charged for line of credit interest, extra check fees, multiple withdrawal penalties, ATM costs etc. If the money lost from opportunity cost, or money earned from higher paying financial instruments, is subtracted from this, the loss of money is even greater.

Numerically, inflation rates, also measured by the Consumer Price Index (CPI), vary depending on how it is calculated, the time of year, economic conditions and who you ask. Generally though, inflation averages between one and three percent based on Bureau of Labor Statistics (BLS) records. Bank savings account rates on the other hand, offer rates mostly fractional of inflation. For example, in July 2010, several brick and mortar  banks where paying less than half a percent in annual interest, whereas the average inflation rate between January and May of 2010 was 2.26 percent as per inflation data.(5)

• High yield savings accounts

Many financial instruments offer interest rates higher than savings accounts; an example of this is the high yield online savings account. These types of accounts are similar to savings accounts, but offer higher rates without withdrawal penalties or locked in savings. According to Money-Rates.com, the interest rates for some of these high yield savings accounts was in excess of 2%.(2) However, even at these higher rates, maintaining value rather than beating inflation isn't always the best option, and can lose higher interest earnings from other savings accounts.

• Peer to Peer lending

Peer to Peer lending sites like propser.com or lendingclub.com offer rates far in excess of what banks offer through their savings accounts. The difference between peer to peer lending and banks is that your lending money to people directly rather than through a bank. In this sense you make the same lending decisions as a bank loan officer yourself and are rewarded with a higher rate if the borrower doesn't default. Even the low risk borrowers can pay rates more than double the inflation rate.

• Investment strategy

Investment strategies involve utilizing financial opportunities that maximize potential returns and minimize risk. For those that are tolerant of some risk, investing money opens up a probability of higher earnings on savings. For example, an investor may wish to dollar cost average a blue chip high yield dividend fund while hedging with an inflation protected bonds or bond funds (3). Many different investment strategies exist that may prevent losing money in a savings account.

By keeping money in your bank, there's a good chance you are also losing money to the forces of a rising Consumer Price Index (CPI), and lost savings or investment opportunities. There are both low and high-risk ways to gain interest rates higher than a savings account; some of these such as high yield savings account, are even insured for loss through bank insolvency.

In the case of higher paying accounts that require money to be inaccessible for a period of time, sound financial management of one's finances pays off with higher interest rates. Savings accounts are just one way to hold money, but there are many more ways to allocate money so that it does more for you. To make the most of personal savings, identifying if the money is needed, and how much risk you are willing to take can mean the difference between half a percent and five or more percent in interest rate returns.

Sources:

1. http://bit.ly/4CnR5Z (Bureau of Labor Statistics)
2. http://bit.ly/NbZhc (Money-Rates.com)
3. http://bit.ly/aOfb6N (CNN Money)
4. http://bit.ly/wfvxD (Inflationdata.com)

What Everyone Should Know About Certificate of Deposit Ladders

A Certificate of Deposit (CD) ladder enables an investor a periodic return of funds to 1) minimize asset class opportunity cost, 2) protect capital form inflation, and 3) maximize investment yield from CD's. CD ladders do this by combining a staggered investment horizon with dollar cost averaging. In other words, the CD's are 'laddered' in the sense they mature at different times allowing the investor to recoup funds while still having money invested in 1 or more certificate of deposits. This article will discuss the advantages and disadvantages, provide an example and relevant illustrative CD ladder links and offer CD Ladder tips and techniques thereafter.

Advantages and disadvantages of Certificate of Deposit Ladders

A Certificate of Deposit Ladder is a relatively safe investment as Certificates of Deposit are guaranteed by the financial institutions that issue them. CD laddering can also provide a more reasonable cash flow due to the expiration of the invested dollars at multiple time periods. This way, if the need for funding does arise, cash could become available via the CD Ladder within 6 months or less depending on the CD time horizons used in the ladder. The advantages and disadvantages of Certificate of deposit laddering are listed below.

Advantages of CD Ladders:

• May be FDIC or NCUSIF insured
• Improved access to funds
• Hedges against interest rate risk
• Reduces inflation risk
• Multiple time horizons available
• Safe investment/ low risk

Disadvantages of CD Ladders:

• Earnings penalty imposed for early withdrawal
• Opportunity cost may not be averted
• Yield may non-profitable
• Interest rate may be low
• May provide low return after adjusted for inflation

Example Certificate of Deposit Ladder

As a CD ladder is created and followed through with, a rising value is invested with each new year and/or CD expiration. If the interest rates are higher or lower in sub-sequent years, the benefit of dollar cost averaging either softens the decline in interest rates or improves the overall average of the long term Return on Investment (ROI). The following link illustrates the benefits of dollar cost averaging CD's through laddering.

Year 1: 6 month at 2.4%, 1 year at 3%, 2 year at 4% and 5 year at 5% CD's invested in with equal denominations of $1000.00 USD.

• Net investment: $4000.00
• Net yield pre-reinvestment: $4372.00 (compounded annually)

Year 2: 6 month and 1 year mature and are reinvested in 6 month at 2.8% and 2 year at 3.2% CD's with the same denomination plus interest ex. $1000.00 + $30=$1030.00 for the 1 year and $1000+$12=$1012.00 for the 6 month CD

• Net investment: $4000.00
• Net yield post re-investment: $4452.00

Certificate of Deposit Ladder tips, tools and techniques:

Certificate of Deposit Laddering can be a useful tool in an individual investment portfolio, family trust or other financial strategy. Prior to setting up a Certificate of Deposit ladder, taking the time to understand, compare and familiarize with the product(s) can be beneficial to being properly aware and in the investment decision. The following linked to Federal Deposit Insurance Corporation (FDIC) website, and Securities and Exchange Commission (SEC) website provide helpful information on investing in Certificates of Deposit. Additionally, the tips below offer information on investing in CD ladders that may be useful in preparing for and planning a Certificate of Deposit Ladder.

1. SEC CD Information
2. FDIC CD information
3. Bankrate.com CD Ladder guide:

• CD Ladder Calculator: A CD ladder calculator can help you plan your investment objectives with laddered CD's.

• International CD Ladders: Overseas CD rates can be quite good. Laddering these CD's may be financially advantageous.

• Forecast interest rates: Interest rates change based on economic conditions. Forecasting these changes in advance can help you plan your CD ladder time horizons accordingly.

• Assess financial need: If the money invested in the CD ladder will be needed before the CDs expire, it may not be a good idea to invest so much in the ladder to avoid financial penalty.

• Create a model: A model or CD ladder chart like those linked to in this article can help you determine whether or not your yield will 1) be profitable, 2) laddered correctly and 3) average yield.

• Research issuers: A financial solvent financial institution may not only be better able to honor higher interest rates, but may also have a lower risk of financial insolvency.

• Compare interest rates and terms: Since rates vary, knowing which financial institutions offer which rates can help in the selection of CDs.

• Utilize ladder friendly financial institutions: For better CD ladder management, some financial institutions may offer special tools and banking services that allow investors to ladder their CD investments more efficiently through automatic reinvestment or online CD ladder management.

In summary, Certificate of Deposit laddering is an investment method that 1) preserves capital value, 2) improves inflation protected cash flow and 3) makes use of dollar cost averaging to better manage the invested funds. CD laddering is a safe investment that can be used alone or within a medley of investment techniques and strategy within an individual or household financial portfolio. The benefits of laddering outweigh the disadvantages if the investor is not expecting a high rate of return and is using the ladder to balance investments under the Federal Deposit Insurance limit.

Sources:

1. http://www.bankrate.com
2. http://www.cdladders.com

An overview of certificate of deposit rates

Certificates of Deposit (CD's) have numerous interest rates depending on 1) duration of the certificate, 2) denomination of the certificate 3) type of CD and 4) issuer of the certificate. Different banks, financial institutions within various regions and countries offer interest rates that may be higher or lower than one's local financial institution.

This does not mean, CD's from non-local sources cannot be purchased. Certificates of Deposits are insured in the United States Government up to a certain amount. This article will discuss the following aspects of Certificate of Deposit interest rates.

• Differences in fixed and variable CD interest rates
• Compounding options
• Comparing CD alternatives
• Insurability of interest bearing CD's

Differences in fixed and variable CD interest rates

Interest on certificates of deposit is calculated periodically at a fixed or variable rate that is usually higher for larger deposits and longer time periods. For example, a 5 year CD for a value of $1000.00 may have an interest rate as a Jumbo $100,000.00 CD deposited for only 3 years. However, a $100,000.00 CD deposited for 5 years may have a larger interest rate than both the $1000.00, 5 year CD and the $100,000.00 3 year CD.

Different U.S. certificate of deposit rates can be compared online using tools like the bankrate.com rate comparison calculator. In the case of variable rate certificates of deposit, part or all of the interest on the certificate of deposit is linked to changes in national interest rates such as the prime rate. In such cases, when the prime rate changes, so does the interest rate on the CD. Still more variable CD's may have pre-determined changes in interest rates or market index based rate changes.

• Fixed interest rate
• Variable prime rate linked rate
• Market index based rate
• Scheduled changes in interest rate

Compounding options of CDs

Not all certificates of deposit compound the same way that means two CD's with the same deposit value, length of deposit and interest rate could yield different ending interest calculations. To illustrate further, depending on the policy of the financial institution(s) issuing the CD's, interest on the CD's can be compounded daily, monthly, quarterly, annually, or any other way that is deemed useful to the issuing institution. (monitorbankrates.com)

What this means is that the interest on the new balance with interest is calculated more frequently leading to a higher amount of accumulated interest. For example, a $10,000.00 CD compounded annually for 2 years at a rate of 5% will yield an ending balance of $11,025.00 whereas a $10,000.00 CD compounded daily for 2 years at a rate of 5% will yield an ending balance of $11,052.00. The bankrate.com website calculator also has an interest rate calculator that automatically compounds the interest on monthly compounded and other types of CD's.

Intertnational, credit union, and bank CDs

Various different financial institutions offer certificates of deposits to clients. For this reason, shopping around for the best CD rate can be beneficial as financial practices, regulations and policies of financial institutions varies form institution type and governing authority. Some of the higher international certificate of deposit annual percentage yield rates are listed below as sourced from money-rates.com, and offer double the yield of U.S. CD's and higher. A disadvantage of these CD's are that the banking regulations protecting CD holders are different from country to country, be subject to foreign currency exchange fluctuations, and minimum deposits may be required.

• South African 6 month CD 8.75%
• Brazil 3 month CD 6.40%
• New Zealand 6 month CD 6.22%
• Australian 6 month CD 5.58%

Credit Union Certificates of Deposit are insured by the National Credit Union Share Insurance Fund (NCUSIF) which is a federal insurance program that protects depositors up to an amount the same as the Federal Deposit Insurance Corporation (FDIC) Rate i.e. $100,000.00 or $250,000.00 depending on the time period in which deposits are made. U.S. Credit Union CD's aren't necessarily better than U.S. bank CD's as a 6 month rate comparison between bank CD's and Credit Union CD's indicates the bank yields aren't always necessarily lower.

Summary

Interest rate yields on Certificates of Deposit vary considerably across financial institutions, CD types, and issuing currency and/or country. Certificates of Deposit interest rates may be fixed or variable and calculation of interest may compound at fixed intervals ranging from daily to annually.

In the United States, Certificates of Deposit provide an insured way to save earning interest higher than typical savings or money market accounts. The insurance of bank and credit union issued CD's is limited to the pre-set federal insurance per account that is currently $250,000.00. However, this insured amount was scheduled to revert back to $100,000.00 of coverage starting in 2010 pending any future adjustments.

Sources:

1. http://www.bankrate.com/brm/rate/deposits_home.asp
2. http://www.fdic.gov/deposit/deposits/index.html
3. http://www.bankrate.com/brm/calc/cdc/CertDeposit.asp
4. http://www.money-rates.com/intsavings.htm
5. http://www.ncua.gov/shareinsurance/
6. http://www.bestcashcow.com/cash_equivalents/fcuaccounts.html
7. http://financial-dictionary.thefreedictionary.com/Variable-rate+CDs
8. http://www.fdic.gov/deposit/deposits/certificate/index.html

Wealth Accumulation: How to Save a Million Dollars

Millions of people have already saved a million or more dollars. According to the website of U.S. Senator's Bernie Sanders of Vermont, in 2009 7.8 million people were millionaires in the United States despite the economic environment. The characteristics of these people have, that would be millionaires don't have add clues to how to save a million dollars. If it were easy to save a million dollars, many more would have already done it, but how to save a million is not really a secret at all.

• Return on Investment (ROI)

Money is a resource like oil, labor and time. When money sits idly by doing nothing or isn't optimized for efficiency that resource incurs opportunity costs, becomes subject to inflationary pressure and lowers potential income. Making proper use of money such as through astute business and financial decision making can lead to returns on investment well into the double or even triple digits.

• Compounding, and Capital gains

Financial principles are the concepts behind economic thinking and day to day finance. Understanding principles like leveraged hedging, business cycle, capital appreciation, and compounding are stepping stones to implementing them in one's financial plan. Financial plans don't have to be complicated, and simple often is better, but either way a financial plan that correctly employs financial methods that work is essential to save a million dollars.

• Assets minus liabilities

Net worth is a financial concept that claims what goes out should be less than what comes in. If at any level this is not the case, saving a million dollars will likely not be possible in any conventional sense. The formula for net worth is easy to understand but hard to do, but is a way to save a million dollars.

• Vocational decisions

According to the U.S. Bureau of Labor Statistics, surgeons, engineers, scientists, lawyers and pilots all receive over $100K per year. Saving 50 percent of this amount every year without any ROI or compounding will save a million dollars after 20 years. Some millionaires may work hard toward their goal and simply earned their way to wealth through a high paying job or lucrative business.

• Financial instruments

A wide variety of financial instruments and methods exist to become wealth. When used correctly becoming a millionaire is only a matter of time, skill and know how. From annuities to zaitech, a wide range of investment and asset allocation methods exist that have made many millionaires. Keep in mind some financial instruments do involve considerable risk.

• Tax protection

Paying unnecessary taxes is a way to slow down wealth accumulation. To save a million dollars tax strategy can come in handy, and a number of legal tax shelters and financial techniques exist to reduce taxes thereby decreasing money paid out. For example, deferring unneeded income to future dates lowers taxes in the present.

• Use a financial plan

Sticking to a financial plan provides a good way to save a million dollars. For example, $999 USD that is added to by $99 per month for 60 years at 7% is equal to $1,031,070.37 with compounding once a year. If this interest accumulates and is contributed to within a traditional retirement account, tax will not have to be paid on it until withdrawal. Naturally, acquiring a high interest rate in as short a time period as possible is the challenge when using a savings method like this.

Knowing how to save a million dollars isn't necessarily difficult, implementing the steps that allow one to save a million dollars does require financial discipline, skill and usually effort. Limitations on people's income, high cost of living, financial obligations and unforeseen expenses can all drill holes into an otherwise solid financial plan. Overcoming these obstacles by utilizing one or more of the above steps will increase one's probability of saving a million dollars.

Sources:

1) http://bit.ly/daFpxy (Vermont Senator)
2) http://bit.ly/dWWXh (MoneyChimp)
3) http://bit.ly/cP6bBX (Bureau of Labor Statistics)

Investment plans for kids

Piggy banks are good for storing money but the money in a piggy bank doesn't teach a child about interest and inflation. They generally can't pay for college tuition either unless they pennies and nickels are invested very well. If you can teach a child to invest his or her allowance so (s)he can retire before you do, you may have done well in getting them started with investing. This article will discuss a number of different investing plans for kids.

The best time to start investing for a child and teaching a kid about investing is before they are born and during their childhood years. What's more if a child starts learning about investing at a young age they won't have to learn about it when they become adults and discover the real world for themselves. In fact financial planning may be just as important as musical training, physical education, and literacy. This article will present some of the savings and investing options for kids, and then follow up with summarizing commentary.

Child savings accounts

The ideal savings account for a child has no annual maintenance fee, a high interest rate, friendly and helpful customer service and online banking. As in the world of adult banking, some bank accounts are better than others in terms of free stuff for opening an account and free services. Credit Unions offer accounts that meet some of these requirements, otherwise separate accounts with joint ownership can be established by the parent. For example, if a financial institution offers an option to open a money market account opened under the same account number and/or owner as a checking and/or savings account, that money market account can be the child's account. Additionally, the child can learn more about the account by visiting websites such as this.

College savings plan

Eventually a child is going to turn 18 and either enter the workforce, stay at home for a little while longer or go off to some kind of post-secondary education program. For the latter there are '529' College savings plans and Coverdell Education Savings Account (ESA). Money used through these plans are completely tax deductible for parents and tax free for the future student when the money is used for education.

Toy and bicycle funds

A toy and bicycle fund can be a parent managed fund that grows with good behavior and discipline and declines with bad behavior and discipline which are things that also lead to wealth in the adult world. Kids can be updated about the amount in the fund and how much they need to do or receive as gifts to acquire additional gifts and toys. This type of fund will help give children a more constant awareness about the value of money.

Individual retirement accounts (IRA's)

It's never too early to save for retirement, however unnecessary or unrealistic it may be. In fact an annual IRA contribution started at birth at maximum contribution amounts could be worth over $120, 000 by age 29 or the same age young people may start thinking about retirement. If that isn't a head start what is?

A/B Trusts

A/B Trusts are a financial instrument that allow parent's with estates invest their money through a trust that may reduce estate taxes. With an A/B Trust, children inherit an estate with potential tax advantages due to use of the estate tax exemption. With an A/B Trust, the surviving spouse is entitled to a portion of the value of an estate and/or its income and the children of the spouse is entitled to another portion. Since the trust is separated this way, estate taxes are reduced and in some cases done away with thereby increasing the value inherited by the children.

Life insurance policies

Other savings vehicles for kids can include a life insurance policy with cash values that fluctuate and appreciate over time. The mere concept of life insurance during childhood is quite abstract and a real step in the direction of financial savvy if a child can grasp the concept. What's more a child life insurance policy can also benefit parents in terms of being reimbursed for costs associated with accidental injury not covered by health insurance and tax deductibility.

Investment plans for kids is ideally one part of a complete financial education program for children as investing does not include other important financial lessons such as budgeting, expensing, employment income and dealing with financial institutions. Nevertheless, investing plans for kids are beneficial to both parents and children and can prevent potential financial crises later in life. The investment products and ideas presented in this article are just a few of the several investment vehicles available, but do embody some of the more important types of investing i.e. toys, college, retirement, and tax savings.

Why It's Important to Know How Much You're Spending

Knowing how much you spend is quite important in to an overall financial strategy. This article will discuss the importance of spending awareness, ways to improve it and benefits associated with it. According to the Society for Financial Awareness (SOFA), knowing financial solutions and being ready for financial adversity is an essential element to living well. Moreover, If you don't know how much you're spending you might as well be subscribing to bank overdraft charges, bounced checks, and personal budget deficits.

Knowing how much is spent on what is a big part of a personal budget because budgets are essentially a price limit on various pre-planned purchases. It is essential to keep track of each purchase to stay on budget. Without a budget, personal finances can get out of control and potentially cause damage to a credit score and financial history. Some employers even access credit information to determine how organized and disciplined candidates are. What's more an out of control and disorganized budget can cause family problems and stress. 

Spending and financial awareness tips

Even though it is important to know how much is spent on what it can get confusing and tedious with all the receipts, the cents, multiple sources of payment etc. With a little fine tuning, lots of people who don't like managing their money can learn to keep track of money with relative ease. Here are a few tips to help keep track of what you're spending. 

Spread sheets

Use a spreadsheet such a Microsoft Excel and create a computer checkbook. At the end of everyday let the first thing you do at the computer be entering your purchases. Excel has a handy function called SUM that does the adding for you. All you have to do once it is set up is enter the numbers. To use it type in the expense for the day in a column one after the other. In the first blank space at the bottom of the column press the insert function feature. Look for the SUM feature and enter SUM=H4:M4 if you have 6 purchases in rows H through M in the 4 column. It may sound confusing at first but with a little practice you can design the spreadsheet to add for you. 

Debit cards

Only use a Visa or MasterCard Debit card to make purchases. This way you'll always have a record of what you spent even if you lose the receipts. Additionally, debit card information is harder to steal than credit card information. 

Online banking

If you don't utilize online banking services already, it's very helpful. With online banking you don't even have to create a spreadsheet as there is one already made for you. Sometimes you can even pay your bills with this feature saving yourself trips to the post office and stamps. Online banking often provides the purchase spreadsheet record for you with a 1-2 day processing delay. 

Account holdings

Keep only as much money as your budget allows for in your checking account and transfer the rest into your savings account or money market account. This way you'll be less tempted to access those funds and after a couple of painful overcharge fees discipline may begin to set in. If you don't want the overcharge fees for going over the budget don't spend more than you afford. Self discipline is unfortunately required to get on track financially. 

Mental record keeping

Mentally keeping track of your budget and what you have available can also help you become aware of how much you spend. It also develops financial discipline and awareness if you do this, and overtime this may positively influence your financial habits.

Summary

After time, and with diligence and practice these things become second nature. The reason the Excel method works so well is that if you stick to it you will becoming an experienced budget practitioner after a few weeks or less. It feels good to know what you've spent and what you have available at the drop of a hat. After becoming a skilled budget practitioner, stress levels can go down, spending becomes disciplined and life generally becomes a little more easy.

Chances are you owe it to yourself to keep track of what you spend and the tips in this article may assist with that process. For additional ideas on why it is important to know how much you are spending, consider reviewing financial websites, consulting with family and friends, bankers etc. There are many ways to improve financial awareness for a more complete financial health profile.