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U.S. Savings Bond: A U.S. Tradition

U.S. Savings Bond: A U.S. Tradition

Many people had their first experience with saving for the future as children when they received a U.S. savings bond as a gift. Savings bonds are issued by the U.S. Treasury Department. However, unlike Treasury bills, notes, and bonds, they are not traded on the open market, and are sold almost exclusively to individuals.

EE bonds

EE bonds issued on or after May 1, 2005 earn a fixed interest rate; the rate for new issues is set every six months. (EE bonds purchased between May 1997 and April 2005 pay a variable interest rate based on average current yields for 5-year Treasury securities.) An EE bond continues to earn interest as long as you hold it (up to 30 years). However, the interest isn’t paid to you until you cash in the bond. An EE bond can be cashed in any time after 1 year, though if you redeem it within the first 5 years, you’ll forfeit the most recent 3 months of interest. There is a $30,000 annual limit on EE purchases.

I bonds

Introduced in 1998, I-bonds offer some protection against inflation. Earnings on an I-bond are calculated by combining a fixed rate of return that is set when the bond is issued, and a semi-annual inflation rate that changes twice a year and is based on the Consumer Price Index (CPI). I-bonds are sold at face value, and the interest is paid when the bond is redeemed. As with EE bonds, if you redeem an I-bond within the first 5 years, you’ll lost the most recent 3 months of interest; after 5 years, there is no penalty for redemption.

Are there other types of savings bonds?

There also are other types of savings bonds, but they can no longer be purchased, though they still pay interest to savers who already own them.

  • E bonds were replaced by EE bonds in 1982 but function in much the same way.
  • HH bonds (and H bonds, their predecessors) pay a fixed interest rate every 6 months for either 20 or 30 years, depending on when the bond was issued. (10 years after the date of issue, the interest rate on an HH or H bond may change to the most recent HH bond interest rate). A maturing HH or H bond can no longer be reinvested into another HH bond.
  • U.S. Individual Retirement Bonds and U.S. Retirement Plan Bonds also are no longer issued but continue to earn interest, which is added to the face value of the bond when it is redeemed. Retirement Plan Bonds can be redeemed once the owner reaches age 59½, and can be rolled over into an existing IRA; they mature 5 years after the owner’s death. Individual Retirement Bonds cease to pay interest after the owner reaches age 70½, or 5 years after the owner dies, whichever is earlier.

What if my bond’s maturity date has already passed?

Once a bond has reached its final maturity date, it no longer pays any interest. You should redeem it at a bank or other financial institution, and use or reinvest the proceeds.

Older bond series–A, B, C, D, F, G, J, K bonds and U.S. Savings Notes (also called Freedom Shares) issued before 1970–have all passed their final maturity dates and no longer pay any interest. If you or an older relative still has any bonds in these series, they should be redeemed.

How can I buy savings bonds?

You can buy savings bonds online directly from the Treasury Department at www.treasurydirect.gov. Also, many banks, credit unions, and savings and loans offer them. You may also be able to buy them through a payroll savings plan with your employer.

Savings bonds can be bought in paper form in denominations of $50, $75, $100, $200, $500, $1,000, $5,000, or $10,000. If bought electronically, you can purchase them in $25 increments. You also can exchange paper savings bond certificates for electronic securities.

Disclosure:The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Sterling Group United recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions

Tapping the Equity in Your Home

Tapping the Equity in Your Home

Over time, the value of your home has grown and your mortgage balance has been reduced (or even eliminated). The equity (the property’s value minus any liens against it) you now have in your home is a reservoir of funding potential. You may decide to tap into it for various purposes, such as remodeling your home, paying off high-interest loans or credit card debt, buying a car, or sending your child to college.

The pros and cons

Home equity financing (which may be set up as either a loan or a line of credit) is secured by the equity you’ve built up in your home. This type of financing has several advantages compared to other forms of personal loans:

  • Higher borrowing limits
  • Favorable interest rates
  • Tax-deductible interest–if you itemize your deductions on your federal income tax return, you may be able to deduct the interest on up to $100,000 ($50,000 if married filing separately) of home equity debt.

There can be drawbacks, however:

  • You may have to pay closing costs and other fees
  • If you sell your home, you’ll have to repay the outstanding balance
  • Since your home is collateral securing the debt, you run the risk of foreclosure if you can’t make your payments

Home equity loans

Often referred to as a second mortgage, a home equity loan generally allows you to borrow a fixed amount of money (typically up to 80 percent of your equity) at a fixed rate of interest. The total amount you borrow is advanced to you when you sign for the loan. You’ll repay the loan with equal monthly payments over a fixed term.

Home equity lines of credit

When you arrange a home equity line of credit, your lender establishes a revolving credit limit determined in part by the amount of your equity. You then borrow only what you need (up to the maximum allowed) only when you need it (subject to any time limit on the borrowing period). You can access the funds either by writing a check or using a credit card associated with the account.

The interest rate for a home equity line of credit is generally a variable rate tied to an index. Your monthly payments may vary, depending on your outstanding balance and the prevailing interest rate. You may have the option of making interest-only payments over the course of the repayment period (e.g., 10 years), or minimum payments that cover a portion of the principal plus accrued interest, coupled with a balloon payment of principal at the end of the loan’s term.

Choosing between the two

When deciding whether to apply for a home equity loan or a line of credit, it’s important to consider how much you’ll need and how soon you’ll need it.

If you want a fixed amount of money for a specific purpose (e.g., remodeling the kitchen), you may wish to take out a home equity loan that advances you the total amount up front. If instead you’ll need an indeterminate amount over a few years (e.g., funds for ongoing college expenses), you may benefit most from a home equity line of credit that you can draw on when needed.

Shop around for the best deal

Whatever choice you make, you’ll want to shop around to find the most favorable rates and terms. Here are a few things to consider:

  • In an effort to attract your business, a lender may be willing to absorb or waive some or all of the costs (e.g., application fees and points) of obtaining the financing
  • The frequency of variable interest rate adjustments and any caps on rate increases will affect the overall cost of a home equity line of credit
  • If you’re considering a home equity line of credit, find out if you have the option to convert the line to a fixed-rate, fixed-term loan in the future
  • When comparing a home equity line of credit to a home equity loan, don’t rely solely on the annual percentage rate (APR) as a measure of cost, because the APR for a home equity loan takes points and financing charges into consideration while the APR for a home equity line of credit does not

Disclosure:The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Sterling Group United recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions.

Teaching Your Teen About Money

Teaching Your Teen About Money

Your teen is becoming more independent, but still needs plenty of advice from you. With more money to spend and more opportunities to spend it, your teen can easily get into financial trouble. So before money burns a hole in your child’s pocket, teach him or her a few financial lessons. With your help, your teen will soon develop the self-confidence and skills they need to successfully manage money in the real world.

Lesson 1: Handling earnings from a job

Teens often have more expenses than younger children, and your child may be coming to you for money more often. But with you holding the purse strings, your teen may have difficulty making independent financial decisions.

One solution? Encourage your teen to get a part-time job that will enable him or her to earn money for expenses. Here are some things you might want to discuss with your teen when he or she begins working:

  • Agree on what your child’s pay should be used for. Now that your teen is working, will he or she need to help out with car insurance or clothing expenses. Or, do you want your teen to earmark a portion of each paycheck for college?
  • Talk to your teen about taxes. Show your child how FICA taxes and regular income taxes can take a bite out of his or her take-home pay.
  • Introduce your teen to the concept of paying yourself first. Encourage your teen to deposit a portion of every paycheck in a savings account before spending any of it.

A teen who is too young to get a job outside the home can make extra cash by babysitting or doing odd jobs. This could be for you, neighbors, or relatives. This money can supplement any allowance you choose to hand out, enabling your young teen to get a taste of financial independence.

Lesson 2: Developing a budget

Developing a written spending plan or budget can help your teen learn to be accountable for his or her finances. Your ultimate goal is to teach your teen how to achieve a balance between money coming in and money going out. To develop a spending plan, have your teen start by listing out all sources of regular income. This would be an allowance or earnings from a part-time job. Next, have your teen brainstorm a list of regular expenses (don’t include anything you normally pay for). Finally, subtract your teen’s expenses from his or her income. If the result shows that your teen won’t have enough income to meet his or her expenses, you’ll need to help your teen come up with a plan for making up the shortfall.

Here are some ways you can help your teen learn about budgeting:

  • Consider giving out a monthly, rather than weekly, allowance. Tell your teen that the money must last for the whole month. Encourage them to keep track of what’s been spent.
  • Encourage your teen to think spending decisions through rather than buying items right away. Show your teen how comparing prices or waiting for an item to go on sale can save him or her money.
  • Suggest ways your teen can earn more money or cut back on expenses to resolve a budget shortfall.
  • Show your teen how to modify a budget by categorizing expenses as needs (expenses that are unavoidable) and wants (expenses that could be cut if necessary).
  • Resist the temptation to bail your teen out. If your teen can depend on you to come up with extra cash, he or she will never learn to manage money wisely. But don’t be judgmental–your teen will inevitably make some spending mistakes along the way. Your child should know that he or she can always come to you for information, support, and advice.

Lesson 3: Saving for the future

As a youngster, your child saved up for a short-term goal such as buying a favorite toy. But now that your child is a teen, he or she is ready to focus on saving for larger goals such as a new computer or a car and longer-term goals such as college. Here are some ways you can encourage your teen to save for the future:

  • Have your teen put savings goals in writing to make them more concrete.
  • Encourage your child to set goals that are based on his or her values, not on keeping up with what other teens have or want.
  • Motivate your child by offering to match what he or she saves towards a long-term goal. For instance, for every dollar your child sets aside for college, you might contribute 50 cents or 1 dollar.
  • Consider increasing your teen’s allowance if he or she is too young to get a part-time job.
  • Praise your teen for showing responsibility when he or she reaches a financial goal. Teens still look for, and count on, their parent’s approval.
  • Open up a savings account for your child if you haven’t already done so.
  • Introduce your teen to the basics of investing by opening an investment account for your teen. If your teen is a minor, this will be a custodial account. Look for an account that can be opened with only a low initial contribution at an institution that supplies educational materials introducing teens to basic investment terms and concepts.

Lesson 4: Using credit wisely

You can take some comfort in the fact that most major credit card companies require an adult to cosign a credit card agreement before they will issue a card to someone under the age of 18, but you can’t ignore the credit card issue altogether. Many teens today use credit cards, and it probably won’t be long until your teen asks for one too.

Credit Card

If you decide to cosign a credit card application for your teen, ask the credit card company to assign a low credit limit (e.g., $300). This can help your child learn to manage credit without getting into serious debt.

Here are some things to discuss with your teen before he or she uses a credit card:

  • Set limits on what the card can be used for (e.g., emergencies, clothing).
  • Review the credit card agreement. Make sure your child understands how much interest will accrue on the unpaid balance. Also, understand what grace period applies, and what fees will be charged.
  • Agree on how the bill will be paid, and what will happen if your child can’t pay the bill.
  • Make sure your child understands how long it will take to pay off a credit card balance if they only make minimum payments. You can demonstrate this using an online calculator.

Prepaid Card

If putting a credit card in your teen’s hands is a scary thought, you may want to start off with a prepaid spending card. A prepaid spending card looks like a credit card, but works more like a prepaid phone card. You load the card with the dollar amount you choose and your teen can generally use it anywhere a credit card is accepted. Your teen’s purchases are deducted from the card balance, and you can transfer more money to the card if necessary. Although there may be some fees associated with the card, no interest or debt accrues.

One thing you may especially like about prepaid spending cards is that they allow your teen to gradually get the hang of using credit responsibly. You can access account information online or over the phone. As well, you can monitor your teen’s spending habits, then sit down and talk with your teen about money management issues.

Disclosure:The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Sterling Group United recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions.

Saving for Retirement and a Child’s Education at the Same Time

Saving for Retirement and a Child’s Education at the Same Time

You want to retire comfortably when the time comes. You also want to help your child go to college. So how do you juggle the two? The truth is, saving for your retirement and your child’s education at the same time can be a challenge. But take heart–you may be able to reach both goals if you make some smart choices now.

Know what your financial needs are

The first step is to determine what your financial needs are for each goal. Answering the following questions can help you get started:

For retirement:

  • How many years until you retire?
  • Does your company offer an employer-sponsored retirement plan or a pension plan? Do you participate? If so, what’s your balance? Can you estimate what your balance will be when you retire?
  • How much do you expect to receive in Social Security benefits? (You can estimate this amount by using your Personal Earnings and Benefit Statement, now mailed every year by the Social Security Administration.)
  • What standard of living do you hope to have in retirement? For example, do you want to travel extensively, or will you be happy to stay in one place and live more simply?
  • Do you or your spouse expect to work part-time in retirement?

For college:

  • How many years until your child starts college?
  • Will your child attend a public or private college? What’s the expected cost?
  • Do you have more than one child whom you’ll be saving for?
  • Does your child have any special academic, athletic, or artistic skills that could lead to a scholarship?
  • Do you expect your child to qualify for financial aid?

Many on-line calculators are available to help you predict your retirement income needs and your child’s college funding needs.

Figure out what you can afford to put aside each month

After you know what your financial needs are, the next step is to determine what you can afford to put aside each month. To do so, you’ll need to prepare a detailed family budget that lists all of your income and expenses. Keep in mind, though, that the amount you can afford may change from time to time as your circumstances change. Once you’ve come up with a dollar amount, you’ll need to decide how to divvy up your funds.

Retirement takes priority

Though college is certainly an important goal, you should probably focus on your retirement if you have limited funds. With generous corporate pensions mostly a thing of the past, the burden is primarily on you to fund your retirement. But if you wait until your child is in college to start saving, you’ll miss out on years of tax-deferred growth and compounding of your money. Remember, your child can always attend college by taking out loans (or maybe even with scholarships), but there’s no such thing as a retirement loan!

If possible, save for your retirement and your child’s college at the same time

Ideally, you’ll want to try to pursue both goals at the same time. The more money you can squirrel away for college bills now, the less money you or your child will need to borrow later. Even if you can allocate only a small amount to your child’s college fund, say $50 or $100 a month, you might be surprised at how much you can accumulate over many years. For example, if you saved $100 every month and earned 8 percent, you’d have $18,415 in your child’s college fund after 10 years. (This example is for illustrative purposes only and does not represent a specific investment.)

If you’re unsure how to allocate your funds between retirement and college, a professional financial planner may be able to help you. This person can also help you select the best investments for each goal. Remember, just because you’re pursuing both goals at the same time doesn’t necessarily mean that the same investments will be appropriate. Each goal should be treated independently.

Help! I can’t meet both goals

If the numbers say that you can’t afford to educate your child or retire with the lifestyle you expected, you’ll have to make some sacrifices. Here are some things you can do:

  • Defer retirement: The longer you work, the more money you’ll earn and the later you’ll need to dip into your retirement savings.
  • Work part-time during retirement.
  • Reduce your standard of living now or in retirement: You might be able to adjust your spending habits now in order to have money later. Or, you may want to consider cutting back in retirement.
  • Increase your earnings now: You might consider increasing your hours at your current job, finding another job with better pay, taking a second job, or having a previously stay-at-home spouse return to the workforce.
  • Invest more aggressively: If you have several years until retirement or college, you might be able to earn more money by investing more aggressively.
  • Expect your child to contribute more money to college: Despite your best efforts, your child may need to take out student loans or work part-time to earn money for college.
  • Send your child to a less expensive school: You may have dreamed your child would follow in your footsteps and attend an Ivy League school. However, unless your child is awarded a scholarship, you may need to lower your expectations. Don’t feel guilty–a lesser-known liberal arts college or a state university may provide your child with a similar quality education at a far lower cost.
  • Think of other creative ways to reduce education costs: Your child could attend a local college and live at home to save on room and board, enroll in an accelerated program to graduate in three years instead for four, take advantage of a cooperative education where paid internships alternate with course work, or defer college for a year or two and work to earn money for college.

Can retirement accounts be used to save for college?

Yes. Should they be? Probably not. Most financial planners discourage paying for college with funds from a retirement account; they also discourage using retirement funds for a child’s college education if doing so will leave you with no funds in your retirement years. However, you can certainly tap your retirement accounts to help pay the college bills if you need to. With IRAs, you can withdraw money penalty free for college expenses. Even if you’re under age 59½ . But with an employer-sponsored retirement plan like a 401(k) or 403(b), you’ll generally pay a 10 percent penalty on any withdrawals made before you reach age 59½. This is even if the money is used for college expenses. You may also be subject to a six month suspension if you make a hardship withdrawal. There may be income tax consequences, as well.

Let a professional help you make important financial decisions

Contact us today and set up a complimentary consultation with one of our advisors. They can review your current financial situation, and make sure that you are making the best decisions for your financial future.


Disclosure
:The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Sterling Group United recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions.

Getting Started: Establishing a Financial Safety Net

Getting Started: Establishing a Financial Safety Net

In times of crisis, you don’t want to be shaking pennies out of a piggy bank. Having a financial safety net in place can ensure that you’re protected when a financial emergency arises. One way to accomplish this is by setting up a cash reserve. A cash reserve is a pool of readily available funds that can help you meet emergency or highly urgent short-term needs.

How much is enough?

Most financial professionals suggest that you have three to six months’ worth of living expenses in your cash reserve. The actual amount, however, should be based on your particular circumstances. Do you have a mortgage? Do you have short-term and long-term disability protection? Are you paying for your child’s orthodontics? Are you making car payments? Other factors you need to consider include your job security, health, and income. Without an emergency fund, a period of crisis (e.g., unemployment, disability) could be financially devastating.

Building your cash reserve

If you haven’t established a cash reserve, or if the one you have is inadequate, you can take several steps to eliminate the shortfall:

  • Save aggressively: If available, use payroll deduction at work; budget your savings as part of regular household expenses
  • Reduce your discretionary spending (e.g., eating out, movies, lottery tickets)
  • Use current or liquid assets (those that are cash or are convertible to cash within a year, such as a short-term certificate of deposit)
  • Use earnings from other investments (e.g.,stocks, bonds, or mutual funds)
  • Check out other resources (e.g., do you have a cash value insurance policy that you can borrow from?)

A final note: Your credit line can be a secondary source of funds in a time of crisis. Borrowed money, however, has to be paid back (often at high interest rates). As a result, you shouldn’t consider lenders as a primary source for your cash reserve.

Where to keep your cash reserve

You’ll want to make sure that your cash reserve is readily available when you need it. However, an FDIC-insured, low-interest savings account isn’t your only option. There are several excellent alternatives, each with unique advantages. For example, money market accounts and short-term CDs typically offer higher interest rates than savings accounts, with little (if any) increased risk.

Don’t confuse a money market mutual fund with a money market deposit account. An investment in a money market mutual fund is not insured or guaranteed by the FDIC. Although the mutual fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in the fund. However, as of September 29, 2008, a money market fund may have backing from the U.S. Treasury if it has chosen to participate in the Treasury’s temporary guarantee program. For a participating fund, the Treasury will guarantee the $1 per share value of a fund if its net asset value (NAV) drops below a certain level. You can contact your fund to find out whether it has the Treasury guarantee. Also, a fund may have arranged for private insurance, though that protection may be subject to the claims-paying ability of the insurer.

When considering a money market mutual fund, be sure to obtain and read the fund’s prospectus,. This is available from the fund or your financial advisor, and outlines the fund’s investment objectives, risks, fees, expenses. Carefully consider those factors before investing.

It’s important to note that certain fixed-term investment vehicles such as CDs, impose a significant penalty for early withdrawals. If you’re going to use fixed-term investments as part of your cash reserve, you’ll want to be sure to ladder (stagger) their maturity dates over a short period of time. This will ensure the availability of funds, without penalty, to meet sudden financial needs.

Review your cash reserve periodically

Your personal and financial circumstances change often. Anew child comes along, an aging parent becomes more dependent, or a larger home brings increased expenses. Because your cash reserve is the first line of protection against financial devastation, you should review it annually to make sure that it fits your current needs.

Let the experts help

If you need help getting started on setting up a financial safety net, set up a complimentary consultation with one of our advisors today.

The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Sterling Group United recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions.

Getting Started: Establishing a Financial Safety Net

Getting Started: Establishing a Financial Safety Net

In times of crisis, you don’t want to be shaking pennies out of a piggy bank. Having a financial safety net in place can ensure that you’re protected when a financial emergency arises. One way to accomplish this is by setting up a cash reserve, a pool of readily available funds that can help you meet emergency or highly urgent short-term needs.

How much is enough?

Most financial professionals suggest that you have three to six months’ worth of living expenses in your cash reserve. The actual amount, however, should be based on your particular circumstances. Do you have a mortgage? Do you have short-term and long-term disability protection? Are you paying for your child’s orthodontics? Are you making car payments? Other factors you need to consider include your job security, health, and income. The bottom line: Without an emergency fund, a period of crisis (e.g., unemployment, disability) could be financially devastating.

Building your cash reserve

If you haven’t established a cash reserve, or if the one you have is inadequate, you can take several steps to eliminate the shortfall:

  • Save aggressively: If available, use payroll deduction at work; budget your savings as part of regular household expenses
  • Reduce your discretionary spending (e.g., eating out, movies, lottery tickets)
  • Use current or liquid assets (those that are cash or are convertible to cash within a year, such as a short-term certificate of deposit)
  • Use earnings from other investments (e.g.,stocks, bonds, or mutual funds)
  • Check out other resources (e.g., do you have a cash value insurance policy that you can borrow from?)

A final note: Your credit line can be a secondary source of funds in a time of crisis. Borrowed money, however, has to be paid back (often at high interest rates). As a result, you shouldn’t consider lenders as a primary source for your cash reserve.

Where to keep your cash reserve

You’ll want to make sure that your cash reserve is readily available when you need it. However, an FDIC-insured, low-interest savings account isn’t your only option. There are several excellent alternatives, each with unique advantages. For example, money market accounts and short-term CDs typically offer higher interest rates than savings accounts, with little (if any) increased risk.

Don’t confuse a money market mutual fund with a money market deposit account. An investment in a money market mutual fund is not insured or guaranteed by the FDIC. Although the mutual fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in the fund. However, as of September 29, 2008, a money market fund may have backing from the U.S. Treasury if it has chosen to participate in the Treasury’s temporary guarantee program. For a participating fund, the Treasury will guarantee the $1 per share value of a fund if its net asset value (NAV) drops below a certain level. You can contact your fund to find out whether it has the Treasury guarantee. Also, a fund may have arranged for private insurance, though that protection may be subject to the claims-paying ability of the insurer.

Note: When considering a money market mutual fund, be sure to obtain and read the fund’s prospectus, which is available from the fund or your financial advisor, and outlines the fund’s investment objectives, risks, fees, expenses. Carefully consider those factors before investing.

It’s important to note that certain fixed-term investment vehicles (i.e., those that pledge to return your principal plus interest on a given date), such as CDs, impose a significant penalty for early withdrawals. So, if you’re going to use fixed-term investments as part of your cash reserve, you’ll want to be sure to ladder (stagger) their maturity dates over a short period of time (e.g., two to five months). This will ensure the availability of funds, without penalty, to meet sudden financial needs.

Review your cash reserve periodically

Your personal and financial circumstances change often–a new child comes along, an aging parent becomes more dependent, or a larger home brings increased expenses. Because your cash reserve is the first line of protection against financial devastation, you should review it annually to make sure that it fits your current needs.

Consult with a financial advisor

At Sterling Financial, we know you need may need help in making the right financial decisions to ensure financial freedom and stability. With a wide range of solutions available to help you, you can depend on our team to be there to support you for years to come. Contact us today to learn more!

The content provided in this publication is for informational purposes only. Nothing stated is to be construed as financial or legal advice. Sterling Group United recommends that you seek the advice of a qualified financial, tax, legal, or other professional if you have questions.