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Knowing why you are saving helps with financial decisions

April 03, 1997|By Lynn F. Little

Savings and investing are important financial objectives. If you do not spend all your income, the excess can be saved for future use.

Families save money for many reasons and in many ways. Some reasons families save money are emergencies, major purchases, education for children, to minimize taxes, retirement or capital accumulation.

Your personal financial goals will determine which is the best place for you to put your money. Where you place your money depends on many factors. These factors include your age, number and age of dependents, job security and profitability, your spending habits, additional sources of income and your personality.

When choosing where to place your emergency reserve fund, you want to be able to have access to the money when you need it. Safety is an important feature. Sources for emergency reserve funds could include passbook savings, share accounts, certificates of deposit and/or a money market account or fund.

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Education is expensive, so parents need to start saving early. Sources for savings for your child's education could include custodial savings accounts in your child's social security number and/or investments that defer as much income as possible until your child turns 14 years old. With tax reform, the first $500 of a child's unearned income is tax free. The next $500 is taxed at the child's own rate. Over $1,000, any unearned income a child younger than 14 receives is taxed at the parent's or grandparent's rate, which is usually higher. Unearned income is defined as the earnings received from savings and investments. Earned income is from wages and salaries.

Retirement planning is necessary to make sure you can live independently during your retirement years. At age 65, the average life expectancy is seven years for men and 14 years for women. Are you managing your financial affairs so that these years will be pleasurable and secure? At what age do you want to retire? Will you have enough income to support your lifestyle when you retire?

There are many ways you can plan for retirement. A major goal of retirement is to have a steady stream of income after you retire. This may be achieved in the following ways:

- Employment earnings during retirement

- Social Security retirement benefits

- Individual Retirement Accounts

- Other personal savings and investment

- Employer pension plans

- Life insurance cash value

Where you place your general investment dollars will depend on how you want these dollars to work for you. Do you want to preserve the dollars? Do you need current income? Do you want your principal to grow?

There are some sources in which you can place your money if you want to be able to get back every dollar you put in, plus the earnings. If you put $1,000 in a savings account you will get back your $1,000, plus earnings. You will not lose the money you set aside, plus it earns money.

If you need to receive a regular payment of interest or dividends from your investment, you will want to select sources such as medium- to long-term bonds, common and preferred stocks, mutual funds, certificates of deposit and money market funds, which will pay income from the principal in the form of interest or dividends paid monthly, quarterly semi-annually or yearly. If your goal is growth of your principal dollars, sources that will provide long-term capital appreciation are necessary. Growth of the principal is obtained as the market price of your investment increases. Your investment grows if you sell it for more than you originally paid for it. You run the risk that it will decrease in price as well. Examples of capital growth investments include common stock, zero coupon bonds, growth mutual funds, real estate, corporate, government and municipal bonds bought at discount prices.

Do not get discouraged if you do not have enough money to get into some of these investments in the beginning. You have to build your program gradually. For example, you may want to save $50 a month until you get $1,000 to get into a growth stock mutual fund. Then you can continue to add $50 to it each month. You may not have enough money to buy stocks and bonds, but you can use your money to buy a mutual fund that invests in stocks.

It is important to know why you are saving. Then you can choose the place to save that best fits your financial objectives.

For information on savings and investments, send a self-addressed, stamped (55-cent) business envelope to Cooperative Extension Service Washington County Office, 1260 Maryland Ave., Hagerstown, Md. 21740 or visit the office and pick up copies of Savings Basics (FS693) and Investment Basics (FS694).

Maryland Cooperative Extension Service's programs are open to all citizens without regard to race, color, sex, disability, age, religion or national origin.

Lynn F. Little is an extension agent, home economics with University of Maryland Cooperative Extension Service.

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