Financial Management Guide

Building Wealth For The Future

Welcome to the club. We all want financial stability. PrimeWay offers a lot of information that can help you prepare for the future, and ultimately be financially secure. However, everything starts with the basics. So, take control of the financial basics below, and you will be on your way.

Savings and Compounding

Money Gets Better With Time

You’ve got a good job paying a steady salary, and now you want to make that money do more for you.

There are several options for investing money for your retirement, and it’s never too early to get started.

Are you eligible for your employer’s 401(k) plan? Consider contributing to start building your savings. The best, and easiest, way to invest is through an automatic deduction from your paycheck. That eliminates any temptation to spend your money on things you may not really need instead of dedicating funds to your future.

And all investments in a 401(k) are made before taxes, meaning you will have less tax liability every year.

Building On Successful Investments

The earlier you start, the better the results over the long haul. If you start a savings account with PrimeWay Federal Credit Union at age 25 instead of age 35, you have an additional 10 years when your money is growing and earning additional returns for you. The interest compounds, meaning your account earns money on the principal plus the interest.

You can see the results for yourself using our compounding calculator.

Another option is establishing an Individual Retirement Account through PrimeWay. The two most common types of IRAs: Traditional and Roth. The difference is in how they’re taxed. Contributions to a Traditional IRA occur before taxes, and you’re not taxed on the money until you withdraw it at age 59 ½. With a Roth IRA, you’re taxed on your contributions now, but that means you can withdraw the money tax-free once you hit retirement age. Start building for retirement as soon as possible, but remember, it’s never too late to start!

Budgeting

The Unglamorous Road to Securing Your Financial Future

Think about the future you want for yourself. Can you see yourself buying a house, driving your dream car and not living paycheck to paycheck? What about retiring early? Traveling when you want?

Yes, these are very possible if you are financially stable. But, to reach that level and maintain your standing, you must be smart about how you spend your money from the moment you establish this goal. For all of the rewards and freedom that seem to come with financial security, the foundation is good budgeting.

Knowing where every dollar goes is imperative, because accumulating and growing your finances requires financial discipline and hard work. Even if Aunt Edna leaves you her estate or you strike it rich in the stock market or lottery, you’ll need to control your spending to make sure your habits don’t erode your wealth.

Tracking Income and Expenses

At the most basic level, the path to becoming financially secure starts with tracking your income and expenses on a weekly basis. Keep detailed records and devise a chart of money coming in compared to money going out to see where you can cut back on unnecessary spending.

Using a PrimeWay Federal Credit Union debit card tied to a checking account is effective at controlling spending because you can’t just pile up expenses and pay them later. You only spend what you have in your account. Other checking options will pay you dividends for keeping a certain amount of money in your account.

With your goal in mind, you’ll likely need to make some tough choices about spending. This means that you might have to skip a couple of nights out with friends for dinner and drinks, and you may have to wait on buying that dream car for right now. Try cooking at home with friends instead, and maybe using public transportation isn’t so bad at this point in your life.

The challenge is to stick to your plan and not cave in when friends pressure you to spend money in ways that defy your budgeting goals.

Investments

Understand How Your Money Is Used

Buy low, sell high. That’s about as basic as you can get when it comes to investing. But what does that mean and how does it apply to your life?

When you’re starting out with investments, you must first determine your risk tolerance. Do you enjoy the wild fluctuations that come with stocks or would that keep you awake at night? Do you want steadier growth in exchange for lower returns?

Whatever you decide, it’s important to understand your investments – where your money is going and what risks, fees and costs are associated with your choices.

Investment Variety Creates a Cushion

Keep diversification in mind, too, and not just with stocks, bonds, etc. in the U.S. market. In this global economy, there are multiple markets around the world where your money can be invested. As a rule of thumb to reduce risk, it’s wise to limit any single stock or bond to no more than 10 percent of your portfolio, especially with employer stock. Too much reliance on a company for your employment and long-term savings goals can be disastrous if that company falters.

Mutual funds are an especially popular investment instrument because they pool investors’ money and concentrate on a variety of stocks, bonds and other securities. So when one stock dives in value, the mutual fund usually offers enough diversification to offset that loss elsewhere.

Ask Questions Before You Invest

A fund manager is responsible for the actual investments, and those services come with a price. Keep costs in mind when choosing a fund manager or any investment advisor. Find out how that person is compensated and what expenses are tied to your investment. When returns are low, high costs can really eat away at your gains.

Being Ready for Retirement

Living The Good Life

After all of these years, you’re now ready to kick back and relax a little bit. Or, at least you’re not spending your time working at the office all week. Reaching retirement is a significant and important milestone that reveals your dedication to a long-term goal.

As you settle into this new life, consider a few points about you might access and use your hard-earned savings.

Consider Your IRA Withdrawal Requirements

Congratulations, you’re retired! At times, this moment probably seemed like a hazy day in the future that you weren’t always sure you’d reach. But the years of disciplined saving and effective planning will pay off.

When you’re ready to access the money you’ve invested in a PrimeWay Federal Credit Union Individual Retirement Account, you’ll need to keep in mind the withdrawal rules that apply to Traditional and Roth IRAs.

Traditional IRA Withdrawals

At age 70 ½, the Internal Revenue Service requires you begin taking annual minimum withdrawals from your Traditional IRA account, but you can start withdrawing penalty-free at age 59 ½. Because these savings were tax-deferred over the years, you’ll need to prepare for the tax implications of these withdrawals. Also consider there are penalties that come into play when you fail to take the minimum withdrawal.

Several factors, including your IRA account balance and projected life expectancy, go into determining what “minimum” actually means for you, so consult with your trusted financial advisor or attorney to get the answer.

Keep in mind that all future annual withdrawals will need to be made by Dec. 31 to avoid penalties.

Roth IRA Withdrawals

Contributions to your Roth IRA were taxed before they entered the account, so generally, these withdrawals will be tax-free. But there are some exceptions.

If your Roth IRA account is at least five years old and you’re over age 59 ½, you won’t pay taxes on your withdrawals. If you’re withdrawing money from your Roth IRA before you reach age 59 ½, you’re subject to a 10 percent early withdrawal penalty tax on the investment gains only. You never will be penalized for withdrawing the amount of your original contributions, no matter your age, and the IRS doesn’t require you to take annual withdrawals.

Different tax rules apply for withdrawals from Roth IRAs that were converted from a Traditional IRA, so consult your financial advisor or attorney.

Then, start enjoying your retirement years!

Be Smart About How You Spend

Now that you’re retired, you have time to take advantage of plenty of opportunities in life.

Maybe you have plans to travel the country or the world. Or you’re excited about dedicating your hours to volunteer work, or enjoying your favorite athletic activities.

You may also look into different investment opportunities, especially if you want to build up your retirement funds without working part time.

Whatever you choose, the key is to use your money in a smart fashion because you never know when unexpected costs, such as health care, can jeopardize a fixed income.

Part of the process is learning how to avoid schemes designed to prey on retired and elderly people.

Recent Investment Scams

A host of retirement investment deals have turned out to be scams, including the following:

• Home equity scam: Homeowners lend money to partnerships promising steady returns. Avoid anyone who suggests you take out a home-equity loan to make an investment.
• Alternative energy schemes: Investors are lured into backing “green” companies as scammers make false claims and sell unregistered stock.
• Precious metals: Companies offer to buy and store investors’ gold, promising to sell when the value increases. However, the gold repository often doesn’t exist at all.

PrimeWay Federal Credit Union provides more tips and suggestions in our Identity Theft Protection section.

More Tips for Securing Your Money

Here’s what the National Consumers League in Washington, D.C., advises:

• Don't succumb to high-pressure sales: A good investment opportunity today likely will be here tomorrow. Pressure to act on impulse often is a danger sign of fraud.
• Beware promises of quick, large profits: No one can accurately predict how an investment will perform. Investments that promise the highest payoff often are the riskiest.
• Realize there is always risk: Know your risk tolerance before investing.
• Get details in writing: Representatives from a legitimate company will be happy to provide all the information you need.
• Be wary of testimonials from strangers: Someone you don't know offering investment advice could be a crook trying to lure you into a scam.
• Investigate investment offers: Get help from your state securities regulator, the federal Securities and Exchange Commission, and the North American Securities Administrators Association.
• Use caution when receiving investment opportunity e-mails: Many unsolicited e-mails are fraudulent.

Life Changing Financial Events

1. Bankruptcy: The Last Resort

Bankruptcy is not an option to take lightly. Declaring bankruptcy carries significant financial and legal ramifications, placing all of your assets at stake.

It’s important to make a detailed account of all of your assets and debts before filing for bankruptcy. Showing creditors that you’re serious about shoring up your financial problems can curry favor and lead to settlements that are advantageous to you. With changing bankruptcy laws, a trusted attorney might be a valuable resource.

PrimeWay Can Help

Bankruptcy doesn’t absolve you of your financial responsibilities, so you’ll be required to follow a payment plan with creditors after you file. You’ll likely need to scrutinize your spending habits and lifestyle if you’re considering or going through bankruptcy, and that’s where PrimeWay Federal Credit Union can assist you directly.

Our checking and savings options can help you rely less on credit and more on cash, decreasing the temptation to make purchases you can’t afford.

2. Divorce: Separating Your Lives And Your Debts

You never expected your marriage to dissolve, but here you are in the midst of it. Along with emotions running high, there are important financial decisions to be made at this time that require clear thinking and long-term vision.

First off, is it worth hiring an expensive divorce attorney and likely incurring tens of thousands of dollars in legal bills or can you and your ex-partner work things out together? Are children involved and what choices will affect their financial futures?

Divorce Ruling Doesn’t Affect Debt Obligations

If the divorce settlement already has been signed and entered into court, you still have work to do. One of the most common mistakes divorcing couples make is failing to separate their joint credit accounts. Mistakenly, they believe that when a court recognizes them as separate, then so do creditors.

But that’s not the case. A divorce decree has nothing to do with a person’s legal and contractual obligation to creditors. If accounts with your name on them no longer get paid, your credit score is at stake. Creditors don’t care who actually made the purchase or if your ex-partner is the one actually driving the financed car.

Take Action On Joint Accounts

So removing your name from a joint account should be one of the first things you do after a divorce is finalized. That can be easy or complicated, depending on the situation and the creditor with whom you’re doing business.

Removing your name from a credit card account likely will be easier if there’s not a huge outstanding balance. For automobile loans, however, a lender may not agree to take a person’s name off the account if the lender doesn’t trust the ex-partner to stay current with payments.

Mortgages are more complicated. A re-finance, which can have huge financial repercussions, likely needs to occur to remove your name from the lender’s records.

If you can’t remove your name from certain accounts, you might need to take out a debt consolidation loan in your name only and divide debts with your ex-partner appropriately.

There’s a lot to consider amidst the tumult, but one thing is certain: Now is the time to contact the creditors directly.

3. Being Widowed: Managing Finances in the After-Shock

Losing a spouse creates one of life’s most heart-wrenching and stressful situations. In these difficult times, it’s important to keep your financial situation in good shape. That may not be easy if your spouse handled the finances, but now is the time to understand the complete picture of assets and debts.

First Steps to Take after Spouse’s Death

• Obtain multiple copies of your spouse’s death certificate
• Notify creditors of your spouse’s death
• Notify credit report agencies of your spouse’s death

It’s best to alert creditors and the reporting agencies so they’re updated immediately about your situation. This can open the door to discussions with creditors about any accounts you held jointly with your spouse, such as credit cards and personal loans, for which you’ll be responsible in the future.

Tips for Managing Your Financial Life After Losing a Spouse

• Keep up on your payments to avoid late fees and charges
• Identify your assets, where they are, and how to access them
• Establish your own credit, in your own name
• Protect your assets from excess taxes, fees, con artists, etc.
• Develop a financial plan that enables you to live comfortably for the rest of your life
• In some instances, you may need considerable help getting through this difficult time. Family and friends are good resources.