Financial Learning Center

The short answer is that the only way to get higher returns on your money is to invest.

Every investor has the goal of increasing the value of his or her investments. They are constantly seeking ways to get higher returns on the money they have. But there are no guarantees in investing. Often times well laid plans for high returns do not work out and investors lose money. That is the unpredictable nature of the markets – there are no future facts and there are no guarantees.

But there is one firm truth that can be relied on. If you don’t take risks, your potential reward will be limited. And if you do take on risks, you will have more potential for high rewards, but will also have the potential for greater loss as well.

This relationship between risk and reward is what makes investing so complicated.

It’s important to understand different kinds of investments and how they stack up in terms of risk/reward. Let’s look at them.

Bank Deposits

The lowest risk investment that we all know about is a bank account. These offer interest rates that can grow your money over time. The Federal Deposit Insurance Corporation (FDIC) insures all bank deposits in the United States up to $250,000. This insurance also covers most bank products including Certificates of Deposits (CDs). So even if your bank goes under, your money is safe. With interest rates at super low levels, returns on bank deposits are equally low. There have been times when interest rates on bank deposits have offered good returns, but it hasn’t been that way for more than a decade.

Government Bonds

Another super safe investment is U.S. government bonds. These include Treasury Bills, Notes and Bonds. These have different terms that can be as short as 4 weeks to as long as 30 years. Interest rates on these treasuries vary, with the long maturities usually holding the highest interest rates. And because the US government backs these investments, they are considered super-safe. The interest rates for longer maturity bonds are usually higher than bank interest rates.

Corporate Bonds

Working up the risk/reward scale are bonds that are issued by corporations. These bonds usually pay higher interest than government bonds, but have higher risk than those bonds. This is because there is no guarantee that the bonds will be paid back. Corporations do go bankrupt, even reputable ones. So corporate bonds do have some risk to them. But the majority of corporate bonds are low risk and are deemed “investment grade” which means that they rarely collapse.

Stock Market

If you are looking for higher returns than corporate bonds, you can look to the stock market. Stocks and funds can offer terrific returns. Historically, the US stock market has returned 7% on average, or 11% on average per year if you include dividend payments. It should be noted that the exact return is subjective and depends on what you consider the “US stock market” and what time period you’re looking at. But nevertheless, the US stock market has, on average, brought solid returns.

The problem with looking at average returns is that you miss the bumpiness of the stock market. In 2007, for example, the S&P 500 returned 5.5%, which is around the historical average. But the next year the market plummeted by 37%. And then in 2009 it was up 26.5%. Those are some crazy bumps!

This volatility makes investing in the stock market very risky when you invest for short periods. Events like wars, economic downturns, corruption, bad business decisions or changes in commodity prices can all cause turmoil. The risk of loss is real.

If you extend your investing horizon to a decade, most of the bumps get smoothed out and you get closer to historical averages. Which is why having a long-term vision is so important.

High-Yield Bonds

If you want better returns than the overall stock market, you have to look at products that hold much greater risk. High yield bonds are one example of higher risk investments. You might know them by their more common name of “Junk Bonds”

Junk Bonds are bonds offered by small, risky companies that cannot access traditional funding streams. In order to raise capital, they must offer high rates of return on their bonds. The companies that issue Junk Bonds are either older companies that are struggling to stay afloat, or young companies trying to get into a market. Either way, the risk of default is higher with junk bonds than with most other investments.

Shorting

Another high risk, but potentially lucrative investment strategy is to short a stock. Shorting a stock is essentially a bet that the stock will go down. These trades can be lucrative when a stock does go down. And the further a stock goes down, the more money you can make.

But the potential loss from a short is massive. If your short goes the wrong way, and the stock goes up in price, you lose money. If the stock goes up 100%, you will lose ALL of your money. If it goes up more than 100%, you will lose all of your money and still owe more! The downside risk of shorting a stock is very high.

Derivatives

Finally, on the far end of the risk scale are derivatives. These products are basically contracts between two parties that are based on the price movement of an underlying asset. A derivative is really just a bet on the direction of a stock, commodity, currency or mortgage. Much like shorting a stock, a derivative that goes the wrong way can wipe out more that what was invested. But when it goes the right way, the proceeds can be terrific. Derivatives are the ultimate risk/reward investment and should be avoided unless you have lots of experience and a super-high tolerance for risk.

In the end, all the different ways of getting higher returns on your money have some level of risk. When deciding on what kind of return you are after, make sure you understand the risk that comes with it. This risk level should be one that you can tolerate. It makes no sense to go after potentially high returns if you cannot stomach the potential losses. So make sure that before you make an investment, you not only look at the potential return, but also look at the potential for loss, and if you can accommodate that possibility.

For as long as people have been making money, there have been people figuring out ways to steal it.

Now, with technology, there are new scams to be wary of.

But first, it’s important to know that most savings account are protected by the FDIC, up to $250,000 – so should your bank fail, you will not lose the money in your savings, checking and CDs (certificates of deposit). Cash in most retirement accounts is also eligible for FDIC protection. What’s not covered? Mutual funds, stocks, bonds and safety deposit boxes.

Most banks are insured in case of theft – but here’s the issue. Sometimes, the account holders themselves enable the thieves. There’s two ways this happens (1) by not providing adequate protection to your account and (2) by being an unknowing participant in a scam.

The first thing to do is to ensure that you have provided significant protection to your account. This means:

1. Not keeping your PIN or passwords anywhere near your ATM card or account details
2. Creating a password that is difficult for hackers to crack.
3. Not using the same passwords, or password structures, across multiple sites

Best practices for creating a strong password include using a combination of upper and lower-case letters, numbers and symbols. Don’t use things that can easily be guessed, like your date of birth or phone number or child’s name.

A quick trick is to think of a sentence that can be easily memorized, and create a 10+ character password. For example  ‘Jane is going to save $10K this year!’ makes the password: Jigts$10Kty!

Sometimes you may get an email or a pop up that says you need to re-enter your account details and password on a web page. Do not click on any links from any sources that are not 100% legitimate. If you are on a page asking for your password, always look for a locked padlock symbol in your browser’s address window. If you click the padlock you will see your bank’s security certificate. If there is no lock, or the certificate looks wrong, don’t enter your password.

Also be careful of emails from unknown recipients. If you click links or download files in these emails, ‘malware’ (malicious software) can be installed on your computer which can track your activity (including your user name and password to your bank!). Just. Don’t. Click.

Always use a site’s main account login page (check the navigation bar to make sure it’s the same as the site you always log into) – and log in from there.

Also, never use the same password at multiple sites – and don’t use the same password for your email account at other places. Keep your banking information in a secure place. A good test to try is ‘if someone broke into my filing cabinet, does the thief have all the information they need to open a credit card in my name’. The answer if often yes, so be careful of your physical security as well as your digital security.

Remember, you have 60 days to dispute unauthorized transactions – one of the many reasons it’s important to keep an eye on your monthly statements!

So now you’ve done the right thing and created secure spaces for your digital and physical records, how else can you protect your deposits from thieves?

The big thing to know is that thieves rarely look like thieves. A good (and sad) rule of thumb is to be suspicious of anyone new in your life that asks for money or personal information. A few of the well-known scams are:

The sweetheart scam. Singles are targeted through online dating sites with the goal of making a personal connection. Months of promising messages, shared photos and even travel plans are made. It is completely possible for people to fall in love online, and the sweetheart scammers know that. Once they feel comfortable, the requests for money start coming in. From the smaller ‘I’d love to visit but can’t afford the fare’ to ‘I urgently need an operation – please help me.’ Love, or the illusion of love, has seen many people milked of their savings.

The taxman scam: A call comes from the IRS. You owe money and they say you’re going to be arrested if you hang up the phone. The caller sounds official (and terrifying). The IRS is prepared to reduce your payment from $20,000 to $5,000 IF YOU PAY TODAY! It’s estimated that up to 450,000 calls a month were being made to Americans from multiple scam call centers, with one bogus call center making $150,000 a day for the scammers. For the record, the IRS does not call you and demand money.

The obituary scam: Scammers scan the obituaries and social media to find descendants of the recently deceased. A caller or emailer claiming to be representing the deceased estate says they have life insurance policies or bank deposits that have been bequeathed. All the target has to do is send money to cover legal fees etc.  The lesson here - be cautious of the information you release in obituaries, and ask many questions of anyone coming to you bearing inheritance money.

The Nigerian prince scam. Versions of this scam have been around as long as the Internet has. Posing as a member of the elite from a troubled country, you receive an email (usually with terrible spelling – always a sign to look for!) saying that a Prince is sitting on a vast fortune and needs your help getting the money out. Can he send you $5,000 to prove it’s real? Many people fall for this scam as the money will actually appear in your account! Now the prince needs you to send $20,000 to pay for legal fees to unlock the million dollars that he’s promised...

When someone is a victim of these scams, and receives a deposit into their bank account (which they subsequently spend or move) they are now in an extremely bad position because the scammer deposits the money via an ACH transfer, which they can then ‘claw back’ within 90 days – even if the victim has spent or moved the money. So the victim is on the hook to the bank for the ACH money, and any money out of their own pocket that they have sent..

What are the things these scams have in common? They often target the elderly, the lonely or recent immigrants. And they are often carried out by groups outside the United States – making it hard for local law enforcement to solve these crimes.

The days when bank robbers wore ski masks and took cash were a lot easier to manage than the current crop of digitally enabled thieves. You are on the hook for funds you lose in these scams, so everyone needs to be wary of cyber thieves and scammers.

Please share this with the people you love and ensure they are protecting themselves, too.

Treasury bills, bonds and notes are investments offered by the US Government that are essentially loans that you make to the Government so that they can run their programs.

In exchange for these loans, the Government offers you interest on the loan you make to them.

There are three types of treasuries issued by the US Government, and they vary depending on the length (term) of the security.

• Treasury bills are the shortest-term securities issued. They have maturities that range from a few days to 52 weeks.
• Treasury notes are longer-term securities and range in maturity from two to ten years. They pay their interest every six months.
• Treasury bonds have maturities that range from ten to thirty years and also pay their interest every six months.

Because these financial instruments are backed by the US Government, they are considered to be extremely low-risk investments. In fact, when gauging risk, many investors use the 3-month Treasury bill as the benchmark for a “risk-free rate of return”. This is the highest return you can get from a no-risk investment.

Investing in US treasuries is a terrific way to get income with very little risk. Any individual with a brokerage account can buy and sell US treasuries. And you don’t have to hold treasuries until they mature. You can sell them any time you want. They are considered very “liquid” investments: They can be bought and sold quickly and easily at little cost.

The interest rate on specific bonds and notes does not change. It is called the “coupon rate” and remains the same throughout the life of the bond or note. They can be bought in increments of $100. So if you get a $100 bond with a 5% coupon rate, you get $5 interest per year (or $2.50 every six months)

US treasury bonds and notes can be traded on secondary markets, and on these markets, the price of the treasuries can actually change. Many things can impact the price, but the most direct impact comes from current interest rates. We’ll give you an example. Let’s say, just like in the above example, you have a $100 treasury note that has a coupon rate of 5%. What if, right after you buy the note, the Federal Reserve raises their benchmark rate, which increases interest rates all through the market? Now the note you just bought is being issued with a 6% coupon rate. Nobody is going to want to buy your note that pays 5%. They can get a 6% note for the same $100 instead.

So are you stuck with the note? No. What happens is the market will buy your note, but not at par value. They will want a discount. And this is where something called yield comes in. The yield on your note is 5% ($5 per year on your $100 investment). But the new notes have a yield of 6% ($6 per year on a $100 investment). But your note can have a 6% yield too! If someone is willing to pay $83.33 for your note, they would still get the $5 interest per year, but at the lower price, the yield is now 6% ($5 on a $83.33 investment). So by buying the note at a lower price, the buyer gets the higher yield.

And this is the logic of bonds: As interest rates go up, bond prices go down.

This example is a very simplistic explanation about how prices and yields on treasuries move. Other factors like time to maturity and the duration of the bond also impact the price. But from the example you can see that prices are not fixed.

Treasury bills are priced slightly differently than notes and bonds. They come in denominations of $1,000, but instead of coming with an interest rate, they are sold at a discount to face value. So if you pay $990 for a one-year treasury note, at the end of the year it can be redeemed for $1000, earning you $10 or 1% interest. Treasury bills are sold at auction when they are released and can also be purchased in secondary markets.

Because treasury bills, notes and bonds are such low risk investments, they are some of the most popular investments both with US buyers as well as with foreign individuals and Governments. It is considered to be a very safe harbor for investments.

If you want to invest in something that pays an income and is extremely safe, US treasuries are a terrific option.

There’s nothing that a parent, or grandparent wants more for their beloved offspring - than for them to get a great education.

But a high quality education often comes at a price - and that’s where education savings plans come in.

There are a few things to look for when you’re considering setting up a plan to save for a child's education.

The first is goals. Think big picture for a minute. As much as you want to best for your children, financially it shouldn’t be at the expense of your own financial future. If you’re not contributing to your own retirement, you should think hard about contributing to college savings plans. Remember the airline instructions - to put on your own oxygen mask first before helping your child - it works great for money too.

If you’re all set with saving for your own short, medium and long term goals - then great -- do the homework on what you think the education savings plan will need.

When you’re saving for college, first, see what benefits are available to the student. Make sure your goals include trying to max out whatever benefits will be available.

The Consumer Financial Protection Bureau (CFPB) has some terrific resources to help you understand the cost of college. Use the “Compare Schools” tool to figure out the cost of attending different schools. Getting a handle on total costs is an important (and sobering) first step.

Next do some homework to see if your child will qualify for student aid. The StudentAid web site has a fantastic tool to calculate potential student aid. Go there to see if you can reduce the burden of tuition.

Also do some research to find out what kinds of need-based scholarships are available at your potential schools. US News has a great school search tool that gives information on the amount of need-based scholarships and grants given by each school.

This work will help you figure out the net cost for school that you’re looking at. The federal government is also pressuring colleges to have net price calculators on their web site. These should also help you figure out the cost of going to school.

Now the hard part: How much will you pay?

Remember, this doesn’t have to be all or nothing. You can be clear with your children that perhaps they will be expected to contribute too. So work with them on how that can happen – preferably through earning money versus debt, but if they do need to take on debt themselves, look for low interest, fixed rate student loans.

Now let’s look into HOW you can build an education savings plan.

The first thing to do is a simple timeline based on your children’s ages. The earlier you start, the better. A simple calculation of how much you need to save each year can be done in excel, or with a piece of paper and a calculator. Or use this calculator at collegeboard.org. But one thing to include in this calculation is inflation. It’s safe to assume the cost of something today will cost more in the years to come. A safe number to ‘inflate’ your goal by is 2% each year. In the US, college tuition has been rising at an unsustainable rate of 8% per year - that means tuition costs can double every 9 years! This is not to alarm you - but to highlight the realities of what education can cost.

In the US, the most common ways to save for education are 529 Plans and Coverdell ESAs. Both of these plans are after-tax vehicles (so don’t lower your current tax bill). But any growth that the funds achieve in the accounts is tax-free when you take the money out. So you get to keep the full value of any gains made on investments in those accounts.

The one catch with these accounts is that the money you put in can only be used for education. If your kids decide not to further their education, or you’ve put too much money into the accounts, or you need the money for an emergency, there are penalties if you take the money out early, or for reasons other than core education expenses.

Also make sure multiple people beyond you can contribute to the plans you choose. Relatives and friends also want what’s best for your kids - so help them to help you!

If you’re planning on asking your child to take on debt, please look at multiple option and make sure you understand ALL the costs and implications involved in holding the debt, and paying it down. The CSFB has great resources to help you understand the different loan options available. But you should know that federal loans are much more flexible and forgiving when it comes to repayments.

Last thing to consider are your contributions:

Like all great savings strategies – the key is automation. You’ve set your goals by year of how much you need to save, now set the amount you should deduct each month – and set it up!

Also make sure you check the benefits that come with your job. Some employers have educational savings plans that allow for pre-tax contribution, subsidies, or if you’re very lucky – matching some of your contributions.

With a family, it can be extremely expensive to just stand still financially. By setting goals, identifying the right ways to save, and automating as much as possible – you can set yourself, and your children, up for the best possible future.

Sadly, money issues are one of the leading causes of divorce in the United States. Setting up great financial practices as a couple is one the best things that people can do to give their relationship a chance to thrive.

But what happens when your money styles are out of sync – and one partner is more focused on saving, while the other is more focused on spending?

Here are some ideas to help make savings a joint goal:

1. Have the conversation

Don’t make a big deal of it. State that this is something that is important to you – and something you would like for the two of you to do as a couple. Keep the conversation on the practical: “Let’s set a goal and save some money” versus an emotional blame game.

2. Set a joint goal that is relatively easy to accomplish for you both

Discuss what goal you would like to tackle first. A good idea is to make it an achievable goal, and something that is positive and pleasant for you both. A good idea is to save for a vacation, or a weekend away.

3. Select a method and a timeframe for saving

So where is this money going to go? If you don’t already have a joint savings account, now is a great time to set one up. Mark your calendars with your target goal date, and set up a direct deposit to automatically route money into the savings account.

As you progress, make sure you discuss how you’re doing against your goal, and keep the conversations positive. You can achieve your goal faster by cutting back in other areas of your budget, and putting the savings towards the goal.

Where many couples fail is that they make this an emotional conversation, or worse, blame their partner for being ‘bad with money.’ Other contributors to savings failures are when unrealistic goals are set (“let’s be debt free in 3 months!”) or the methods to achieve the goals are impossible to live with (“let’s not go out for 3 months while we pay off our credit card!”).

Once you’ve started to build your savings muscle as a couple, you can extend this behavior into a larger long-term goal (like saving for a deposit on a house), or work toward multiple goals at once. Think about how your options in life will open up as you pay off debt, save an emergency fund, and save a base of money to grow together for your future. A simple trick to keep you on course is to build mini rewards along the way (and if they don’t cost much money, even better!!)

When your goal is to help your partner get better at saving money, the #1 thing to remember that it takes a lifetime to build up financial habits, and they don’t change overnight. Be patient, be positive and make it a joint effort. Make changes in your own behavior to make sure your partner understands that you are trying to change too.

It can be helpful to talk about why they overspend (remembering what you consider overspending may seem very reasonable to your partner). A good conversation to have is to draw and review your respective ‘money family trees’. Talk about the habits your parents instilled in you as a child, or the impact of seeing an uncle go broke, or how your sister has a bad case of the ‘keep up with the Joneses.’ You’ll learn a lot about each other by looking at your extended families behavior from an objective perspective – with the goal of understanding why you act the way you do.

There are a few other things to do while you’re at it. Make a commitment to each other to not hide spending. A great way to be open about where money goes is to set a line in the sand where each person can make a decision without the other’s input (say a $100 purchase) – but for anything over than amount, it should be discussed. This works even better when you have a budget with a set amount for discretionary spending (clothing, entertainment, eating out etc.).

If you can - a great idea is to make a commitment to live off one income and save 100% of the other. This creates a clear path to savings. And should either one of you lose your job, you won’t have to tighten your belt significantly as you’re already living well below your means.

Remember, start small, keep it positive, and make your partner see that saving is not about deprivation – but about creating positive options for your future.

It’s easy to think of your savings as a single number – a goal to work towards.

But savings is more sophisticated than that. There are important differences between different types of savings. So to be strategic about how you save, think of your savings living in three buckets

1. Emergency savings
2. Short-term goals
3. Long-term savings

In the first bucket you have emergency money.  Call it a contingency fund if “emergency” is too alarming. But it’s important to have money accessible. The rule of thumb is to have savings equal to 6 months of expenses should you lose your income. The key thought here is that if you live month to month and suddenly lose your income, you may have few options other than going into debt.

And if you’re already in debt, like 75% of Americans, it’s still important to save and have a contingency fund so that in times of emergency you don’t go deeper into debt.

So where should you put your contingency fund? You never know when you’ll need the money, and keeping it in a savings account allows you to access your money instantly. Don’t lock it up in places like retirement accounts where access is limited or penalized.

In the second bucket you have money for short-term goals. This is money for things that you should not go into debt for. Taking a trip, upgrading your computer or holiday gifts should all be part of your short-term savings bucket. These are higher cost items that you should pay for by setting aside savings. Many savings accounts allow you to assign money to individual goals. It’s a great way to stay on track when you see your vacation savings, for example, growing towards your goal.

For short-term savings, you won’t need constant access this money. So you can lock this savings away for specific amount of time. If you’re saving for a trip, for example, you should be comfortable with locking this savings away for a few months at a time. By temporarily giving up access to your money, banks will give you better returns. Products like Certificates of Deposit (CD) or Government Bonds offer you protection of your principal and higher rates of return than savings accounts. And don’t worry. If you do need to access this money, you still can. There will just be a fee for doing so.

The final bucket is for long-term savings. These are the funds that you need in order to build the future you want. Consider these your ‘investment funds’. It is money you don’t need access to in the short term. If you have a 401K or IRA – that’s a great start.

If you don’t have a retirement account, make sure you get one. They allow you to grow your money either tax-free or tax-deferred. Check with your employer if they have a 401K and if they do, take advantage of it. They often come with matching funds from your company. Take advantage of this “free money”. If you don’t have access to a 401K, look to IRAs. They are another tax-advantaged way to grow your money.

But often your long-term plans may include things that will come before retirement. You may want to start a business, or buy a vacation property. Or maybe unexpected expenses will come up (braces really cost that much???). These are all things you cannot fund from a retirement account without getting hit with huge early withdrawal penalties.

This is why it’s important to also have a separate investment account that is not a retirement account. You can open one through a brokerage or investment advisor, where part of your third bucket can be put to work in a way that can buy you options in the future.

By categorizing your savings into these three buckets, it will help you manage your savings, and reduce the temptation to dip into emergency or investment funds for your day-to-day needs or you short-term wants.