Get the Facts

The SEC's Roadmap to Saving and Investing

Welcome to the SEC Road Map to Saving & Investing, which is brought to you by the Office of Investor Education and Assistance of the U.S. Securities and Exchange Commission.

Need some help finding the right path for your financial future? You've come to the right place. We've put together an itinerary that takes in all the basics for your journey to learn more about saving and investing. Traveling down the right road to achieving financial well-being is one of the most important trips that you'll ever make in life. You don't have to be a genius to do it … and you don't have to be rich … you just need to hit the road and get started.

At each stop along the SEC Road Map to Saving & Investing, you'll learn more about how to be about smart investor

Define Your Goals

A home? A new car? Your education or that of a child? A comfortable retirement? The needs of your parents?

All of these goals will cost money. To make sure that you will have enough money when you need it, follow this process:

• Make your own list and then think about which goals are the most important to you. List your most important goals first.

   

• Decide how many years you have to meet each specific goal, because when you save or invest you'll need to find a savings or investment option that fits your time frame for accomplishing each goal. Knowing how much time you have will help you decide how much risk you can take on.

   

• Use available tools to help you put your financial plan together. For example, the Ballpark Estimate, a single-page worksheet created by the American Savings Education Council, can help you calculate what you'll need to save each year for retirement. And the Consumer's Almanac, published by the American Financial Services Association Education Foundation guides you step-by-step as you organize your finances, plan for the future, and learn to manage your credit.

The Ballpark Estimate and the Consumer's Almanac are part of the Financial Facts Tool Kit.

How much does a cup of coffee a day cost you?

Would you believe $465.84?

If you buy a $1.00 cup of coffee every day, that adds up to $365.00 a year. If you saved that $365.00 for just one year, and put it into a savings account or investment that earns 5 percent a year, it would grow to $465.84 by the end of five years, and by the end of 30 years, to $1,577.50.

That's the power of compounding. With compound interest on the money you save and on the interest that money earns. Over time, even a small amount saved can add up to big money. If you are willing to watch what you spend and look for little ways to save on a regular schedule, you can make money grow. You just did it with one cup of coffee.

Make A Financial Plan

Figuring Out Your Finances

You can never take a journey without knowing where you're starting from, and a journey to financial security is no different. You'll need to figure out on paper your current situation--what you own and what you owe.

You'll be creating a "net worth statement." Print out this page and list what you own (these are your "assets") and on the other side list what you owe (these are your "liabilities" or debts.)

Subtract your liabilities from your assets. If your assets are larger than your liabilities, you have a "positive" net worth. If your liabilities are greater than your assets, you have a "negative" net worth.

Your Net Worth Statement

 

Assets	Current Value	Liabilities	Amount
cash	_______	mortgage balance	_______
checking account	_______	credit cards	_______
savings	_______	bank loans	_______
cash value of life		car loans	_______
insurance	_______	personal loans	_______
retirement accounts	_______	real estate	_______
real estate	_______		_______
home	_______		_______
other	_______		_______
investments	_______		_______
personal property	_______		_______
total	_______	total	_______

Update your "net worth statement" every year to keep track of how you are doing. Don't be discouraged if you have a negative net worth. If you follow a plan to get into a positive position, you're doing the right thing. That leads us to the next step in the journey toward saving, figuring out your income and expenses.

KNOW YOUR INCOME AND EXPENSES

Now, you need to make a record of your income and your expenses for every month. Write down what you and others in your family earn, and then your monthly expenses.

Print out this page and fill out the chart at the right. Start out with how much you take home and then figure out where it goes every month. Many people get into the habit of savings and investing by following this advice: Always pay yourself or your family first.

Many people find it easier to pay themselves first, if they allow their bank to automatically remove money from their paycheck and deposit it into a savings or investment account. That way they are never tempted to spend the money before they pay themselves first.

If you are spending all your income, and never have money to save or invest, you'll need to look for ways to cut back on your expenses. When you watch where you spend your money, you will be surprised how little everyday expenses that you can do without add up over a year.

You're in the savings habit! Now that you are freeing up some money to save and invest, it's time to move ahead to the next stop in your journey.

Determine Your Risk Tolerance

Savings     Investing     Diversification     Risk Tolerance

You are approaching the half-way point in your journey to saving and investing. This is a good point to make sure that you understand some key concepts:

Savings 

Your "savings" are usually put into the safest places or products that allow you access to your money at any time. Examples include saving accounts, checking accounts, and certificates of deposit. At some banks and savings and loan associations your deposits may be insured by the Federal Deposit Insurance Corporation (FDIC). But there's a tradeoff for security and ready availability. Your money is paid a low wage as it works for you.

Most smart investors put enough money in a savings product to cover an emergency, like sudden unemployment. Some make sure they have up to 6 months of their income in savings so that they know it will absolutely be there for them when they need it.

Investing 

When you "invest," you have a greater chance of losing your money than when you "save." Unlike FDIC-insured deposits, the money you invest in securities, mutual funds, and other similar investments are not federally insured. You could lose your "principal," which is the amount you've invested.

But then, how "safe" is a savings account if you leave all your money there for a long time, and the interest it earns doesn't keep up with inflation? The answer to that question explains why many people put some of their money in savings, but look to investing so they can earn more over long periods of time, say three years or longer.

Though there are no guarantees, investing means you may earn much more money than by relying upon no-risk savings. Investors are not promised a return, but they do get the opportunity of making money that more than offsets the cost of inflation.

Diversification 

Investors protect themselves against this added risk by spreading their money among various investments, hoping that if one investment loses money, the other investments will more than make up for those losses. This strategy, called "diversification," can be neatly summed up as, "Don't put all your eggs in one basket." Diversification can't guarantee that your investments won't suffer if the market drops. But it can help you balance risk.

Risk Tolerance 

What are the best saving and investing products for you? The good news is that you already have supplied the answer in this journey to saving and investing. By figuring out where you can save and then defining your goals, you've already determined where it makes the most sense to put your money.

The answer depends on when you will need the money, your goals, and if you will be able to sleep at night if you purchase a risky investment where you could lose your principal.

For instance, if you are saving for retirement, and you have 35 years before you retire, you may want to invest in riskier investment products, knowing that if you stick to only the "savings" products or to less risky investment products, your money will grow too slowly—or given inflation or taxes, you may lose the purchasing power of your money. A frequent mistake people make is putting money they will not need for a very long time in investments that pay a low amount of interest.

On the other hand, if you are saving for a short-term goal, you don't want to choose risky investments, because when it's time to sell, you may have to take a loss. Since investments often move up and down in value rapidly, you want to make sure that you can wait and sell at the best possible time.

Investment Products:
Your Choices

Stocks and Bonds     Mutual Funds

You're at that stage in your financial journey when you need to make decisions about the investment products that are right for you. Here are some of your major choices:

How Stocks and Bonds Work 

Many companies offer investors the opportunity to buy either stocks or bonds.

Let's say you believe that a company that makes automobiles may be a good investment. Everyone you know is buying one of their cars. Plus your friends report that the company's cars rarely breakdown and run well for years. You either have an investment professional investigate the company and read as much as possible about it, or you do it yourself. After your research, you're convinced it's a solid company that will sell many more cars in the years ahead.

The automobile company offers both stocks and bonds. With the bonds, the company agrees to pay you back your money, your initial investment in ten years, plus pay you interest twice a year at the rate of 8% a year.

If you buy the stock, you take on the risk of potentially losing a portion or all of your initial investment if the company does poorly. But you also may see the stock increase in value beyond what you could earn from the bonds. If you buy the stock, you become an "owner" of the company. You'll only make money if the company does well and other investors think so too.

Because it is sometimes hard for investors to become experts on various businesses—what are the best steel, automobile, or telephone companies—investors often depend on professionals who are trained to investigate and recommend companies that are likely to succeed. Since it takes work to pick the stocks or bonds of the companies that have the best chance to do well in the future, many investors choose to invest in mutual funds.

Considering Mutual Funds 

After investigating the prospects of many companies, one or more investment professionals pick the stocks or bonds of companies and put them into a fund. Investors can buy a share of the fund, and their share rises or falls in value as the values of the stocks and bonds in the fund rise and fall. Investors may pay a fee when they buy or sell their shares in the fund, and those fees in part pay the salaries and expenses of the professionals who manage the fund while they own shares.

Even small fees can add up, so you need to look carefully at how much a fund costs and think about how much it will cost you over the amount of time you plan to own its shares. If two funds are similar in every way except one charges a higher fee than the other, you'll make more money choosing the fund with the lower cost.

Mutual funds appeal to many investors because:

• You can often invest with a small amount of money.

   

• Some mutual funds spread their investments over a large number of companies so your investment is diversified. (You haven't put all your eggs in one basket.) If you have a small amount of money to invest, investing in mutual funds may be the only way you can diversify your investments.

   

• The professionals who run the fund choose the investments and monitor them continuously.

Understanding the Ups and Downs of Investing

You can make money in an investment if:

• The company performs better than its competitors.

   

• Other investors recognize it's a good company. So that when it comes time to sell your investment, others want to buy it.

   

• The company makes profits, meaning they make enough money to pay you interest for your bond, or maybe dividends on your stock.

   

• The people who run the business are honest, hardworking, and talented.

You can lose money if:

• Their competitors are better than they are.

   

• Consumers don't want to buy the company's products.

   

• They fail at managing the business well, they spend too much money and their expenses are larger than their profits.

   

• Other investors that you would need to sell to, think the company's stock is too expensive given its performance and future outlook.

   

• The people running the company are dishonest. They use your money to buy homes, clothes, and vacations, instead of using your money on the business.

   

• They lie about any aspect of the business: claim past or future profits that do not exist, claim it has contracts to sell its products when it doesn't, or make up fake numbers on their finances to dupe investors.

   

• The brokers who sell the company's stock manipulate the price so that it doesn't reflect the true value of the company. After they pump up the price, these brokers dump the stock, the price falls, and investors lose their money.

   

• You have to sell your investment when the market is down.

How To Pick A Financial Professional

Investment Advisers and Financial Planners       Brokers     Questions to Ask

Are you the kind of person who can go "solo" on the journey of saving and investing? Do you have a firm command of your investment choices and how to go about making them?

Maybe you're one of the people who already has all the answers. If not, you will probably end up getting some help from a financial professional, such as an investment adviser, a financial planner, or a broker.

Investment professionals offer a variety of services at a variety of prices. It pays to comparison shop.

You can get investment advice from most financial institutions that sell investments, including brokerages, banks, mutual funds, and insurance companies. You can also hire an investment adviser, an accountant, a financial planner, or other professional to help you make investment decisions.

Investment Advisers and Financial Planners 

Some financial planners and investment advisers offer a complete financial plan, assessing every aspect of your financial life and developing a detailed strategy for meeting your financial goals. They may charge you a fee for a plan, a percentage of your assets that they manage, or receive commissions from the companies whose products you buy, or a combination of these. You should know exactly what services you are getting, how much they will cost, and how your investment professional gets paid. Smaller investment advisers are generally regulated by those states with the authority to do so. For information on how to contact your state's securities agency, call NASAA at (888) 846-2722 or visit its website.

Brokers 

Brokers make recommendations about specific investments like stocks, bonds, or mutual funds. While taking into account your overall financial goals, most brokers will not give you a detailed financial plan. Brokers are generally paid commissions when you buy or sell securities through them.

Brokerages vary widely in the quantity and quality of the services they provide for customers. Some have large research staffs, others specialize in particular types of companies, for example, companies that are new and have never been in business before.

• A discount brokerage charges lower fees and commissions for its services than what you'd pay at a full-service brokerage. But generally you have to research and choose investments by yourself.

   

• A full-service brokerage costs more, but the higher fees and commissions pay for a broker's investment advice based on that firm's research.

You can check out your prospective or current broker online through the National Association of Securities Dealers. Another good place to turn for information is your state securities agency, which can be accessed through the website for the North American Securities Administrators Association.

Questions to Ask Before Selecting 
an Investment Professional

The best way to settle on an investment professional is to know what type of services you need and then figure out who is best suited to get the job done for you. Once you know that ask your friends and colleagues whom they recommend. Try to get several recommendations, then arrange a face-to-face meeting. Make sure you get along with the financial professional. Make sure that he or she understands your goals and risk tolerance.

Here are some questions to ask before hiring an investment professional:

• Are you licensed with the states or SEC?

   

• Do you have disciplinary problems on file with the NASD or states?

   

• How are you compensated?

   

• What is your relevant experience as a financial professional?

   

• What kind of special education or training have you received?

   

• How would you describe your investment philosophy?

   

• Do you understand my financial goals and risk tolerance?

   

• What other clients do you have whom I could speak to?

   

• What kind of periodic reports on my money should I expect from you?

How To Avoid Problems

While most investment professionals are honest and hardworking, you must watch out for those few unscrupulous individuals. They can make your life's savings disappear in an instant.

Securities regulators and law enforcement officials can and do catch these wrongdoers. But catching them doesn't always get your money back. Too often, the money is gone.

The good news is you can avoid potential problems by protecting yourself.

Let's say you've already met with several investment professionals based on recommendations from friends and others you trust, and you've found someone who clearly understands your investment objectives. Before you hire this person, you still have more homework.

Make sure the investment professional and her firm are registered with the SEC and licensed to do business in your state. And find out from your state's securities regulator whether the investment professional or the firm have ever been disciplined or have any complaints against them. You can get that number by calling the North American Securities Administrators Association (NASAA) toll-free at (888) 84-NASAA.

You should also find out as much as you can about any investments that your investment professional recommends. First, make sure the investments are registered. Sometimes a simple phone call to your securities regulator can prevent a lot of heartache.

Be wary of promises of quick profits, offers to share "inside information," and pressure to invest before you have an opportunity to investigate. These are all warning signs of fraud.

Ask your investment professional for written materials and prospectuses, and read them before you invest. If you have questions, now is the time to ask.

• How will the investment make money?
• How is this investment consistent with my investment goals?
• What must happen for the investment to increase in value?
• What are the risks?
• Where can I get more information?

Finally, it's always a good idea to write down everything your investment professional tells you. Accurate notes will come in handy if ever there's a problem.

What If I Have a Problem?

Some investments make money. Others lose money. That's natural, and that's why you need a diversified portfolio to minimize your risk. But if you lose money because you've been cheated, that's not natural, that's a problem.

Sometimes all it takes is a simple phone call to your investment professional to resolve a problem. Maybe there was an honest mistake that can be corrected. If talking to the investment professional doesn't resolve the problem, talk to the firm's manager, and write a letter to confirm your conversation. If that doesn't lead to a resolution, you may have to initiate legal action. You will need to take action quickly because the legal time limits for doing so can be short. Your local bar association can refer you to attorneys who specialize in securities law.

At the same time, call us and let us know what the problem was. Investor complaints are very important to the SEC, and sometimes we can help you resolve your problems. You may think you're the only one experiencing a problem, but typically, you're not alone. Sometimes it takes only one investor's complaint to trigger an investigation that exposes a bad broker or an illegal scheme. Here's how to contact us:

U.S. Securities & Exchange Commission
Office of Investor Education and Assistance
450 5th Street, NW
Washington, D.C. 20549-0213
Fax: (202) 942-9634
Online Complaint Form

Now The Real Journey Begins

CONGRATULATIONS!

You have successfully completed the process of becoming a smart saver and investor. But before you put the trip behind you, it's time to consider a few additional pieces of advice:

Keep in Touch with Us

We hope that you've found this brochure helpful. Please let us know how it can be improved.

We've only covered some of the basics, and there's a lot more to learn about saving and investing. But you'll be learning as you go and over your lifetime.

As we said at the beginning, the most important thing is to get started.

And remember to ask questions as you make your investment decisions.

Some of the most important questions, you'll need to ask us, such as is the person licensed to sell investments, and is the investment registered with securities regulators.

Be sure to visit the rest of our Web site for more information about how to save and invest wisely: