financial planning

making money work for you

our mission
The mission of The USAA
Educational Foundation is
to help consumers make
informed decisions by providing
information on financial
management, safety concerns
and significant life events.

This publication is not medical, safety, legal, tax or investment advice. It is only a general overview of the subject
presented. The USAA Educational Foundation, a nonprofit organization, does not provide professional services
for financial, accounting or legal matters. Consult your tax and legal advisers regarding your specific situation.
Information in this publication could be time sensitive and may be outdated. The Foundation does not endorse or
promote any commercial supplier, product or service.

Table of contents
September 2011

Planning For Your Future

Setting Financial Goals

Your Financial Resources

Your Spending Plan

Using Credit Wisely

Saving And Investing

10

Protecting Your Financial Future

14

Preparing Wills And Powers Of Attorney 15

Measuring Your Financial Progress

16

Planning For Your Future

What are your goals for the future? To attend graduate school? Start your own business? Maybe
you would like to get married and start a family. You may dream of living in a certain type of home
or of traveling abroad. You are never too young to save for the very expensive goal of retirement.
Whatever your goals, your ability to achieve them will depend on the way you manage money now
and in the future. This publication introduces you to the following basics of financial management:

Setting personal and financial goals.

Understanding your financial resources.
Creating a budget to manage expenses and minimize debt.
Establishing a good credit reputation by using credit wisely.
Saving and investing for future goals.
Protecting your assets with insurance, trusts, wills, powers of attorney and good planning.
Adjusting your financial plans as circumstances change.
Review Your Goals
At least once each year and at significant life events such as graduation, marriage, divorce,
birth or adoption of a child or the purchase of a home you should review your financial situation
and adjust your goals and plans for reaching them. A good time for your annual review is when you
have gathered your financial records when preparing your federal income tax returns.
Financial management is a lifelong process. Doing it responsibly requires hard work and selfcontrol but it can lead to a secure and satisfying future. Remember, it is best to consult a
financial planning professional before making any major financial decisions.

THE USAA EDUCATIONAL FOUNDATION OFFERS ADDITIONAL PUBLICATIONS RELATED TO THIS TOPIC. SEE RESOURCES ON THE INSIDE
BACK COVER OF THIS PUBLICATION TO ORDER FREE COPIES.

Setting Financial Goals

Financial planning begins with goal setting. Take time to determine your goals and how much time
and money you will need to achieve them. You may likely need to set short-term (less than 3 years),
intermediate-term (3 to 7 years) and long-term (more than 7 years) goals.

Determining Goals
While goals will differ for everyone, here are some examples that are applicable to most individuals.
Begin saving and investing now for short-term, intermediate-term and long-term goals.
Short-Term

Pay debt in full.

Establish a good credit reputation.
Implement a disciplined savings and investment plan.
Create an emergency fund of at least 36 months of basic living expenses.
Purchase a vehicle.
Purchase insurance coverages appropriate for your situation.
Prepare and execute a will and power of attorney.

IntermediateTerm

Make the down payment on a home.

Plan for a wedding.
Increase income for additional goals or to reach your goals sooner.
Prepare for the birth or adoption or education/graduation of your children.
Provide for your advanced education.

Long-Term

Establish and work toward your retirement goals.

Provide for your childrens college education.
Plan to support aging parents.
Consider long-term health care needs.
Maintain desired standard of living for your lifetime.
Assess housing location and needs for retirement.

Once you have established your financial goals, the next step is understanding the resources you
will need to achieve them. If you are like most individuals, your primary resource will be your income. If you manage your income well, over time you will build net worth.
Your net worth indicates your financial position at a particular time and is a measure of the progress you are making toward your goals.

Your Financial Resources

Use the following Budget Work Sheet to calculate your current net cash flow. Skip items that do
not apply.

Budget Work Sheet

Income For The Month Of:
Monthly gross income (total income before deductions)

Amount
$

Other income (interest, etc.)

Total Monthly Gross Income

=$

Deductions
FITW Federal Income Tax Withholding (if applicable)

SITW State Income Tax Withholding (if applicable)

FICA Social Security

FICA Medicare

Other deductions (for example, Flexible Spending Account)

Total Deductions

=$

Total Monthly Net Income (total gross income minus total deductions) =$
Expenses

Amount Planned Actual Expenses

Charitable Giving
Place of worship

Other
Savings/Investments (target at least 10%15% of monthly net income)
Emergency fund

Retirement accounts (IRA, 401(k), etc.)

Other
Home/Utilities
Food

Rent/Mortgage payment
Property taxes (1/12 of total annual expense)
Utilities
Home maintenance
Furniture
Phone/Cell phone

Internet service provider (ISP)

Debt
Credit card(s) payment

Loan(s) payment

Expenses (CONTINUED)

Amount Planned Actual Expenses

Insurance
Auto insurance

Property insurance (renters, homeowners)

Health insurance
Life insurance
Long-term care insurance
Disability insurance
Education
Tuition

Room/Board/Travel
Books/School supplies/Uniforms
Transportation
Vehicle payment

Gasoline/Parking/Tolls /Public transportation

Vehicle maintenance
Registration/License fees (1/12 of total annual expense)
Personal
Clothing

Laundry/Dry cleaning
Grooming (hair care, toiletries, etc.)
Child care expenses (baby sitters, child care center)
Recreation/Entertainment
Vacation(s) (1/12 of total annual expense)

Entertainment/Dining out
Hobbies (for example, golf or tennis equipment and fees)
Club fees/Organization dues
Cable/Satellite television
Total Monthly Expenses

=$

=$

Less Total Monthly Expenses

Net Cash Flow (Deficit)*

=$

=$

Calculate Monthly Cash Flow

Total Monthly Net Income

*If your net cash flow is positive, you can save more for emergencies or other financial goals. If negative, you will have
to cut expenses or increase income (by taking a second job, for example) to reduce or eliminate debt.

your spending plan

Creating A Plan
Creating and following a budget, or spending plan, are essential in establishing financial control
and direction. Total every dollar you spend for a month and keep track of what you buy. Review
your spending plan once each month. Compare what you actually spent to the amounts you planned
to spend. Look for areas requiring special attention and reduce or eliminate expenses as needed.

Improve Your Cash Flow

If you find that you do not have enough money for each month, you may be able to improve your
net cash flow by reducing or eliminating unnecessary expenses. To begin, look for potential ways
to save money:

Switch to a low-interest, no annual fee credit card.

Switch to a less expensive phone plan.
Use a less expensive Internet service provider (ISP).
Dine out less often.
Monitor and adjust your spending, as needed.
Save for purchases that cannot fit into your budget.
Stop charging unless you can pay credit card balances in full each month.
Wait for sales and use coupons.

Consider downsizing your vehicle or home.

Once you have learned to monitor your expenses and spend within a monthly budget, you will have
money to save and invest. Your budget should be both realistic and flexible. Budgets often fail because they are too rigid. Plan for unexpected, but necessary, expenses such as medical emergencies
or vehicle maintenance expenses. Build in entertainment, as well. Review your budget regularly to
ensure it meets your changing needs and circumstances.

Using Credit Wisely

Practice Healthy Credit Habits

Use credit responsibly as part of an overall saving and spending plan. The following healthy credit
habits can improve your credit reputation:

Set and follow a monthly limit for charges.

Pay bills on time and in full to avoid monthly charges. If you cannot pay in full, pay more
than the minimum.

Do not skip a payment.

Limit the number of credit cards you own.
Do not apply for credit you do not need.
Know the due date and terms and conditions of your credit card(s) and loan(s). If you have
questions, ask the company for an explanation.

Keep credit card and loan information in a safe, secure place.

Keep copies of sales slips and compare charges when your billing statements arrive. Call
your company immediately if there is a discrepancy.

The Four Cs Of Credit

When you apply for a credit card or loan, potential lenders tend to look at the same factors to
decide if you are a good credit risk.
Capacity

Your ability to repay credit.

Collateral

Your personal property, such as a bank account or vehicle, that

provides the creditor with security if you cannot repay your debt.

Character

Your ability to use credit responsibly.

Creditworthiness

Your credit history (how you have managed money in the past).

Your Credit Reputation

By practicing healthy credit habits, you can build a good credit reputation.

You have a better chance of being approved for credit.

You are more likely to receive higher loan amounts at lower interest rates.
You are more likely to get a desirable job, secure an apartment and acquire insurance
coverage.

The following steps can help you start building a good credit reputation:

Maintain active checking and savings accounts with no checks returned for non-sufficient
(NSF) funds. This demonstrates that you can manage money well and have the discipline
to save.

Apply for a small, secured loan or credit card from your financial institution, backed by
your savings account. Use it carefully and make payments promptly. Paying small credit
transactions responsibly establishes your creditworthiness.

Limit your debt.

Your Credit Report
As you establish credit, you build a credit rating resulting in a record of creditors experience with
you as a borrower. It is this credit report that future lenders, employers, landlords and other businesses review to make their own decisions about your creditworthiness.
Your credit report is a month-by-month record of your payment history with financial institutions or
credit card issuers (companies that grant credit). It shows the following:

How much credit you are using.

How well you pay your debts.
Who is inquiring about your credit.
Information on bankruptcies or federal income tax liens.
How long you have been managing credit responsibly.
What types of credit you manage (for example, revolving debt, installment loans or mortgages).

Order A Free Credit Report

The Annual Credit Report Request Service is a central contact for requesting your free annual
credit report. It was created by the three nationwide consumer reporting agencies: Equifax,
Experian and TransUnion. Visit www.annualcreditreport.com or call (877) 322-8228 to request
free copies of your credit report from each of the agencies.
With a poor credit rating, you could be denied a loan or credit card or incur higher interest rates.
You could also be turned down for a job, an apartment or insurance. If you are a servicemember,
it can even adversely impact your ability to get or maintain your security clearance. Review your
credit report at least once each year to ensure it is accurate and that you are not the victim of
identity theft. Dispute any entries that do not belong to you.

Your Credit Score

In addition to your credit report, creditors look at your credit score. Your credit score is a threedigit numerical summary of your credit report.
Credit scores range from approximately 300 to 850. The higher your score, the better. Most
lenders consider scores above 700 a good indicator of low credit risk, while scores below 660
may indicate credit problems. A low score may cause you to be denied credit. If your score is high
enough, you may qualify for the best rate on a loan or credit account.
No single factor determines your score. But one or more of the factors may affect the final score
more than others, depending on the overall information in your credit report. Your score can also
change as new information is received by consumer reporting agencies. Your score today could be
different than the score you have 3 months from now.
You may have different credit scores from Equifax, Experian and TransUnion, because some lenders report information only to one or two of these agencies. To understand how lenders evaluate
you, review your credit scores from all three consumer reporting agencies. You will have to pay a
small fee to obtain your credit score.

Your Credit Rights

Under the Fair Credit Reporting Act and the Fair And Accurate Credit Transactions (FACT) Act of
2003, you have the right to require a consumer reporting agency to do the following to ensure that
your credit rating is accurate:

Provide you a complete credit report. Anyone may request a free credit report annually. You
may request a free credit report anytime if you have been denied credit, are a victim of
identity theft, receive welfare benefits or are unemployed but expect to apply for employment in the next 60 days.

Investigate, at your request, erroneous or missing information in your report. The consumer
reporting agency must provide you with a written report of the investigation, as well as a
revised copy of your credit report if the investigation resulted in changes.

Keep your credit report information from anyone other than legitimate users of the consumer reporting agency.

Remove detrimental credit information from your file after 7 years. Bankruptcy information
can be removed after 7 to 10 years.

10

saving and investing

Start saving and investing early and regularly to reach major financial goals. The key is to establish
and continue a disciplined savings and investment plan. Although the terms are often used interchangeably, saving and investing represent different methods of using money to prepare for the
future.

Saving is accumulating money safely in a bank savings account, certificate of deposit

(CD) or a money market deposit account (MMDA) generally for short-term needs such
as upcoming expenses or emergencies. Typically, money placed in such accounts earns a
lower, fixed rate of return. Your money is protected and can be withdrawn or accessed with
relative ease. Banks generally offer a higher rate on CDs than savings accounts because of
your commitment to keep the money in the account for a period of time. However, if you
choose to take your money out of the CD before the term is up, a penalty may apply.

Pay Yourself First

Think of saving as paying yourself a salary. The money you set aside will earn more money if kept
in an interest-bearing account. The sooner you begin saving, the more you will accumulate over
time.

Automatically transfer a portion of your pay to a savings account as soon as it is deposited.

That way, you will not miss the money.

If you begin saving in your 20s, save at least 10 percent to 15 percent of your net income.
If you cannot afford this amount, save as much as you can. The key is to begin saving now.
If you wait until later in life, you need to save more.

Create an emergency fund of at least 3 to 6 months of basic living expenses enough to

manage a crisis without borrowing money.

The fund should be low risk and available, so the money is available whenever you need it.
Increase savings contributions when you can. For example, when you receive pay increases,
federal income tax refunds, gift money and rebates, consider putting some or all of this
additional money toward your savings goals.

11

Basic Principles Of Investing

Investing requires that you take a risk with your money by buying securities, such as stocks, bonds
or mutual funds, with the hope of earning higher, long-term returns. Investments generally do
not offer the safety that a savings account does so your capital is at risk. In return for taking that
risk, you have the potential for a more rewarding gain. Take time to understand various investment
options and how they work. Those include setting goals, developing strategies, selecting the most
appropriate investments, handling risks prudently and finding professionals to help when needed.

Ask Questions Before You Invest

What is my primary investment goal? To keep my money safe or grow my investment?
What is my risk tolerance? How much money can I risk losing? Risk tolerance level
depends on several factors:
Age.
Current and anticipated income.
Financial responsibilities. How would the possible loss in the value of my investment
affect my situation?
Am I willing to watch my investment decrease in value?

Is my goal intermediate-term or long-term?

Will I need access to my money periodically or can it remain untouched and potentially
yield a higher return?

What federal income tax issues should I consider when investing?

Investing For Retirement
Retirement may seem distant, but you should begin investing for it nonetheless. Why start now?

The sooner you begin, the more money you may be able to accumulate.
You cannot foresee how long you will be able to work. Injury, illness or other difficulties
could interrupt your future earning and saving ability.

You do not know how long retirement will be. With longer life expectancy, you could need
enough savings to last 20 to 30 years or more.
Take time to understand the following investment options. You may want to consult a financial
planning professional for in-depth guidance about the best choices for your situation.

12

Individual Retirement Accounts (IRAs)

An IRA is a tax-advantaged account that can hold many different types of investments: stocks,
bonds, mutual funds, annuities, certificates of deposit (CDs) and more.

ROTH IRA

TRADITIONAL IRA

With a Roth IRA, you cannot deduct your

contribution from your income for federal
income tax purposes. However, qualified
withdrawals of earnings are free of federal
income tax. If you withdraw earnings before
the account has been open at least 5 years
or before age 591/2, you are generally subject
to federal income taxes and a 10 percent
penalty on the amount of earnings withdrawn.

With a traditional IRA, you may be able to

deduct your contribution from your taxable
income, thus reducing current federal income taxes. This depends on your income.
While your money grows, taxes are deferred.
Withdrawals are subject to ordinary federal
income taxes.

ROTH VS. TRADITIONAL IRA

A Roth IRA differs from a traditional IRA in three important ways:
1. You cannot deduct your contribution to a Roth IRA from your taxable income for federal income
tax purposes.
2. Qualified distributions from a Roth IRA are exempt from federal income tax.
3. There is no mandatory requirement to withdraw money during the Roth account owners lifetime.

13

401(k) And 403(b) Plans

These employer-sponsored retirement plans allow participants to invest a portion of their salary on
a pretax basis up to certain limits.
401(k)
Plans

May be offered by for-profit businesses, such as corporations or limited liability

companies.

Employees may invest a portion of their salary in an employer plan on a pretax

(and/or after-tax) basis up to certain limits.

Some employers match a percentage of the employees contribution, such as 50

cents for every $1 contributed up to a set percentage of salary. Generally, participants should invest at least enough to get the entire employer match.
Distributions may be made for retirement, death, disability, separation from employment, reaching age 591/2 and hardship as defined in the plan description.
Federal income taxes and possibly a 10% penalty may be assessed.
Some 401(k) plans permit loans in certain circumstances.
In most cases, you must pay federal income tax and a 10% penalty for withdrawing funds before age 591/2.
Some 401(k) plans also have a Roth 401(k) feature that allows employees to
contribute after-tax dollars. Earnings can potentially be withdrawn in retirement
tax free.
403(b)
Plans

May be offered by nonprofit organizations and public education institutions. Only

employees of organizations granted 501(c)(3) status by the IRS qualify for 403(b)
plans.
Work similarly to a 401(k) plan.
Are a major retirement planning vehicle for school teachers and hospital workers.
With some exceptions, withdrawals made before age 591/2 are subject to federal
income tax and a 10% additional early distribution penalty.

The Roth 401(k) and the Roth 403(b) are employer-sponsored plans similar to a 401(k) or 403(b).
However, you cannot deduct your contribution from your income for federal income tax purposes.
But, qualified withdrawals of earnings are free of federal income tax. The contributions are not
deducted from your taxable income (no immediate tax savings). With these plans, the employee
essentially pays the tax upfront and can take qualified distributions free from federal income tax
at retirement. There are a number of factors to consider when deciding between the two, such as
current tax bracket and anticipated tax bracket during retirement.

14

Protecting Your Financial Future

Effective financial risk management includes obtaining adequate insurance for you, your family
and your possessions.

TYPES OF INSURANCE
Auto

Premiums vary by state and driver. Auto insurance generally does not cover personal possessions that may be stolen from your vehicle. For that, you need property
insurance, either a renters or homeowners policy. However, some property, such as
CD players and digital audio players may be limited.

Property

When you have your own apartment or home, you need renters or homeowners
insurance to protect your personal possessions if they are stolen or damaged.
These policies may also pay damages if you are held legally liable for injury to
another individual or for damage to their property.

Health

This coverage helps protect your finances from health costs associated with an unexpected accident or major illness. Take advantage of employer-sponsored/group
employment benefits if they are available to you. Consider purchasing an individual
insurance plan if you are between jobs, self-employed or work for an employer who
does not provide health insurance.

Life

You probably need life insurance as soon as a spouse, family member or other individual depends on your income. Even if you are single with no dependents, you
should consider purchasing enough life insurance to pay your debts and final expenses. Because premiums increase with age and declining health, you should generally consider purchasing life insurance while you are young and in good health.

Long-Term
Care

This insurance can help minimize the financial effects of a long-term health problem such as Alzheimers disease, dementia, stroke and accidents by paying
for benefits if you become physically or mentally unable to provide for your own
safety or well-being. It covers a variety of services to help you maintain your
standard of living in your own home or in a nursing home.

Disability

This form of insurance provides you with income if you are unable to work for a
period of time due to injury or illness. Many employers provide disability coverage,
often at little or no cost to employees. Coverage may be limited and benefits may
be taxable. You may want to consider supplemental disability insurance, especially
if you are the sole income earner for your family.

Note: Insurance descriptions are general in nature. For precise information on coverages, limitations and conditions,
contact your insurance company.

Before purchasing insurance, carefully assess what you need to protect. Determine the level of
coverage you require. Compare several companies premiums, services and reputation. Ask friends
and coworkers for recommendations. Consult consumer publications, A.M. Best insurance company reports (available in most libraries) and your state insurance department.

Preparing wills and powers of attorney

15

Most individuals work hard accumulating assets for their familys well-being. It is also important to
preserve those assets for your heirs.

Wills
A will is an important legal document that specifies who gets your property when you die. It is
generally the best way to name a guardian for your minor children and to name an executor for
your estate. The executor will handle your affairs when the time comes to probate the will.
If you die without a will (intestate), a state court makes decisions for you according to applicable
state law. The state also charges your estate for the expense involved and, if you are not married
and have no blood relatives, may even take your property upon your death. With so much at stake,
it is understandable why a will is the foundation of comprehensive estate planning.
A will allows you to:

Designate who administers your estate and who receives your property when you die.
Appoint a guardian for your minor children.
Provide financial security for your spouse and children.
Leave money to a worthy cause.
Powers Of Attorney
With a durable power of attorney, you can give another individual the legal authority to act on your
behalf for a purpose you designate, such as paying your bills, managing your personal affairs,
handling your finances and making health care decisions on your behalf. You must be of sound
mind and not under mental duress to prepare and execute any of these documents. You may want
to consult with an attorney to prepare powers of attorney appropriate for your circumstances. A
general power of attorney that does not contain required language to make it durable expires if
you become incapacitated.

The USAA Educational Foundation publication, Estate

Planning, offers more information. See Resources
on the inside back cover of this publication to order
free copies.

16

MEASURING YOUR FINANCIAL PROGRESS

Once you know what is involved in managing your finances, you are ready to apply your knowledge
and review your progress over time. Periodically review this list to determine how well you are
managing your finances. Check all that apply.

q
q
q
q
q
q
q
q
q
q
q
q
q
q
q
q
q
q
q
q

I know my short-term, intermediate-term and long-term financial goals.

I understand my financial resources. I am familiar with my income and the deductions that
determine my net income. I have calculated my net worth.
I follow a spending plan, or budget, for managing my income and expenses.
I target at least 10 percent to 15 percent of my net income for savings/investments each pay
period.
I have an emergency fund with at least 3 to 6 months of my basic living expenses.
I use credit wisely. I pay my balances in full each month. I limit the number of credit cards I
own.
I know my credit score and the information contained within my credit report.
I check my credit report at least annually for accuracy.
I understand my consumer rights and take steps to ensure my credit rating is accurate.
I am investing for retirement. I contribute to my 401(k) or 403(b) at least enough to obtain
the entire match offered by my employer. I am familiar with the federal income tax advantages of IRAs and other plans.
I am familiar with the basics of saving and investing.
I have purchased appropriate auto insurance coverage for my vehicle(s).
I have purchased renters insurance to protect my personal property (if you do not own a home).
I have insured my home for its complete replacement value (if you own a home).
I have the proper level of liability insurance for both my home and vehicle to avert financial
disaster in the event of an accident.
I have appropriate life insurance for my situation. My death will not create a financial burden
for my family.
I have the appropriate level of health insurance for my situation.
I have appropriate long-term care insurance.
I have appropriate disability income insurance.
I have prepared and executed a will and power of attorney, as appropriate. I update them
regularly to help prevent court delays in my estates settlement and other important matters
after my death.

Resources

17

The USAA Educational Foundation offers the following publications on a variety of topics:
Financial Planning And Goal
Setting (#511)
managing your Personal
Records (#506)

Auto Insurance (#526)

Homeowners Insurance (#558)
Health Insurance (#545)

estate planning (#518)

Life Insurance (#507)

annuities (#525)

Long-Term Care (#537)

MANAGING ASSETS AND EXPENSES

IN RETIREMENT (#588)

Making Medicare Choices (#582)

Get MoneyWise (#504)

Get CreditWise (#534)
Managing Credit And Debt (#501)
Basic Investing (#503)

Renting A Home (#533)

Buying Or Refinancing
A Home (#502)
Buying A Vehicle that
meets your needs (#505)

Stocks And Bonds (#553)

protecting your identity

and personal information (#520)

mutual funds (#517)

Financing College (#513)

basic insurance coverages (#530)

YOUR JOB SEARCH (#532)

To order a free copy of any of these and other publications, visit

www.usaaedfoundation.org or call (800) 531-6196.
Information in this publication was current at the time it was printed. However, the Foundation cannot guarantee
that Web sites and phone numbers listed in this publication have not changed since then.
If a Web site address or phone number has changed since you received this publication, log onto a search engine
and type in keywords of the subject matter or organization you are researching to locate such updated information.

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