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Module 10 Personal Finance

By Katherine L. Jackson, Truman State University

Learning Objectives

After reading this module, you should be able to

• Evaluate your current financial position to establish a benchmark to measure your progress.

• Establish financial goals and create a budget.

• Apply savings techniques to achieve your short- and long-term financial goals.

• Demonstrate why saving early for retirement is crucial to success.

Gregory_lee/iStock/Thinkstock

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Introduction: Ensuring a Bright Financial Future

Congratulations! You made it to the final module of the text. Our focus in this module will be ensuring that you have a bright financial future. Let’s begin with some reflection on what you would like to accomplish in the years to come. What type of career would like to have once you’ve completed your degree? What promotions do you hope to get down the line? When would you like to retire? Beyond your professional life, think about where you’d like to live and what you’d like to do for fun. If you have children, what would you like to do for them? Identifying your goals is the first step in achieving them. Once you know where you would realistically like to be 5, 10, and 20 years down the road, you can put financial plans in place that allow you to actually reach your destination—and hopefully enjoy the ride!

Recall Elena Maria from Module 9. She is determined to leverage her education to get a good job that will allow her to save for her retirement and take care of her mother, who wasn’t able to do that for herself. Elena Maria recently began saving and investing her money, at the rate of $100 per month. Figure 10.1 shows how much money she can accumulate over 30 years with this rate of savings. Her cousin, Alberto, has also been working full time, but he spends all of his money on his car and going out with his friends. What if Alberto waits another 10 years to start investing $100 a month? If they both retire in 30 years and earn a 10% return, Elena Maria will have $226,068 and Alberto will have only $75,944—a whopping $150,000 difference! The lesson is to save early and save often.

Figure 10.1: Saving now versus 10 years from now

By starting to save now, Elena Maria accumulates a significant amount of money over the next 30 years.

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This is not to say that it’s ever too late to start saving. If you get a late start (and the majority of savers do), you can still save enough to reach your financial goals. Those who start to save later in life have to save a bit more, but they can still enjoy a secure financial future.

In this module, we will take a close look at both your present financial situation as well as your plans for the future. We will cover the basics of what you need to know to be financially competent and live within your means. We will work to assess your current financial state, discuss how to create and use a budget, examine how to set goals and achieve them, and explain why an emergency fund is a must. We conclude the module with a look at how to make your money work for you, how to plan for retirement, and how to take advantage of investing sooner rather than later.

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In order to plan for the future, it’s important to get a sense of where you are right now. In this section, we will work to create your personal income and expenditure statement and bud- get. Although this process takes an ini- tial investment in time, the benefits are worth the effort. A good budget will allow you to live within your means, help you prepare for emergencies and unexpected events, and guide you to make sound financial decisions so you can achieve your goals. Living within your means is not magic; it is as a result of your hard work that you take control of your financial well-being.

10.1 Getting Your Personal Finances in Order

Tetra Images/SuperStock

To begin the process of getting your personal finances in order, it is important to create a personal income and expenditure statement and a budget.

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10.1 Getting Your Personal Finances in Order

Assess Your Finances With an Income and Expenditure Statement

Before we can create your budget, we need to track your income and expenditures; in other words, the amount of money you make versus the amount you spend. We can do this in an income and expenditure statement, which reflects your finances over a certain period of time, usually a month or a year. Let’s begin by calculating your expenses for one month.

We start with your income from your employer and then deduct income taxes and Social Secu- rity taxes to calculate your after-tax income. If we divide that figure by 12, we get your monthly take-home pay. Then we identify all of your monthly expenditures and track them for 1 month. Most people are not aware of where their money actually goes; after this exercise you’ll have a much better idea. You can see Elena Maria’s income and expenditure statement in Table 10.1.

Table 10.1: Elena Maria’s income and expenditure statement for one month

Income (cash inflows) Expenditures (cash outflows)

Gross salary $35,000 Fixed expenses % of after-tax income

Income taxes ($8,000) Rent paid $317 16%

Social Security tax ($2,500) Health insurance premiums $100 5%

After-tax income $24,500 Student loan payments $300 15%

Monthly after-tax income $2,042 Transportation fees $92 4%

Cell phone $50 2%

Internet $58 3%

Total fixed expenses $917

Variable expenses

Utilities $150 7%

Groceries $225 11%

Dining out $120 6%

Medical expenses $25 1%

Clothing $180 9%

Books and school supplies $40 2%

Entertainment $63 3%

Personal care expense $40 2%

Total variable expenses $843

Total expenses $1,760

Cash surplus/deficit $282

Allocation of surplus

Emergency savings $83 4%

Retirement $200 10%

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10.1 Getting Your Personal Finances in Order

Let’s look at Elena Maria’s percentages in her income and expenditure statement. She spent 16% of her after-tax income on rent. Typically, most people in her age group spend up to 27% on housing (Burbank & Keely, 2014), so having a roommate has allowed her to have a nicer place and save money. The percentages also give her the opportunity to see where she might cut expenses. For instance, after she sees what percentage of her budget she spent on cloth- ing, she may decide to cut back so she can save up for a larger financial goal, such as buying a car.

The best way to get a handle on your expenditures is to track them for a longer period of time, since your spending will vary from month to month (see Strategies for Success: Know Thyself). Try keeping an income and expenditure statement for several months or even a whole year. With that information, you can figure out how much you spend on average, which will give you even greater insight into your spending habits. There are a number of mobile apps, such as Mint, Money Manager, Money Tracker, and Expense Tracker, that can help you keep a record of your expenses. Some banks offer this feature as part of online banking, as well. But good old paper and pencil is fine, too. Collect all of your receipts and be exact.

Strategies for Success: Know Thyself

You may be surprised by how much you spend on items like dining out, entertainment, or a cup of coffee. It is not always easy to cut back on those types of expenses, because they require you to break established habits. If you know your weakness is impulse shopping, take only the cash you need to the place you are going and leave your extra cash and credit cards at home. If you are easily influenced by friends (and who isn’t?) to spend money you do not have, then take only $10 with you, which prevents you from spending more. You need to know and understand yourself to be able to negotiate around your weak spots.

Reflection Questions

1. Why does it help to know what percentage you spend on a particular category? 2. How will tracking your expenses for a month help you with your finances?

Define Your Goals: Be SMART

Now that we know Elena Maria’s current state of income and expenditures, we can concentrate on her financial goals. Elena Maria wants to save up for a car. Her older sister, Sofia, borrowed the money to buy her car and complains often that so much of her hard-earned money went to pay for the interest on the loan. As a result, Elena Maria wants to save up enough cash to pay for the car outright, without borrowing. In other words, she wants to set for her- self a SMART goal, which stands for “specific, mea- surable, action-oriented, realistic, and time-based.” Let’s see how we can make Elena Maria’s goal a SMART goal.

Moodboard/Moodboard/Thinkstock

Write your goals down, or you risk not achieving them. People who write down their financial aspirations are much more likely to accomplish their goals.

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10.1 Getting Your Personal Finances in Order

• Specific: Indicate (in writing) exactly what you need or want. Elena Maria researched reliable economy cars and determined that she would like to buy a used Toyota Yaris, and she wants to spend $8,000.

• Measurable: Elena Maria calculated that it will take her 4 years to save up for the car and pay for it outright. She estimates that she will need to save approximately $167 per month.

• Action-oriented: Elena Marie plans to save the $167 by taking on a part-time Satur- day morning job (which will earn her an additional $67 a month) and cutting back $50 per month on both dining out and clothing expenditures, which will net her an additional $100 per month. With the additional income and reduced expenditures, she’ll be able to meet her goal of $167 per month.

• Realistic: Elena Maria feels confident she can achieve her goal. If she had wanted to acquire a new turbo-charged Porsche 911, which has an estimated price of $85,000, this would not be a realistic goal, given her current financial situation.

• Time-based: Elena Maria has identified the amount of time it will take her to achieve her goal: 48 months.

We can assign goals to one of three time-based categories.

1. Short-term goals: These include goals you hope to achieve in the next year, such as saving up to install new carpet or to purchase a high-end video console.

2. Medium-term goals: These include goals that you plan to achieve within 1 to 5 years, such as your emergency savings, saving for a car (like the example of Elena Maria), or saving for a down payment on a house.

3. Long-term goals: These include goals that take a bit longer, such as saving up for your child’s college education or putting aside enough to see you through retirement.

Teamwork is essential if you have a spouse or family. You need to work together to come up with agreed-upon goals, and you must function as a team to achieve them. Without clear com- munication, you may not achieve your goals. Once you have a goal and an action plan to make it happen, everyone can pitch in and help! Keep visual reminders of your goal by creating a goal poster or putting a picture on your fridge. You should evaluate your goals over time to see if you are still on track and whether the goal is still relevant: Perhaps based on new cir- cumstances, you may want to revise your goal. For more information about setting goals, see https://www.youtube.com/watch?v=1-SvuFIQjK8.

How to Create a Budget

Once you have tracked your spending for a month, you will be in a better position to create a budget that fits your needs. After you have created a budget like the sample one for Elena Maria (see Table 10.2), you will be able to track your spending on any given day and for any given category (for example, dining out, groceries, personal care, and so on). Ideally, you will be able to estimate what you spend on average in each category in your budget (based on previous tracking), and you can fill in those amounts to see where you think you are at any given point in the month. You can find free budget software options at the following link: http://www.vertex42.com/ExcelTemplates/monthly-cash-f low.html, or you can use a sim- ple spreadsheet such as Google Docs Simple Budget Planner (found here: https://docs.google .com/templates?type=spreadsheets&sort=hottest&view=public).

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10.1 Getting Your Personal Finances in Order

If you have an unexpected financial event (such as your car breaking down), you will need to review your budget to see where you can adjust your spending so you do not have a deficit at the end of the month. Being prepared for such things with an emergency fund or ade- quate savings is also important if you want to stay on budget. To that end, Elena Maria has already put $1,000 into her savings for her emergency fund. She plans to continue to build up her emer- gency savings until she can cover at least 6 months of her monthly expenses.

Elena Maria’s monthly budget allows her to see what she has available to spend in each category. Don’t expect to achieve the perfect budget. The point is to have a budget that works for you so you are able to live within your means and accomplish your financial goals. Notice Elena Maria has already incorporated her plan to save $167 for a car, which required her to reduce the amount she spends on clothes and dining out by $50 each. The remainder she will cover through her new part-time job.

A budget helps Elena Maria keep her spending on track. She can compare what she spends to her budgeted amount to see where she is in any given category at any given point in time. So if her friends ask her to join them for dinner at one of her favorite restaurants, Elena Maria will look at what she has spent to date before she accepts the invitation. In fact, Elena Maria sees that she has already spent $67 on dining out this month. She calls her friends back to politely decline the invitation and offers to have them over for games after they are done. This way she stays within her budget, works in some needed study time, and yet still has fun with her friends. Find more tips for saving in Strategies for Success: Tips for Saving.

Table 10.2: Elena Maria’s monthly budget

Expense Amount

Rent $317

Health insurance $100

Student loan $300

Transportation $92

Cell phone $50

Internet $58

Utilities $150

Groceries $225

Dining out $70

Medical expenses $25

Clothing $130

Books and supplies $40

Entertainment $63

Personal care $40

Savings for car $167

Emergency fund savings $83

Retirement savings $200

Total $2,108

Caia Images/SuperStock

Before creating a budget, track your spending for at least 1 month to determine where your money goes and where you can cut back.

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10.1 Getting Your Personal Finances in Order

Strategies for Success: Tips for Saving

By now you have a budget and some financial goals in mind. But where are you going to get money to meet your financial goals? To save money, you either have to increase your income or reduce your expenses. Although it is a simple formula, it can be difficult to put into practice when you have to cut back on comforts and conveniences to achieve your goals.

Here are a few tips to help you build up your savings.

1. One key component of an effective savings plan is to pay yourself first. Ask your financial institution to automatically reroute a portion of every paycheck to your savings account. Learn from Elena Maria’s mistakes. She used to save by putting away whatever was left over at the end of the month. The problem was she rarely had anything left over. Rather than simply assume she couldn’t save and give up, Elena Maria decided to make saving a priority and make it automatic. She had a hard time at first, but she got used to it. Now her savings has built up over time. All it took for Elena Maria to be successful was a new approach and a positive attitude.

2. Pick up that loose pile of change from your pants pocket or wallet and put it into a piggy bank, because saving spare change can add up over time.

3. Write yourself a check every week and put it on the fridge. Deposit the money into an account you have set up for your financial goals.

4. Any windfall money should be saved immediately before you think of 20 different ways to spend it. If you get an unexpected tax return, reimbursement check, or money from relatives for a birthday or holiday, stuff it into the financial goal account. If you can’t bring yourself to do that, then compromise and put half of it into the goal account and spend the rest.

5. Make coffee at home or at work. An extravagant coffee concoction every day can be more costly than you think! Let’s say you spend $3.50 per day on an iced caramel macchiato. That’s $17.50 per week and $915 per year (not including sales tax)! Treat yourself to a special coffee drink every few weeks instead—you’ll savor it that much more.

6. Pack a lunch. Eating out at work, whether at the sandwich shop across the street or lunch out with the gang, costs between $7 and $12 per day (not including tax or tip). Alternatively, you could pack your lunch for about $1.50 per day. This would save you around $40 per week, or more than $2,000 per year! This doesn’t mean you can never eat out with your colleagues or friends, but instead of every day, how about twice a week? That would still save you more than $1,000 per year. Your friends may follow your example once they see how much money you save.

Fancy Collection/SuperStock

There are several steps you can take to create adequate savings for yourself.

(Continued)

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10.1 Getting Your Personal Finances in Order

Setting Up an Emergency Savings Account

What happens to you if you lose your job and it takes months to find another? Losing a job is not something anyone wants to think about, but you will likely work many jobs during your career. Consider what would happen if you got hurt and were unable to work for several months. Your health insurance may not cover all of your medical expenses, and who is going to pay your rent, utilities, and groceries? You can protect yourself from financial catastrophes if you prepare for the unexpected. Almost all of life’s calamities are, by definition, unexpected.

This means that one of your top financial priorities, and very first SMART goal, should be to create an emergency savings account that contains at least enough money to cover 6 months of your expenses. If your employment position is particularly risky or your line of work is such that there is a greater supply of people who can do your job than there is demand, you should have money saved for more than 6 months. You do not have to come up with this amount overnight, but you should make steady progress to build up that fund as quickly as you can. You read that Elena Maria contributed money to her emergency savings account because it was one of her financial goals.

Strategies for Success: Tips for Saving (Continued)

7. Take a long, hard look at your cable, Internet, and phone bills. There is no denying that some of these services are essential. You need reliable Internet service to complete your course work. Yet how much time do you really spend watching cable, especially now that you’re a busy student? Could you stream some of your favorite shows online instead? Analyze your usage and consider making some cuts. You may not even miss much of it once it’s gone! Here are some creative solutions for cutting some of your cable expenses: http://time.com/2897949/5-ways-to-cut-cable-but-keep-all-your-shows.

8. Barter! If you need some work done on your house or a car repair, ask friends who have the knowledge to help you and in turn, provide some type of reciprocity such as pet- sitting while they are on vacation. This saves money and creates a larger networking web of friends.

Reflection Questions

1. How does making small sacrifices today benefit your future? 2. What small changes can you make in your daily life to meet your financial goals?

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10.2 Saving and Planning for Your Retirement

LDProd/iStock/Thinkstock

These two young people have discov- ered the value of saving money. They want to prepare and save for retirement.

As you finish up school, you will hopefully be in a position to move beyond contributions to your emer- gency savings fund and start contributing toward long-term investments. This is the key to a secure retirement. The sooner you start to save, the bigger your nest egg will be when you are ready to retire. When you retire, you will likely live for another 20 to 30 years (Social Security Administration, n.d.). That’s a long time to go without a paycheck. That’s why it is imperative to plan accordingly.

What Is Social Security?

The Social Security Act was passed in 1935 and included the Old-Age, Survivors, and Dis- ability Insurance program. A large component of this program is the payment of retirement benefits, intended as a safety net for lower paid workers who can’t save enough for retire- ment to sustain themselves. The amount of Social Security benefits workers currently receive at retirement varies based on how much they have paid into the system over their working career. To review your own benefits, you can visit the Social Security Administration here: http://www.ssa.gov/myaccount.

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10.2 Saving and Planning for Your Retirement

Why worry about saving for retirement when there is Social Security? There are a couple of reasons. First, Social Security was never intended to cover everyone’s retirement needs. As mentioned previously, it was established as a safety net for the poor. Second, there are unan- swered questions about the viability of Social Security’s future. Social Security is an unfunded pension plan, which means that your contributions go to today’s retirees. With baby boomers retiring at a rate of 10,000 per day, the number of workers who support those retirees grows ever smaller over time. Finally, the amount workers receive from Social Security is barely enough to live on. A single worker who averages $3,000 a month during his or her working career would currently receive 35% of this amount, or $1050 a month, at age 62.

Making Your Money Work for You

We have spent quite a bit of time emphasizing how vitally important it is to save your money. Once you have learned how to live within your means and how to save for your financial goals, the next step is to learn how to make your money work for you. The best way to put your money to work is to invest it and let it grow. Both the interest rate your investment earns and how long you plan to invest the money affect the amount you are able to accumulate. It is important to understand that the interest you earn will be compounded, meaning that you will earn interest not only on your initial investment, but also interest on the interest you earned in the previous period(s).

Recall from the module introduction how Elena Maria and her cousin Alberto started to save for retirement at different times. Let’s imagine that Elena Maria began saving at age 18, whereas Alberto did not start until age 30. They both save the same amount ($200 per month) until they reach age 66, and they both earn the same rate of interest (10% compounded monthly). Figure 10.2 shows the visual differences in their accumulated wealth. Elena Maria will have saved $2,834,820, whereas Alberto will have only $501,951 in his retirement account. Alberto would need to save nearly $1,125 per month in order to catch up to Elena Maria at age 66! That said, $500,000 is a lot more than nothing and proof that it is never too late to start saving.

Figure 10.2: Value of accumulated wealth

By saving early and often, Elena Maria will be in great shape by the time she retires. Alberto’s savings is still significant, however. It is never too late to start saving!

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10.2 Saving and Planning for Your Retirement

There is one proven way to increase your net worth: Put your money into assets that increase in value. Clothing, electronics, and cars all drop in value over time. So, the rule of thumb is to invest less in assets that decline in value and more in assets that have the potential to increase in value, such as real estate and financial investments (including retirement accounts).

Retirement Plan Basics: 401(k)s, 403(b)s, and IRAs

Now you have a sense of what you can achieve with long-term investments, but how do you get started? One of the best and easiest things you can do is take advantage of your company’s matching 401(k) sav- ings program, if it offers one. This is free money! Many employers will match your contribution, up to a certain percentage. For example, if you make $50,000 and you set aside 3% of your income, or $1,500, your employer will also contribute $1,500 to your 401(k). Another benefit of this program is that your contribution is tax-deferred, meaning that it is deducted from your income before taxes are taken out. If you work for a nonprofit, you may have access to a 403(b) savings program. Both plans are defined-contribution plans funded with before-tax dollars. You will not have to pay taxes on this income until you withdraw it at age 55 or 59½, depending on your circumstances. Use of before-tax dollars allows you to contribute more now, which improves your growth potential. In addition, you may be in a lower tax bracket once you retire, and, thus, pay less in taxes. You can learn more about this important opportunity here: http://guides.wsj.com /personal-finance/retirement/what-is-a-401k.

What if you do not have access to an employer- sponsored investment program? No need to worry; there are still options available to you. Individual Retirement Accounts (IRAs) are an effective way to save for retirement. There are two kinds of IRAs: the traditional IRA and the Roth IRA.

Traditional IRA With traditional IRAs, you make contributions that you can deduct from your taxable income. This is similar to contributing to a 401(k) using pretax dollars, described earlier. The value of a traditional IRA grows tax free until you may begin to withdraw money at retirement age. With a traditional IRA, the Internal Revenue Service (IRS) taxes each withdrawal made dur- ing retirement at your tax rate at the time of the withdrawal.

Monkeybusinessimages/iStock/Thinkstock

Thinking about and saving for retire- ment early in your career is vital to your well-being later in life. There are different types of accounts that can work for you, depending on what type of job you have.

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10.2 Saving and Planning for Your Retirement

To qualify for a traditional IRA deduction, you must not have access to a 401(k) retirement account through your place of employment. In addition, the maximum allowable contribution is subject to certain income limitations. For example, if you are single, do not have a 401(k) through your employer, and you make less than $60,000 per year, you can make the full con- tribution ($5,500 as of 2016). If you are 50 years old or older, you can add an extra $1,000 to your eligible contribution as a “catch-up” for older Americans. The IRS adjusts the maximum allowable deduction to account for inflation, and thus the amount is different each year. You can contribute to a traditional IRA even if you have a 401(k) at work, but the amount is not deductible and you are still subject to the income limitations.

Roth IRA With a Roth IRA, you make your contributions with after-tax income. The maximum amount allowable is the same as for the traditional IRA ($5,500 as of 2016), with annual adjustments for inflation. You can also add an extra $1,000 contribution if you are age 50 or older.

The beauty of the Roth IRA is that you can still make contributions regardless of whether you have a 401(k) at work. In addition, you will not be taxed on the money when you withdraw your funds. If you want to start a Roth IRA, contact your local bank or an investment company such as Vanguard, Fidelity, or Dreyfus, all of which can help get your Roth IRA started. There are advantages and disadvantages to both, many of which depend on your own personal cir- cumstances. The following comparison should help you determine which one might be right for you: http://www.rothira.com/traditional-ira-vs-roth-ira. To determine how much you need to save for retirement, try out the calculator in A Closer Look: How Much Do I Need to Save for Retirement?.

A Closer Look: How Much Do I Need to Save for Retirement?

As an exercise, you can input your own variables into a retirement calculator (http://www .retirementcalculator.biz) to see how much you need to save by the time you retire. Be good to the older you, and start saving for retirement early. Knowing the amount you need will help motivate you to save and give you a measurable goal.

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Summary & Resources

Module Summary You now know how to create financial statements and a budget. Take the time to do so! The key to the income and expenditure statement is in the surplus or deficit generated. A surplus increases your assets and, thus, increases your net worth. A deficit increases your liabilities and, thus, decreases your net worth. If you track your spending for a month, or better yet for several months, you will learn where you spend your money and where you can cut back or reduce your debt. Once you have a handle on where your money goes—or more importantly, where you want it to go—you can create a budget. The budget should indicate how much you are spending in each category so you can live within your means. Saving is tough because it means forgoing some of the things you want in order to save up for the things you need. The most important rule is to always pay yourself first. Have a portion of each paycheck automati- cally whisked away to your savings account so you do not have to decide to save; you simply do save.

Setting goals is the smart way to get what you want. With no specific direction, your money will slip through your fingers like melted butter. To be successful, you need to set goals that are specific, measurable, action oriented, realistic, and time based: SMART. One of your first goals should be to build an emergency savings account that covers at least 6 months of your expenses. This will help protect you against loss of employment, illness, or other calamities.

Saving early and often is the winning plan to retirement. If you started late, you will have to invest more dollars to make up for lost time, but you can still save enough for retirement. If you work for a corporation, you may have access to a 401(k) plan. If you work for a nonprofit, you may have access to a 403(b) plan. Both plans are defined-contribution plans funded with pretax dollars, which gives you more to invest in your retirement account. Your employer may match your retirement savings dollar for dollar up to a specific percentage. This money grows tax free until you withdraw the funds upon reaching retirement age. If you do not have access to a 401(k) or 403(b), you may be eligible to save for retirement using an IRA. If you open a traditional IRA you can make (income-limited) contributions with pretax dollars and let the money grow tax free until you withdraw the money when you retire. If you open a Roth IRA, you invest with after-tax dollars and make (income-limited) contributions that grow tax free, and you may withdraw these funds tax free upon retirement.

Critical-Thinking Questions

1. Daryl has struggled with money all his life. He cannot seem to get a handle on where all his money goes every month. He is desperate to get control over his financial life. How can creating his own income and expenditure statement help him assess his current financial situation?

2. Now that Daryl has created his income and expenditure statement, he is ready to establish some financial goals and create a budget. How can Daryl establish SMART goals, and how can using a budget help him achieve his goals?

3. Now that Daryl knows what his goals are and has a budget, how can he save enough to reach his financial goals?

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Summary & Resources

4. Will and Gabriela met in college and were married the summer after their gradu- ation. They both work for different employers and have access to matching funds through their employers’ 401(k) plans. Will’s employer offers matching up to 4%, and Gabriela’s offers matching up to 7%. They are reluctant to put so much aside, because they have other things they want to spend their money on. What might you say to Will and Gabriela about the importance of matching funds? Why is it impor- tant to start saving early for retirement?

Key Terms budget What you plan to spend in each of your spending categories. You can create a budget on the back of an envelope or in an Excel spreadsheet.

emergency savings account A bank account intended to cover at least 6 months’ worth of your expenses in case of unemploy- ment, medical leave, or other emergency.

401(k) savings program A defined contri- bution plan offered by corporate employers in which the employee makes before-tax contributions for retirement purposes. The employer may offer to match your contri- butions up to a certain percentage of your gross income.

403(b) savings program A defined contri- bution plan offered by the nonprofit employ- ers in which the employee makes before-tax contributions for retirement purposes. The employer may offer to match your contri- butions up to a certain percentage of your gross income.

income and expenditure statement A report that shows a family’s income and expenditures over a period of time such as a month or a year.

Individual Retirement Accounts (IRAs) Individual retirement accounts that encourage workers to set aside greater amounts for retirement.

Internal Revenue Service (IRS) A federal organization that carries out the respon- sibilities of the secretary of the treasury under Section 7801 of the Internal Revenue Code. The secretary has full authority to administer and enforce the internal revenue laws and has the power to create an agency to enforce these laws. The IRS was created based on this legislative grant.

Old-Age, Survivors, and Disability Insur- ance The part of the Social Security Act of 1935 that established a system of retirement benefits for workers.

Roth IRA An individual retirement account that allows an eligible person to make con- tributions in after-tax dollars. These dollars are not taxed by the IRS when they are with- drawn at the appropriate retirement age.

SMART goals Financial goals that are spe- cific, measurable, action oriented, realistic, and time based.

traditional IRA A retirement account an investor can use if he or she meets certain specifications; individuals can deduct from their taxable income the amount (up to a limit) contributed to a traditional IRA.

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