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AMI Newsletter, Spring 2021
Get a Fresh Start on Your
Finances in 2021
There's no doubt about it — last year was tumultuous. The coronavirus pandemic, a contentious election, and
widespread protests were just some of the events that impacted our nation in 2020. Fortunately, the arrival of
new vaccines has brought hope for a brighter 2021. If you are looking forward to a fresh start this year, why
not begin with your personal finances? Here are some tips to help you get started.
Examine your budget
One way to start the year off right financially is to examine your budget. First, identify your income and
expenses. Next, add each of them up and compare the two totals to make sure you are spending less than
you earn. Hopefully you've been able to stay the course during the pandemic and your budget is still on track.
If you find that your expenses outweigh your income, you'll need to make some adjustments. For example, if
you've experienced a loss or reduction in income during the pandemic, you may need to cut back on certain
discretionary spending (e.g., online shopping, take-out) or look for ways to lower your fixed costs, which may
require more significant changes.
Once you have a solid budget in place, it's important to stick with it. And while straying from your budget
from time to time is normal, there are some ways to help make working within your budget a bit easier:
• Make budgeting a part of your daily routine
• Build occasional rewards into your budget
• Evaluate your budget on a regular basis and make changes when necessary
• Use budgeting software/apps to help analyze saving and spending patterns
Rethink your financial goals
While the pandemic may have sidelined or stalled some of your financial goals, now is a good time to regain
your focus. Take a look at the financial goals you set for yourself last year. Perhaps you wanted to increase
your emergency fund or save money for a down payment on a home. Maybe you wanted to invest more money
towards your retirement. Were you able to accomplish your goals despite any setbacks brought about by the
pandemic? Do you have any new goals you would like to achieve in 2021? Finally, if your personal or financial
circumstances changed, will you need to reprioritize your goals?
Make sure your investment portfolio is still on target
Despite the pandemic, the U.S. stock market ended 2020 at an all-time high. But that doesn't necessarily
mean your investment portfolio is still targeting your financial goals. When evaluating your investment
portfolio, you'll want to ask yourself the following questions:
• Do I still have the same time horizon for investing as I did last year or prior to the pandemic?
• Has my tolerance for risk changed?
• Do I currently have an increased need for liquidity?
• Does any investment now represent too large (or too small) a part of my portfolio?
Pay down your debt
Reducing debt is part of any healthy financial plan. Whether you have student loan debt, an auto loan, and/or
credit card balances, you'll want to try to pay it down as quickly as possible. Start by tracking all of your
balances and being mindful of interest rates and hidden fees. Next, optimize your repayments by paying off
any high-interest debt first and/or taking advantage of debt consolidation/refinancing programs.
If the financial impact of the pandemic has made it difficult for you to pay down your debt, you may want to
contact your lenders to see if they offer financial assistance. Many lenders may be willing to work with you by
waiving interest and certain fees or allowing you to delay, adjust, or even skip some payments.
All investing involves risk, including the possible loss of principal, and there is no guarantee that any investment strategy will be successful.
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Investing for Major Financial Goals
Go out into your yard and dig a big hole. Every month, throw $50 into it, but don't take any money out until you're ready to buy a
house, send your child to college, or retire. It sounds a little crazy, doesn't it? But that's what investing without setting clear-cut
goals is like. If you're lucky, you may end up with enough money to meet your needs, but you have no way to know for sure.
How do you set goals?
The first step in investing is defining your dreams for the future. If you are married or in a long-term relationship, spend some time
together discussing your joint and individual goals. It's best to be as specific as possible. For instance, you may know you want to
retire, but when? If you want to send your child to college, does that mean an Ivy League school or the community college down
the street?
You'll end up with a list of goals. Some of these goals will be long term (you have more than 15 years to plan), some will be short
term (5 years or less to plan), and some will be intermediate (between 5 and 15 years to plan). You can then decide how much
money you'll need to accumulate and which investments can best help you meet your goals. Remember that there can be no
guarantee that any investment strategy will be successful and that all investing involves risk, including the possible loss of
principal.
Looking forward to retirement
After a hard day at the office, do you ask, "Is it time to retire yet?" Retirement may seem a long way off, but it's never too early to
start planning — especially if you want your retirement to be a secure one. The sooner you start, the more ability you have to let
time do some of the work of making your money grow.
Let's say that your goal is to retire at age 65 with $500,000 in your retirement fund. At age 25 you decide to begin contributing
$250 per month to your company's retirement plan. If your investment earns 6 percent per year, compounded monthly, you
would have more than $500,000 in your retirement account when you retire. (This is a hypothetical example, of course, and
does not represent the results of any specific investment.)
But what would happen if you left things to chance instead? Let's say you wait until you're 35 to begin investing. Assuming you
contributed the same amount to your retirement plan and the rate of return on your investment dollars was the same, you would
end up with only about half the amount in the first example. Though it's never too late to start working toward your goals, as you
can see, early decisions can have enormous consequences later on.
Some other points to keep in mind as you're planning your retirement saving and investing strategy:
• Plan for a long life. Average life expectancies in this country have been increasing for years and many people live
even longer than those averages.
• Think about how much time you have until retirement, then invest accordingly. For instance, if retirement is a long way off
and you can handle some risk, you might choose to put a larger percentage of your money in stock (equity) investments
that, though more volatile, offer a higher potential for long-term return than do more conservative investments. Conversely,
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if you're nearing retirement, a greater portion of your nest egg might be devoted to investments focused on income and
preservation of your capital.
• Consider how inflation will affect your retirement savings. When determining how much you'll need to save for
retirement, don't forget that the higher the cost of living, the lower your real rate of return on your investment dollars.
Facing the truth about college savings
Whether you're saving for a child's education or planning to return to school yourself, paying tuition costs definitely requires
forethought — and the sooner the better. With college costs typically rising faster than the rate of inflation, getting an early start
and understanding how to use tax advantages and investment strategy to make the most of your savings can make an enormous
difference in reducing or eliminating any post-graduation debt burden. The more time you have before you need the money, the
more you're able to take advantage of compounding to build a substantial college fund. With a longer investment time frame and a
tolerance for some risk, you might also be willing to put some of your money into investments that offer the potential for growth.
Consider these tips as well:
• Estimate how much it will cost to send your child to college and plan accordingly. Estimates of the average future cost
of tuition at two-year and four-year public and private colleges and universities are widely available.
• Research financial aid packages that can help offset part of the cost of college. Although there's no guarantee your child
will receive financial aid, at least you'll know what kind of help is available should you need it.
• Look into state-sponsored tuition plans that put your money into investments tailored to your financial needs and time frame.
For instance, most of your dollars may be allocated to growth investments initially; later, as your child approaches
college, more conservative investments can help conserve principal.
• Think about how you might resolve conflicts between goals. For instance, if you need to save for your child's education
and your own retirement at the same time, how will you do it?
Investing for something big
At some point, you'll probably want to buy a home, a car, maybe even that yacht that you've always wanted. Although they're
hardly impulse items, large purchases often have a shorter time frame than other financial goals; one to five years is
common.
Because you don't have much time to invest, you'll have to budget your investment dollars wisely. Rather than choosing growth
investments, you may want to put your money into less volatile, highly liquid investments that have some potential for growth,
but that offer you quick and easy access to your money should you need it.
How can I reduce my spending?
Answer:
To reduce your spending, you first need to know where your money goes. Start out by keeping track of all of your expenses for a
month. None are too small or insignificant: the daily newspaper, coffee on the way to work, an extra gallon of milk, that burger at
the fast-food outlet. Next, categorize the expenses so you can see what you spend and where you spend it. Be sure to factor into
your monthly expenses a prorated portion of the annual cost of your irregular expenses (e.g., clothes, gifts, car maintenance,
insurance premiums).
Expenses generally fall into two categories. Essential expenses are ones you can't avoid (e.g., rent, utilities, groceries, car
insurance). Discretionary expenses are ones you choose to incur (e.g., eating out, entertainment, gifts, cigarettes, videos).
Discretionary expenses are the ones over which you will have the most control. Do you buy a lot of books? Try the library instead.
Take coffee or lunch to work rather than buy it once you get there. Limit eating out to once a week rather than twice. Quit smoking,
or at least begin to cut back on the number of packs you smoke each week.
Although essential expenses are fixed, there may be ways to reduce them. Make sure you shut off the lights and TV when you
leave the room. E-mail your distant friends and relatives rather than call them long-distance. Change the oil in your car on a
regular basis to avoid more costly repairs due to neglect. Review your insurance policies: Can you save on your premiums by
taking a nonsmoker discount or increasing your deductibles? Clip the grocery store coupons, always shop from a list, and avoid
the impulse items at the end of the aisles.
Pick a realistic goal for your monthly spending reduction and try not to make too many changes all at once. To see how big a
difference this can make, do the math. If you start by committing to reduce your spending by $2 a day, that's $730 a year! Set the
saved money aside, perhaps in a savings account for your planned vacation, or use it for a specific purpose, such as reducing
debt faster.
3|PageMutual Fund Basics
A mutual fund pools the money of many investors to purchase securities. The fund's manager buys securities to pursue a stated
investment strategy. By investing in the fund, you'll own a piece of the total portfolio of securities, which could be anywhere from a
few dozen to hundreds of stocks. This provides you with a convenient way to obtain instant diversification that would be harder to
achieve on your own.
Types of mutual funds
There are many mutual funds to choose from. The two most common types are stock mutual funds and bond mutual funds. A
stock fund invests in common stocks issued by U.S. and/or international companies. Funds are often named and classified
according to investment style or objective, which can be stated in various ways. For example, some stock mutual funds buy stocks
in companies believed to have potential for long-term growth in share price. Other stock mutual funds look for current income by
focusing on companies that pay dividends. Sector funds buy stocks in a particular sector, such as technology or health care. Still
other mutual funds may purchase stocks based on the size of the company (e.g., stocks of large, mid-size, or small companies).
Although the name of a stock mutual fund generally offers insight into its investment style and objective, it is important not to rely
on the name alone in determining whether a particular fund is what you want. The fund prospectus is like an owner's manual and
contains information about the kind of investment style that the manager(s) employ, and the kinds of stocks that the fund will buy.
Note: Before investing in any mutual fund, carefully consider its investment objectives, risks, fees, and expenses, which are
discussed in the prospectus available from the fund. Read the prospectus carefully before investing.
A bond fund is made up of debt instruments that governments or corporations issue to raise capital. They are designed to provide
investors with interest income in the form of regularly scheduled dividends. If you bought individual bonds, you would need to
concern yourself with their maturity dates and the reinvestment of your funds. Buying shares of a bond fund relieves you of these
concerns; the fund manager handles them for you.
Bond funds are primarily classified according to the issuers of the bonds in the fund's portfolio and/or to the term of the bonds. For
example, municipal bond funds buy bonds issued by municipalities. The income from these is free from federal tax (however, a
portion of the income may be subject to the federal alternative minimum tax) and may be free from state and local taxes. Similarly,
some funds invest only in U.S. Treasury debt instruments (e.g., bonds, bills, and notes) or high-grade (or low-grade) corporate
bonds. Some bond funds, from all types of issuers, limit themselves to bonds maturing in the short, intermediate, or long term.
Bond funds are subject to the same inflation, interest-rate, and credit risks associated with their underlying bonds. As interest
rates rise, bond prices typically fall, which can adversely affect a bond fund's performance.
There are other types of mutual funds that you will encounter. Funds that invest in both stocks and bonds (or stocks, bonds,
and cash alternatives) are often known as balanced funds. A money market fund buys extremely short-term debt instruments
and is often used as a place to put cash, short term, until it is needed elsewhere. (Though a money market fund attempts to
maintain a$1 per share value, there is no guarantee it will always do so, and it is possible to lose money investing in a money
market fund.) Index funds attempt to duplicate a standardized, broad-based index such as the Standard & Poor's 500 (S&P
4|Page500) stock index or Moody's bond index by holding a portfolio of the same securities used by the index in an attempt to match
the index's performance as closely as possible.
What are the benefits of investing in a mutual fund?
Diversification: Most mutual funds own dozens or even hundreds of securities. The managers often spread the fund's assets
over more than one type of investment (e.g., both stocks and bonds, or stocks from a variety of industries). This exposes you to
less potential risk than buying just a few individual securities. If some of the fund's holdings perform poorly, they may be offset by
others doing well (though diversification cannot guarantee a profit or ensure against a loss).
Professional money management: When you buy shares in an actively managed mutual fund, part of what you pay for is the
fund manager's expertise. The manager analyzes hundreds of securities (both current and contemplated holdings) and makes
decisions on what and when to buy and sell.
Small investment amounts: Depending on fund rules, you can open an account and make subsequent contributions with a
very small initial investment. You can even set up automatic investments through a transfer of funds from your bank account.
With a retirement account, you make contributions to your investment selections through the payroll process.
Liquidity: You can convert your mutual fund investment into cash (i.e., redeem your shares) by making a request to the
fund company in writing, over the phone, or on the Internet on any business day.
Of course, mutual funds are not guaranteed investments. The price of all mutual fund shares can change daily, and you'll receive
the current value of your shares when you sell — which may be more or less than you paid. All investing involves risk, including
the possible loss of principal, and there can be no assurance that any investing strategy will be successful.
Choosing a fund
Choosing a mutual fund to invest in requires more than picking a fund from the Top 10 list of the best past performers. Choosing
a mutual fund requires careful thinking about numerous factors. The most important of these to consider include your investment
objectives, risk tolerance, and time horizon.
Spend some time considering these factors, then do as much research as you can. Many financial magazines and web sites
are good sources of information to use in an initial screen for suitable mutual funds. Review the fund prospectus. It provides a
great deal of information that you'll want to know about the fund, such as the fund's investment objective and style, and the
fund's expenses. To get a prospectus, contact the mutual fund company directly, or go on-line to the company's website to
download one.
You can also access fund information through your retirement plan’s website.
Sales charge and other costs
All mutual funds have expenses that investors must pay for, but the sales charge, or load, is probably the most significant and
varied among funds. These sales charges are generally paid as commissions to stockbrokers, financial advisors, and insurance
agents. The sales charge may be deducted at the time you purchase shares of the mutual fund (front-end load), leaving less to
work for you, or it may be charged at the point of redemption (back-end load). Some mutual funds, known as no-load funds,
have no sales charges.
Pay attention to a mutual fund's other fees and expenses, as well. Look at a fund's expense ratio, which is calculated by
dividing the fund's annual expenses by the fund's average net assets. Expenses affect a fund's net return. The higher the
expense ratio, the less money is being put to work for you.
Turnover ratio
Portfolio turnover reflects the value of a fund's trades during a year compared to the total value of its assets, and is often used
as an indicator of how actively a fund manager trades. If the value of a fund's trades equals that of its entire portfolio, its turnover
ratio would be 100 percent.
Aggressively managed funds generally have higher portfolio turnover ratios than do conservative funds, which buy and hold
for the long term. High turnover generally adds to the expenses of a fund because of the brokerage commissions paid for each
transaction.
More important, however, is that when the fund sells stock at a gain, the gain must be distributed to shareholders. You will then
be liable for income tax on your portion of the gain, even if the gain was reinvested, and even if your fund's share value actually
decreased that year. Inside of a retirement plan, your earnings grow tax deferred.
A tax-efficient approach minimizes the tax impact of its trades by implementing strategies such as offsetting gains by selling other
stocks at a loss, or holding stocks for long periods. Note that if you own a mutual fund in an individual retirement account (IRA) or
a qualified retirement plan at work (e.g., a 401(k)), tax efficiency is not as important. This is because no tax is immediately paid on
realized gains in these retirement accounts and plans; tax is deferred until the money is withdrawn.
5|PagePast performance
Although past performance is no guarantee of future results, a fund's track record over the past 3, 5, and 10 years is certainly
worth considering. How does it compare with its peers — funds with similar risk and investment strategies? Apples-to-apples
comparisons of funds are difficult, so a variety of broad market indexes are used as comparison benchmarks. For example, the
S&P 500 is often used as a proxy for the U.S. stock market as a whole. Examine how well the fund that you are looking at has
performed in both good and bad years relative to the most appropriate benchmark index.
Fund managers
One of the advantages of purchasing shares in an actively managed mutual fund is professional money management. The past
performance of the fund is a reflection of the fund manager's ability to effectively manage its assets. You should research the
current manager's history with the fund; was the fund's performance his or her achievement? If the fund has a new manager,
make sure that individual's investment style matches your expectations.
IMPORTANT DISCLOSURES
AMI Benefit Plan Administrators, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented
here is not specific to any individual's personal circumstances.
To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose
of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her
individual circumstances.
These materials are provided for general information and educational purposes based upon publicly available information from sources believed to
be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and
without notice.
AMI Benefit Plan Administrators, Inc.
100 Terra Bella Drive
Youngstown, Ohio 44505
800‐451‐2865
ami@amibenefit.com
www.amibenefit.com
Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2021
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