Saving and Investing

Saving and Investing

Why Save? And How?

Teacher/Parent Interview

• Do you have a written budget?• What strategies do you use to allocate your

financial capital(money)?• Do you have a plan to save money?• What are the biggest obstacles to saving

money?• Do you have any investment accounts?• Give one example of an investment account

that you use.

Key Vocabulary

• Disposable Income

• Discretionary Income

• Fixed Expenses

• Variable Expenses

• Tradeoffs

• Opportunity Cost

• Budget

Why?

• Large Annual or Semi-annual Payments

• Examples:

• Car insurance

• Property Taxes

• Vacation / Christmas

Why?

• Unexpected Expenses

• Examples:

• Speeding ticket

• Car trouble

• Home repairs

Why?

• Major Purchases

• Examples:

• Car

• Furniture / Appliances

• Engagement Ring

• Down Payments

Why?

• Future Expenses

• Examples:

• Children

• College

• Retirement

• Funeral

Why?

• To accumulate wealth

How?

1. Savings Account

• Low interest

• High Liquidity

• FDIC protected

• Emergency Fund

• Life Change Fund

How?

2. Money Market

• Little more return (yield) than SA

• Less liquid– Limits on withdraws– Minimum balances

• Can write checks

How?

3. Time Deposits

• Examples: CD, Savings Bonds, Gov’t Securities

• Time requirements called maturity dates

• Longer the maturity date or higher the minimum balances the higher the yield.

Savings Bonds

• Pay less than face value now - collect face value at maturity.

• Rule of 72

• Example: $50 savings bond that pays 4%. 72/4 = 18 (reaches maturity in 18 yrs).

Government Securities

• T-Bills - short-term (3m - 1 yr) high minimum.

• T-Notes (1 - 10 yrs) $1000 - $10,000

• T-Bonds (10+ years) $1000 increments.

How?

4. Corporate Bonds

• Little to a lot more risk.

• You are basically a lender to the corporation.

• Bond Ratings - AAA, AA, A, BBB, etc

• Junk Bonds - extreme risk, basically worthless.

Bond Listing

How?

5. Mutual Funds• Investment into Company Stocks• Diversification• Way to invest without putting all your

eggs in one basket.• Less control over who you are investing

in, but still have control over what type investing you do.

Mutual Fund

• A mutual fund is a professionally managed investment that pools money from many investors and invests in stocks, bonds, & other mutual funds. The mutual fund will have a fund manager that trades (buys and sells) the fund's investments in accordance with the fund's investment objective.

Answers to FE - 17

• 1075 1090 91,92,93• 1153 1068 90, 94-99• 1242 1100 safer, better short term• 1335 1276 long-term better return• 1435 1506• 1543 1807• 1659 2150• 1783 2774• 1917 3162• 2061 4396

How?

6. Stocks

• Ownership in a company

• Buy low sell high

• Dividends

• Broker - go between for buyers and sellers in the market.

Exchanges

• NYSE

• NASDAQ

• AMEX

• Regional Exchanges

• World Exchanges

Index

• Gives you an idea on how the whole market is doing.

• Examples:• Dow Jones Industrial Average• S&P 500 (100)(50)• Internet 50• Bull and Bear

Investment Game

Google – NYSE, Small Cap Companies

Pick 3, write down stock symbol

Open New Window

www.yahoo.com

Go to Finance

Enter Stock Symbol

Write down current Price

Go to Historical Prices

Common stocks 10%-13%

Stocks of smaller companies

14%-16%

Long term corporate bonds

6.5%-8%

Long term US government bonds

5%-7.5%

Short term US Treasury bills

3.5%-5%

Commodities

• Agricultural Products (Pork Bellies, soybeans)

• Precious Metals (Gold, silver)

Other Investments

• Real Estate• Annuities / Pension Plans

– 401k– 403b– IRA (Roth IRA) Tax Free– Keogh Plans

• College Plans– 529 Plan

• Small Business

Saving vs Investing

• Saving - putting money aside for future expenses

• Investing - putting money aside for the purpose of making money

Capital Gains/Losses

• Capital Gains - tax on money made through investments.

• Capital Losses - deduction on taxes

Where to invest?

• 1. You have $5000 to invest. No other information is available.

• 2. You have $4000 that you will need six months from now

• 3. You inherited $10000 from a great-aunt; she has suggested that you save it for use in your old age.

Where to invest?

• 4. You are just starting a career and can save $50 per month for retirement.

• 5. A new baby arrives, and mom and dad plan to save $100 a month for the child’s college education.

Quiz

• Which has more liquidity?

• CD or Money Market

• Which has more liquidity?

• Savings Account or Checking

• Which has more liquidity?

• T-bill or T-Bond

Quiz

• What is the relationship between liquidity and rate of return?

• Which has more risk?

• Mutual Fund or Stocks

• Which has more risk?

• AAA Bond or AA Bond

Quiz

• Which has more risk?

• Junk Bond or Mutual Fund

• What is the relationship between risk and rate of return?

• What plan would someone who is self-employed use to defer taxes?

• What type of IRA is Tax free?

Which is harder to get?

• Secure loan or

• Unsecured loan?

• Why?

• Collateral

Goods that last 3 or more years?

• Durable

• Opposite of durable goods?

• Consumption or perishable goods

The “T” in T-Bills stands for:

• Treasury

How do Savings Bonds pay their interest?

• Pay less than face value, then when bond matures, you get face value.

Pension plan for self employed?

• Keough plan

Spreading out investments to lessen risk?

• Diversification

Finance company that specializes in home loans?

• Mortgage Company

Which should come first?

• Saving or

• Investing

Cost of credit expressed in dollars and cents?

• APR or

• Finance charge

Financial institution that is member owned?

• Commercial bank or

• Credit Union

Credit cards are issued by?

• Banks or

• Credit card companies

• Is a debit card the same as a credit card?

What happens to the monthly payment when you decrease

the length of loan?• Increases

• Total of payments?

• Decreases

A Roth IRA is?

• Tax deferred or

• Tax free

Which has more risk?

• Mutual fund or

• Bond

• Lender?

• Bond

• Owner?

• Stock

The Dow Jones is a?

• Stock Index or

• Stock Exchange

Largest exchange?

• NYSE

• Name another exchange.

• NASDAQ or AMEX

Payment from company to shareholders?

• Dividend

• IF you make money on an investment it is called?

• Capital Gain

Advantages of retirement plans

• Tax deferred

• Tax free

• Other names for retirement plans?

• IRA

• Annuity

• Pension plan

• 401K, 403B, Keough plan

Which would be higher?

• Interest earned or

• Interest paid