UNIT FOUR Savings and Investments: Your Money at Work

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UNIT FOURSavings and Investments Your Money at
Work
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Questions to be answered

• How can you develop the habit of saving?
• What is the difference between saving and
  investing?
• What does time value of money mean, and why is it
  such a neat thing for one to know now?
• What is a quick way to find out how long it will
  take your money to double?
• What is the difference between a stock and a
  bond?
• How do mutual funds work?

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Saving vs. Investing

• Talked about how to earn money.
• Will focus on how you can make your money work
  for you.
• Where does the money come from?
• Two significant ways savings and investments.
• Are they the same?????????????????

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Savings

• Money set aside for a short-term goals.
• May save money in order to have money to invest
  later.
• Usually very safe and probably earns a small
  amount of interest.
• Can usually get your money out of the account
  whenever you want is called liquidity.

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Investing

• Money set aside for future income, benefit, or
  profits to meet LONG-TERM goals
• Is no guarantee your money will grow or increase.
• Earnings or loses usually more than from savings
  accounts.
• Investor recognizes it usually takes a LONG TIME
  to earn big bucks in it for the LONG HAUL.

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Time Value of Money

• Is the relationship between time, money and rate
  of return (interest), and their effect on
  earnings of growth.
• Earned Interest the payment you receive for
  allowing a financial institution or corporation
  to USE your money.

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Time, Money and Rate of Interest

• The more TIME you have to save, the more money
  you will have at the end of the time period.
• The more MONEY you have to save, the more money
  you will have at the end of the time period.
• The higher the RATE OF INTEREST you can earn, the
  more money you have at the end of the time period.

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• The really cool thing is that people of your age
  have the dynamics of time and compound interest
  on your side because you have more time to save
  and invest.

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Compounding

• Compounding, or compound interest is the idea
  of earning interest on interest.
• One of the greatest aspects of personal finance.
• Compounding is the 8th wonder of the world.
  attributed to Albert Einstein.
• Savings that earn interest can grow into an
  investment fund. Individual who learn to P.Y.F
  generally have money when they need it.

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• First year - 100 x 10 10 100 110
• Second year - 110 x 10 11 110 121
• Third year - 121 x 10 12.10 121 133.10
• Fourth year - 133.10 x 10 13.31 133.10
  146.41
• Earning - INTEREST on INTEREST

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Rule of 72

• Simple rule based on the concept of compounding
• It tells you how long it takes for your money to
  double in value.
• 72 / interest rate number of years for your
  money to double. 72/6 12 years
• If you have a time period in mind, you can figure
  out what interest you need to double your money.
• 72/8 years 9 interest.

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Time

• We discussed the time value of money fact is,
  the more time you have to reach your savings
  goals, the more money you will have at the end of
  that time.
• Example page 49 in Student Guide

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Risk and Return

• Investments in the stock market do have risks
  one can certainly lose money on stocks or any
  other investments.
• The risk-to-return relationship is a key
  investment principle. The more risk you take,
  the greater the potential return you can receive.
  
• The reverse is also true less risk, less return
  on your money. Page 50 Figure 4.2
  Student Guide.

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Rate of Return

• Is a critical factor in the saving and investment
  world, that is how fast your money grows.
• Interest rate and rate of return are synonymous.
• Earlier you read that the more time you have, the
  less money you need to reach your goal. In a
  similar way, the higher your rate of return, the
  less money you need to reach a goal.
• Page 51 Assignment 4.2 - Figure 4.3 Student
  Guide.

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Diversification

• People have different ideas about how much risk
  to take with their money.
• Some are conservative and want to be safe like
  savings accounts.
• Others are more aggressive and are willing to
  take a risk like the stock market.
• Regardless of your investment style wise
  investors know that diversification a critical
  element in any investment plan.
• Diversification is the reduction of investment
  risk by spreading your invested dollars among
  several different investments.

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Inflation and Taxes

• Inflation occurs when the price of goods and
  services rise. Has been around for decades
  ranging from barely .5 to 18
• What does that mean and why should you care
• It means you are going to be paying more in the
  future for the same items. A dollar in the future
  wont buy as much as a dollar today.
• Depending on your type of investments, inflation
  can go up faster than your earnings.
• Inflation can work against your money, so you
  need to protect yourself against that risk. Learn
  to invest wisely, follow the rate of inflation,
  and make sure your investment rates are higher
  than those of inflation.

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• Taxes are the another drain on your savings and
  investments.
• When you have a job, state and federal
  governments take their share from your income.
  When you have income from your savings and
  investments, the state and federal governments
  tax those earnings as well.
• If you buy and sell investments, like stocks, the
  governments taxes you on any gains or profits you
  make.
• There are types of savings and investments that
  can overcome inflation and minimize the impact of
  taxes.

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• In general terms, people put their money to work
  for two reasons Income or Growth.
• Income means they get paid in cash for
  holding certain types of investments.
• Growth means they hold an investment with the
  hope that it will increase in value over time.
• In terms of months or a few years, income
  investments tend to provide more reliable returns
  with less risk and lower returns than growth
  investments.

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Owner or Lender

• If you are a lender, you lend your money to a
  business or the government and receive interest.
• If you are an owner, you actually buy a piece of
  a business and hope the business goes up in
  value.
• Lenders typically take less risk than owners, so
  owners tend to get paid more but theres no
  guarantee.

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Income Investments (Lenders)

• Savings Accounts payments are called interest.
• U.S. Savings Bonds formal agreement between you
  (lender), the U.S. government (borrower)
  covering a set time period. Borrower agrees to
  pay you cash interest. It will cost you a
  penalty of lost interest if you cash in the bonds
  within five years of purchase. Bonds typically
  pay higher rates of interest than savings
  accounts.

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• Not to be out done by the government, banks and
  credit unions have their own versions of bonds,
  called certificates of deposit (CD). Set up for a
  period of time and pay interest. Usually pay
  slightly higher interest than savings accounts,
  although do have penalties if cashed in early.
• Money Market Accounts Work like checking
  accounts and pay a higher rate of interest than
  savings accounts. You can take money out
  whenever you want and usually with no penalty.
• Corporate and Government Bonds Government bonds
  tend to be safer than company bonds, so corporate
  bonds usually pay higher rates of interest. Time
  periods can be 2 to 30 years. In general, the
  longer the time period, the higher the interest
  rate.

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Growth Investments (Owners)

• Stocks Investments that represent ownership in a
  company. When a company first issues stock, it
  does so to raise money for itself. The company
  then puts that money to work to produce its
  product or service. The stock itself sells for a
  price. A stock buyer wants the price of the
  stock to increase over time. Eventually, the
  buyer will sell the stock. Buy low sell high.
  The difference between the purchase price and
  selling price is the investors earnings, which
  is called capital gain.

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• Real Estate. Investors buy pieces of property,
  such as land or a building, in hopes of
  generating a profit.
• Collectibles. Are usually unique items that are
  relatively rare in number. Examples include
  paintings, sculptures, baseball cards, etc. Just
  like stocks or real estate, collectors buy items
  they hope will go up in value over time. They are
  very high risk, because popularity and demand can
  change from one year to another.

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• Mutual Funds. Investors always have choice when
  making investment decisions. Although some people
  like to hire a professional to make their
  management choices for them. Investors who want
  professional management turn to mutual funds. A
  mutual fund pools money from several investors
  and uses the money to buy a particular type of
  investment, such as stock. A fund manager, who is
  an investment expert, makes all the buy and sell
  decisions for the investments in the fund.
  Because mutual funds own a variety of
  investments, investors enjoy the benefits of
  diversification, and are a great choice of
  investing. Mutual funds invest in almost any area
  of the business world. If you can imagine it,
  there is probably a fund in existence that
  specializes in a particular type of business or
  product.