Saving and Investing

1
Chapter 7

• Saving and Investing

2
Focus Questions

• Why should you save?
• What is the difference between saving and
  investing?

3
pay yourself first (a little can add up)

• Save this each week at interest in 10
  years youll have
• 7.00 5 4,720
• 14.00 5 9,440
• 21.00 5 14,160
• 28.00 5 18,880
• 35.00 5 23,600
• You can buy two fast food meals or one movie
  ticket (and a candy bar) or save 7.00 this
  week.
• You can buy two small cheese pizzas or one
  large pepperoni pizza, delivered or one new
  CD or save 14.00 this week.
• What can you give up to save for your
  financial goals?

teens lesson 12 - slide 12-A
4
What is Saving?

• Savingthe setting aside of income for a period
  of time so that it can be used later.
• Results of saving?
• When an individual saves, the economy as a whole
  benefits because savings provides money for
  others to invest or spend.
• FDR created the FDIC (Federal Deposit Insurance
  Corporation) to protect all savings after the
  Depression.

5
Interest is returned to saver/depositor
People deposit savings to get interest.
Businesses pay interest to financial institutions
Businesses use to expand and improve
Financial Institutions loan to businesses
Computers
Trucks
Plant
Equipment
6
Where Do You Save?

• Some people save at home
• Financial Institutions
• Savings Plans
• Something with interest.
• Interest is the payment people receive when they
  lend money or allow someone else to use their
  money.

7
Savings Account

• Passbook Savings Account
• Account for which a depositor receives a booklet
  in which deposits, withdrawals, and interest are
  recorded.
• Statement Savings Account
• Account similar to a passbook except that the
  depositor receives a monthly statement showing
  all transactions.
• Money-Market Deposit Account
• Account that pays a higher interest rate and
  allows you to write checks. The trade-off is
  that you must keep a higher minimum balance.

8
Time Deposits

• Time Deposits
• Savings plans that require savers to leave their
  money on deposit for a certain amount of time.
  The period is known as maturity.
• CDsCertificate on Deposit

9
How simple and compound interest are calculated

• simple interest calculation
• Dollar Amount x Interest rate x Length of Time
  (in years) Amount Earned
• example
• If you had 100 in a savings account that paid 6
  simple interest, during the first year you would
  earn 6 in interest.
• 100 x 0.06 x 1 6
• At the end of two years you would have earned
  12.
• The account would continue to grow at a rate of
  6 per year, despite the accumulated interest.
• compound interest calculation
• Interest is paid on original amount of
  deposit, plus any interest earned.
• (Original Amount Earned Interest) x Interest
  Rate x Length of Time Amount Earned
• example
• If you had 100 in a savings account that paid
  6 interest compounded annually, the first year
  you would earn 6.36 in interest.
• 100 x 0.06 x 1 6
• 100 6 106
• With compound interest, the second year you
  would earn 6.36 in interest.
• The calculation the second year would look
  like this

teens lesson 12 - slide 12-E
10
Relating Saving to the Economy

• How can saving benefit the economy?

11
Investing

• Taking risks with your savings
• Types of investing
• Stocks
• Bonds
• Mutual Funds
• Real Estate

12
Stocks

• Corporations are formed by selling shares of
  stock (also called securities).
• A stock gives you ownership of a corporation.
  Thus you are called a stockholder.
• Stockholders make money by dividends and
  speculation.
• A dividend is money paid to each stockholder
  during a time of profit.
• Speculation is the money earned by selling your
  stock back during a profit time.
• Money gained or lost during a stock holding time
  is known as capital gains and capital loss.

13
Capital Gain/Loss

• Capital Loss Example
• On December 1, you buy 100 shares of Best Buy _at_
  45 per share.
• You hold on to the shares until July 15 at which
  time they are selling for 42 per share.
• What is your capital loss?
• 45 x 100 4500
• 42 x 100 4200
• Capital loss 300

• Capital Gain Example
• On December 1, you buy 100 shares of Best Buy _at_
  45 per share.
• You hold on to the shares until July 15 at which
  time they are selling for 52 per share.
• What is your capital gain?
• 52 x 100 5200
• 45 x 100 4500
• Capital gain 700

14
Bonds

• A bond is a certificate issued by a company or
  the government in exchange for borrowed money.
• In return it promises to pay a stated rate of
  interest over a stated period of time, and then
  to repay the borrowed amount (principal) in full
  at the end of that time.

15
Types of Bonds

• Tax-exempt bonds
• Sold by local and sate governments without
  federal, state, or local tax.
• Interest is not taxable
• Savings bonds
• Sold by the federal government.
• You receive interest updates every 6 months
• Interest is Taxable
• T-Bills
• Minimum 10,000matures in 3 months to 1 year
• Interest is only taxable by federal govnt
• T-Note
• Minimum 1000-5000matures in 2-10 years.
• Interest is only taxable by federal govnt
• T-Bond
• Minimum 1000-5000matures in 10 or more years.
• Interest is only taxable by federal govnt

16
Difference Between Stocks and Bonds
Stocks Bonds
All corporations issue or offer to sell stock. That is what makes them a corporation Corporations are not required to issue bonds
Stocks represent ownership Bonds represent debt
Stocks do not have a fixed dividend rate (except preferred stocks) Bonds pay a fixed amount of interest
Dividends on stock are paid only if the corporation makes a profit Interest on bonds must always be paid whether there is a profit or not
Stocks do not have a maturity date Bonds have a maturity date
Stockholders can elect a board of directors who control the corporation Bondholders usually have no voice in or control over how the corporation is run
Stockholders have a claim against the property and income of a corporation Bondholders have a claim against the property and income of a corporation that must be met before claims of any stockholders
17
How do you buy stocks and bonds?

• Stocks are bought and sold through brokers on a
  stock exchange either at a brokerage firm or on
  the internet.
• A broker is a go between for buyers and sellers
• NYSENew York Stock Exchange
• Stocks can also be acquired on your own. These
  are called over-the-counter stocks.
• NASDAQ has the largest volume of over-the-counter
  stocks

• Bonds
• Bonds are sold over-the-counter and on the
  Internet

18
Mutual Funds and Money Market Funds

• Mutual Funds
• Investing in the stock market where your money is
  pooled with many other individuals to buy stocks,
  bonds, or other investments.
• Usually a diversified portfolio of stocks and
  bonds.
• Most are invested into one of two indexes.
• DJIA
• SP

• Money Market Fund
• A type of mutual fund used to buy the short term
  debt of businesses and banks
• You may write a check against the amount you have
  in that fund.

19
Government Regulations

• SEC
• Securities and Exchange Commission
• Regulates brokerage firms, stock exchanges, most
  businesses that issue stock.
• Investigates any dealings among corporations that
  affect the value of stock
• Mergers

20
Is property the route to wealth?
21
Special Savings Plans and Goals

• Retirement

22
Special Savings Plans and Goals

• Investing for retirement
• Pension plans are the most popular of the
  retirement income plans.
• 401K is the most popular
• A portion of your check is withheld and a company
  matches that amount to be paid with interest upon
  retirement or buyout.

60 Minutes The 401K Fallout
23
Special Savings Plans and Goals

• Investing for retirement
• Pension plans are the most popular of the
  retirement income plans.
• 401K is the most popular
• A portion of your check is withheld and a company
  matches that amount to be paid with interest upon
  retirement or buyout.
• Individuals can set up their own plans
• Keogh Plan15 of your income, deductible for
  yearly taxes
• Traditional IRASet up for people earning less
  than 30,000 a year. You can contribute up to
  5000 a year and deduct that amount from your
  taxes.
• Roth IRAYou can contribute up to 5000 a year.
  This amount is not tax deductible now, but rather
  later the interest earned is tax deductible.

24
IRAs an example of a return on investment

• contributions made only between ages of 2230 (9
  years)
• 2,000 contributed each year
• Total investment of 18,000
• At an interest rate of 9, by age 65 will have
  579,471
• contributions made only between ages of 3165 (35
  years)
• 2,000 made contributed each year
• Total investment of 70,000
• At an interest rate of 9, by age 65 will have
  470,249

teens lesson 12 - slide 12-N
25
Real Estate as an Investment

• ways to invest
• Buy a house, live in it, and sell it later at a
  profit.
• Buy income property (such as an apartment house
  or a commercial building)and rent it.
• Buy land and hold it until it rises in value.
• advantages
• Excellent protection against inflation.
• disadvantages
• Can be difficult to convert into cash.
• A specialized type of investment requiring study
  and knowledge of business.
• capital gains profits from the sale of a capital
  asset such as stocks, bonds, or real estate.
  These profits are tax-deferred you do not have
  to pay the tax on these profits until the asset
  is sold. Long-term capital gains occur on
  investments held more than 12 months. Short-term
  capital gains occur on investments held lessthan
  12 months.

teens lesson 12 - slide 12-L
26
How Much Do You Save?

• Evaluate your amount of risk
• If investing, spread your investments
  outdiversification
• How much do you value now or later?

27
the rule of 72

• How many years will it take to double my money?
• 72 DIVIDED BY
• YEARS TO DOUBLE A SUM OF MONEY
• INTEREST RATE
• At what interest rate will my money double in a
  set number of years?
• 72 DIVIDED BY
• INTEREST RATE REQUIRED
• YEARS TO DOUBLE
• INVESTMENT

28
Relating Investing to the Economy

• How does investing play a part in the economy?

29
Career Opportunity

• Stock Broker
• Job Description
• Relay investors stock orders to the floor of a
  securities exchange
• Offer financial counseling and advice on the
  purchase or sale of particular securities.
• Qualifications
• College Degree
• Pass a state licensing exam and the General
  Securities Registered Representative Exam
• Median Salary38,800
• Job Outlook Above Average