Transcript for saving and investing

PF 8.01
Options for Saving & Investing
Saving and Investing
Definition
Saving
Investing



Saving is setting aside present
income for future use.
Savings is the portion of income not
spent on consumption.

Investing is purchasing assets that earn
interest over time.
Investments are assets purchased with
the goal of increasing income.
Primary purpose
To make money available for future
needs
To make a profit over time
Reasons for saving
and investing
To prepare for emergencies
To prepare for major purchases
To achieve financial goals
To pay recurring expenses
To prepare for future purchases
To prepare for retirement
Interest earnings
A bonus or side-benefit
The main focus
Return
Usually earns lower rates of interest
Usually earns higher rates of interest
Liquidity
Money may be withdrawn at any time
Money may not be easily accessible
Volatility
Usually not volatile; rates are fixed
Rate of return and value may change
suddenly and significantly
Risk
Usually little risk of losing money
Usually more risk, but risks may be
necessary to make a profit
Reasons individuals may fail to
save/invest
• Not being able to meet current needs and
wants
• Not being aware of how much needs to be
saved for future goals
• Over-relying on credit for emergencies
• Over-relying on job security and insurance
“Rules” for saving and investing
• View saving and investing as a fixed expense
• Rule of Saving: Pay yourself first; take a portion of
earnings for saving/investing before spending any of
your paycheck
• 70-20-10 Saving and Investing Rule: For any money
earned, spend 70%, save 20%, and invest 10%
• Saving and Investing Plan: For those whose values or
lifestyle make saving 30% unrealistic, start a saving and
investing plan in order to continually save a fixed
amount
• Rule of 72: Divide 72 by the rate of interest earned on
an investment to find the number of years needed to
double an amount of money invested
Certificates
Savings Accounts Money Market
of Deposit
Definition
An account in a
bank/financial
institution that allows
one to make deposits
and withdrawals
A type of savings
account in which
deposits are invested by
the bank/financial
institution to yield
additional earnings
A certificate issued by a Nontransferable debt
bank/other institution to certificates issued by
show that money has
the U.S. Treasury
been deposited for a
certain term
Minimums
Minimum deposits
usually lower than
other savings options
Minimum opening
deposit usually higher
than with savings
accounts
Minimum opening
deposit varies
Usually allows person to Usually must pay a
Withdrawals Usually the most
and liquidity liquid savings option write a limited number substantial penalty to
of checks per month
withdraw money early
Savings Bonds
Smallest denomination
purchased is generally
$50 or $500,
depending on series
of bond
Most can be cashed after
6 months; some may
carry penalties if
cashed before 5 years
Interest rates
and rates of
return
Usually lower
interest rates than
other savings
options, but may vary
Usually higher interest
rate than savings
accounts, but may
vary
Interest rate is usually
fixed until the end of the
term
Fixed and variable rates;
interest earnings subject
to state, but not federal,
taxes. Federal taxes can
be deferred until cashed
or stops earning interest.
Interest paid when bond
is cashed, or every 6
months by direct
deposit to checking or
savings account
Transactions
Use bank teller,
ATM, phone, online;
no checks; get
monthly statement
Withdrawals and
transfers limited
Usually cannot make
additional deposits during
the term, but can add to it
when you renew
Usually can be cashed
after
6 months. Some carry a
penalty if cashed
before 5 years, but pay
current value (higher than
face value) after 5 years.
Security and
risk factors
Protected by FDIC or
NCUA insurance
Generally protected by Generally protected by
FDIC or NCUA
FDIC or NCUA
insurance
insurance
Since generally backed by
the federal government,
these are relatively safe.
Definition
Minimums
Withdrawals
and liquidity
IRA
Stocks
Bonds
Personal savings plan
used to set aside
money for retirement
Shares of ownership
and interest in assets
and earnings of a
company
Debt issued by a
government or
company for a
specified time
A group of investments
(stocks
and bonds) held in
common
with shares owned by
many
investors
Vary
Vary
Vary
Vary
Traditional IRAscontributions taxdeductible; taxed
when withdrawn
Stockholders may
buy and sell stocks
when they wish
Liquidate when
mature; vary from
short-term (days,
weeks) to long-term
(years)
Management fees must be
paid
when you sell or redeem
shares,
even if earnings are low
Interest on municipal
bonds exempt from
federal income tax
Can be liquidated at any
time;
no term or maturity dates
Roth IRA- not taxdeductible; earnings
tax-free
Tax-deferred plans:
*Keogh Planretirement plan for the
self-employed
401k-employersponsored retirement
plan
Mutual
Funds
Interest rates
and rates of
return
Vary with type
and status
When directors approve,
dividends paid from net
profits; interest rates vary
Interest earnings vary
according to type of
bond and level of risk
Transactions
Purchased
through
financial
institution
Security and
risk factors
A reasonably
safe investment
when the
economy is
stable
Bought on securities
exchanges (stock
markets), over-the-counter
markets, initial public
offerings, or directly from
company
Earnings based on how
well company does
Common or preferred?
*Common-more risk,
more potential for gains
*Preferred-paid first, fixed
earnings, low risk
Corporate and
municipal, usually
bought/sold through
brokers; US
government, issued by
Treasury
Generally protected by
FDIC or NCUA
insurance; generally
considered safe and
reliable
Type of company?
*Blue chip-from big
companies, less risk
*Growth-from growing
companies, more risk
*Penny-from high-risk
companies, less than $1
per share, very risky
Fixed and variable rates;
interest earnings subject
to
state, but not federal,
taxes
Bought and sold through
investment brokers
Funds are diversified in
various
investments so losses in
one
fund may be offset by
gains in another
A reasonably secure
investment
when the economy is
stable
Money markets are not
FDICinsured
Directions: See if you can do the math in your head to solve these problems using the
70-20-10 Saving and Investing Rule.
Josh earned $100 from mowing lawns during the month of July.
How much should he save?
How much should he spend?
$20
$70
How much should he invest?
$10
Janet received $140 in gift money for her birthday. How much should she spend?
THINK
$140 divided by 10 and then multiply by 7
$140/10 = $14 x 7 = $98
Hal earned $25 today. How much should he invest? $2.50
Mr. Jones inherited $50,000 from his great uncle. How much should he invest? $5000
Sarah won $100 from a raffle. How much should she save? $20
Theo sold enough magazine subscriptions to earn a profit of $200. How much should
she save? $40