Transcript Section 8.1 Preparing for a Savings or Investment Program

Business and Personal Finance Unit 3 Chapter 8 © 2007 Glencoe/McGraw-Hill
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Chapter 8
Saving and Investing
What You’ll Learn
 Section 8.1
 Explain how to establish goals for a savings or
investment program.
 Discuss ways to obtain funds for investing.
 Identify the factors that affect your investment
choices.
 Section 8.2
 Identify the main types of savings and investment
alternatives.
 Explain the steps involved in developing a personal
investment plan.
 Section 8.3
 Describe your role in a personal investment plan.
 Identify sources of financial information.
Business and Personal Finance Unit 3 Chapter 8 © 2007 Glencoe/McGraw-Hill
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Investments
 Q: After paying my bills, I do not have much money left
over. I save any extra that I get. Since I do not have a lot of
money, why should I even considering investing?
 A: If inflation increases at a higher rate than your savings
account return, you can lose purchasing power. To stay
ahead of inflation and taxes, the money you set aside for
long-term goals will need to earn more than the rates
usually paid on savings accounts. Consider other
investments that can earn a higher return.
Go to finance07.glencoe.com to complete the Standard &
Poor’s Financial Focus activity.
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Section 8.1
Preparing for a Savings or Investment Program
Main Idea
Can you think of
any reasons to
risk putting money
in investments
instead of a
savings account?
Laying a foundation for your savings or
investment program will help ensure that you
meet your future financial goals.
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Section 8.1
Preparing for a Savings or Investment Program
emergency
fund
a savings
account that
you can access
quickly to pay
for unexpected
expenses or
emergencies
Establishing Your Financial Goals
A savings or investment plan starts with a
specific, measurable goal. You can reach that
goal through:
 A savings account
 An investment
You might also decide that you should begin
saving money in an emergency fund.
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Section 8.1
Preparing for a Savings or Investment Program
Your Goals and Values
Your goals should correspond with your values.
You will have to choose whether to:
 Save or invest as much of each paycheck
as possible
 Spend a lot of money on temporary
activities, thus running out of money
before you receive your next paycheck
Even a small amount of money saved or
invested on a regular basis can add up to a
large amount over time.
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Section 8.1
Preparing for a Savings or Investment Program
Outlining Goals
As you outline your financial goals, ask yourself
these questions:
 How do I want to spend my money?
 How much money do I need to satisfy my
goals?
 How long will it take to save the money?
 How much risk am I willing to take when I
invest?
 Am I willing to make sacrifices to save?
 What will happen if I do not meet my
goals?
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Section 8.1
Preparing for a Savings or Investment Program
Performing a Financial Check-Up
Before you think about investing for the future,
you must take steps to be sure your personal
finances are in good shape. Then you will be
ready to move ahead with your financial plan.
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Section 8.1
Preparing for a Savings or Investment Program
Money to Get Started
You will be ready to start saving or investing
after you have:
 Set your goals
 Completed your financial check-up
 Gotten the money
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Section 8.1
Preparing for a Savings or Investment Program
Pay Yourself First
Instead of saving and investing money after you
have paid all your other expenses, you should:
 Include the amount you want to save in
your monthly expenses and pay that
amount first.
 Pay your monthly living expenses, such
as rent and food.
 Use money that is left over for personal
pleasures, such as going to the movie or
buying a new CD.
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Section 8.1
Preparing for a Savings or Investment Program
Employer-Sponsored Retirement Plans
Your employer may offer a retirement plan,
usually a:
 401(k)
 403(b)
With this ready-made investment program,
saving is made simple because an amount you
choose is deducted automatically from each
paycheck.
Many employers will match part or all of the
money you save.
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Section 8.1
Preparing for a Savings or Investment Program
Elective Savings Programs
Some employers provide the option of having
money:
 Automatically withheld from your
paycheck
 Deposited in a standard savings account
You can also arrange with a mutual fund or
brokerage firm to take a certain amount from
your bank account every month and invest it.
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Section 8.1
Preparing for a Savings or Investment Program
Special Savings Effort
Another way to save is to set aside a specific
time each year when you:
 Cut back sharply on what you spend.
 Put the money you save into an
investment fund.
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Section 8.1
Preparing for a Savings or Investment Program
Gifts, Inheritances, and Windfalls
During your lifetime, you might receive:
 Gifts of money
 Inheritance money
 Bonuses at work
 Tax refunds
 Salary raises
Consider putting this extra money in a savings
or investment program.
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Section 8.1
Preparing for a Savings or Investment Program
The Value of Long-Term Investment
Programs
Many people do not start investing because
they:
 Have only a small amount of money
 Believe that they are too young to invest
Remember that small amounts of money add up
because of the time value of money.
Look at figure 8.2 on page 242. Why would you
be willing to invest $2000 per year for a long
term?
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Figure 8.2
Long Term Investing and Growth
Balance at the End of the Year
Rate of
Return
1
5
10
20
30
40
1%
$2,000
$10,202
$20,924
$44,038
$69,570
$97,773
4%
$2,000
$10,833
$24,012
$59,556
$112,170
$190,051
5%
$2,000
$11,051
$25,156
$66,132
$132,878
$241,600
6%
$2,000
$11,274
$26,362
$73,571
$158,116
$309,524
7%
$2,000
$11,501
$27,633
$81,991
$188,922
$399,270
8%
$2,000
$11,733
$28,973
$91,524
$226,566
$518,113
9%
$2,000
$11,969
$30,386
$102,320
$272,615
$675,765
10%
$2,000
$12,210
$31,875
$114,550
$328,988
$885,185
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Long Term Investing and Growth
Invest $150 Monthly
Rate of
Return
End of
Year 1
End of
Year 5
End of
Year 10
End of
Year 20
End of
Year 30
End of
Year 40
1%
$1,808
$9,225
$18,922
$39,834
$62,944
$88,484
4%
$1,833
$9,945
$22,087
$55,016
$104,107
$177,294
5%
$1,842
$10,201
$23,292
$61,655
$124,839
$228,903
6%
$1,850
$10,466
$24,582
$69,306
$150,677
$298,724
7%
$1,859
$10,739
$25,963
$78,139
$182,996
$393,722
8%
$1,867
$11,022
$27,442
$88,353
$223,554
$523,651
9%
$1,876
$11,314
$29,027
$100,183
$274,612
$702,198
10%
$1,885
$11,616
$30,727
$113,905
$339,073
$948,612
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Section 8.1
Preparing for a Savings or Investment Program
Making Investment Decisions
Once you know how much money you need to
meet your goals, you then have to think about
where to invest it.
To make that decision, you need to:
 Understand the different risk factors.
 Consider each investment’s potential for
income and growth as well as its liquidity.
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Section 8.1
Preparing for a Savings or Investment Program
speculative
investment
a high-risk
investment that
might earn a large
profit in a short
time
Safety and Risk
You can select investments that are:
 Very safe
 Very risky
 In between these extremes
Generally, if you choose a safe investment, your
rate of return will be low. With a speculative
investment, you may:
 Earn a large profit in a short time
 Lose most or all of the money you invest
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Investment Risk
• Safe
• High Risk
– Gov’t bonds and
securities
•
•
•
•
•
T-bills
T-notes
T-bonds
Muni bonds
US savings bonds
– Commodities
– Options
– Precious Metals and
gems
– Collectibles
• Moderate (risk can
vary)
–
–
–
–
Stocks
Corporate bonds
Mutual funds
Real Estate
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Section 8.1
Preparing for a Savings or Investment Program
Choosing Your Risk Level
Without risk, it is impossible to obtain returns
that make investments grow. The key is to:
 Determine how much risk you are willing
to take.
 Choose quality investments that offer
higher returns without an extremely high
risk.
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Section 8.1
Preparing for a Savings or Investment Program
Five Components of Risk
Evaluate the overall risk factor of an investment
by examining five different components of risk:
 Inflation
 Interest rate
 Business failure
 Financial market
 Global investment
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Section 8.1
Preparing for a Savings or Investment Program
Inflation Risk
Investing your money can help you stay ahead
of inflation. However, during periods of rapid
inflation:
 The return from your investments might
not keep up with the inflation rate.
 You lose buying power, and your money
will buy less.
Some investments will protect you from inflation
better than others.
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Section 8.1
Preparing for a Savings or Investment Program
Interest Rate Risk
If you put money in an investment that gives you
a fixed rate of return, the value of your
investment will go down if interest rates go up.
If you have to sell your bonds, you will get less
than you originally paid.
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Section 8.1
Preparing for a Savings or Investment Program
dividends
distributions of
money, stock, or
other property
that a
corporation pays
to stockholders
Business Failure Risk - is the risk that the
stock of a company an investor purchases may
become worthless due to the business failing.
This type of risk applies to:
 Common stock
 Preferred stock
 Corporate bonds
When you buy stocks or corporate bonds, you
are investing in a particular company. Lower
business profits usually mean lower dividends.
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Section 8.1
Preparing for a Savings or Investment Program
Avoiding Business Failure Risk
To avoid losing your investment, you should:
 Do careful research on companies in
which you might invest.
 Invest your money in more than one
company.
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Section 8.1
Preparing for a Savings or Investment Program
Financial Market Risk
Sometimes the prices of stocks, bonds, mutual
funds, and other investments go up or down
because of the overall state of financial markets.
Factors that affect financial markets include:
 Social conditions
 Political conditions
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Section 8.1
Preparing for a Savings or Investment Program
Global Investment Risk
If you plan to invest in companies outside the
United States, take these steps:
 Evaluate international investments as if
they were U.S. investments.
 Consider the currency exchange rate.
Also, keep in mind that the economic and
political stability of a country can affect the value
of your investment.
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Section 8.1
Preparing for a Savings or Investment Program
Investment Income
There are a variety of other types of investments
for income. The safest and most predictable
investments include:
 Savings accounts
 Certificates of deposit (CDs)
 U.S. Savings Bonds
 U.S. Treasury bills
Other sources of investment include:
 Government bonds
 Corporate bonds
 Preferred stocks
 Stable mutual funds
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Section 8.1
Preparing for a Savings or Investment Program
retained
earnings
profits that a
company
reinvests, usually
for expansion or
to conduct
research and
development
Investment Growth
The best opportunities for investment growth
usually come from:
 Stocks
 Growth stocks
Growth companies usually reinvest their profits
rather than paying dividends.
Growth that is financed by retained earnings
usually contributes to increasing the stock’s
value.
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Section 8.1
Preparing for a Savings or Investment Program
investment
liquidity
the ability to buy
or sell an
investment quickly
without
substantially
reducing its value
Investment Liquidity
A final factor to consider when choosing
investments is investment liquidity.
You may be able to sell some investments
quickly, but you may not be able to regain your
original investment, due to:
 Market conditions
 Other factors
A low-liquidity investment requires more time to
sell.
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Section 8.2
Savings and Investment Options
Main Idea
Since stock
investments can
be risky, why do
you think people
choose them?
The more you know about different investment
opportunities and the planning process, the
better able you will be to select a savings or
investment program that meets your needs.
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Section 8.2
Savings and Investment Options
Types of Investments
When you have your personal finances in order,
an emergency fund, money for investments, and
you know how much risk you can take, you can
begin to search different types of investment
alternatives:
 Stocks
 Bonds
 Mutual funds
 Real estate
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Section 8.2
Savings and Investment Options
equity capital
money that a
business gets from
its owners in order
to operate
common stock
a unit of ownership
of a company
preferred stock
a type of stock that
gives the owner the
advantage of
receiving cash
dividends before
common
stockholders receive
cash dividends
Stocks
A corporation gets its equity capital from its
stockholders, who become owners when they
buy shares of stock in the company.
The two basic types of stock are:
 Common stock
 Preferred stock
If a company fails, preferred stockholders
receive dividends first and any assets that are
left before common stockholders receive
anything.
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Section 8.2
Savings and Investment Options
Investing in Stock
Stock can be an attractive investment because,
as owners, stockholders share in the success of
the company.
However, you should consider several facts
before you invest in stock:
 A corporation does not have to repay you
what you paid for the stock.
 The current value of your stock is partially
determined by how much another
investor is willing to pay for your shares.
 A corporation does not have to pay
dividends.
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Section 8.2
Savings and Investment Options
corporate bond
a corporation’s
written pledge to
repay a specific
amount of money,
along with interest
government
bond
the written pledge
of a government
or a municipality,
such as a city, to
repay a specific
sum of money
with interest
Corporate and Government Bonds
You may also consider investing in bonds.
There are two types of bonds an investor can
consider:
 A corporate bond
 A government bond
When you buy a bond, you are lending money
to a corporation or government entity for a
period of time.
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Section 8.2
Savings and Investment Options
The Value of a Bond
Two key factors affect the value of a bond:
 Whether the bond will be repaid at
maturity
 Whether the corporation or government
entity will be able to pay interest until
maturity
Maturity dates range from 1 to 30 years, and
interest on bonds is usually paid every six
months.
The value of the bond is closely tied to the
ability of the corporation or government agency
to repay the bond at maturity.
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Section 8.2
Savings and Investment Options
mutual fund
an investment in
which investors
pool their money
to buy stocks,
bonds, and other
securities
selected by
professional
managers who
work for an
investment
company
Mutual Funds
You may also want to consider joining a mutual
fund. If one of the fund stocks or other securities
performs poorly, the loss can be offset by gains
in another stock or security within the mutual
fund.
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Section 8.2
Savings and Investment Options
Real Estate
The goal of real estate investing is to:
 Own property that increases in value so that you can sell
it at a profit
 Receive rental income
Before making a decision to purchase any property, ask the
following questions:
 Why are the present owners selling?
 Is the property in good condition?
 What is the condition of other properties in the area?
 Is there a chance that the property will decrease in
value?
Before selling real estate, ask the following question:

Can the buyer get the required financing?
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Section 8.2
Savings and Investment Options
diversification
the process of
spreading your
assets among
several different
types of
investments to
reduce risk
Evaluating Investment Alternatives
As you make your choices, remember it is wise
to diversify.
Some financial advisers suggest that you think
of your investment program as a pyramid,
where:
 Level 1 provides a solid foundation with
safe investments
 Levels 2 and 3 carry moderate risk
 Level 4 is highly speculative
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Collectibles, such as artwork, baseball cards, etc., are
the highest risk type of investment, which is Level 4.
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Section 8.2
Savings and Investment Options
Developing a Personal Investment Plan
To be a successful investor:
 Develop a plan.
 Put it into action.
Often the follow-through is the most important component of
a successful, long-range, personal investment plan.
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Section 8.2
Savings and Investment Options
Achieving Your Goals
You may find these steps helpful to get started:
 Establish investment goals.
 Decide how much money you will need to
reach those goals by a particular date.
 Evaluate the risks and potential return for
each investment on your list.
 Choose multiple investments so that you
have some diversity.
 Recheck your investment program
regularly.
If your goals are important to you, you will be
willing to work to attain them.
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Section 8.3
Reducing Risk and Sources of Information
Main Idea
How might
investing change
your income tax
reporting?
By becoming an informed investor, you will be
able to reach your investment goals.
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Section 8.3
Reducing Risk and Sources of Information
financial planner
a specialist who is
trained to offer
specific financial
help and advice
Financial Planners
There are two main factors to consider when
deciding if you need a financial planner:
 Your income level
 Your willingness to make your own
financial decisions
If you make less than $45,000 a year, you may
not need a planner’s services.
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Section 8.3
Reducing Risk and Sources of Information
Types of Financial Planners
There are four main types of financial planners:
 Fee-only planners
 Fee-offset planners
 Fee-and-commission planners
 Commission-only planners
When hiring a financial planner, find out the
exact fees for specific services. Also discuss
how and when the fees will be collected from
you.
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Section 8.3
Reducing Risk and Sources of Information
Selecting a Financial Planner
Look for a financial planner who will provide
these basic services:
 Assess your current financial situation.
 Offer a clearly written plan with
investment recommendations.
 Discuss the plan with you and answer
questions.
 Help you keep track of your progress.
 Guide you to other financial experts and
services as needed.
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Section 8.3
Reducing Risk and Sources of Information
Certification of Financial Planners
The largest financial planners are monitored by the
Securities and Exchange Commission (SEC)
The requirements for becoming a financial planner vary
from state to state.
Some states:
 Require that financial planners pass an exam
 Issue licenses to individual planners and planning
companies
 Have no regulations at all
Although a financial planner may have credentials, not all
planners are licensed. You should research and investigate
any financial planner you might be considering.
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Section 8.3
Reducing Risk and Sources of Information
Managing Your Investments
Most people do not have professional financial
planners and need to learn how to manage their
own finances.
You can take an active role by taking these
steps:
 Evaluate investments.
 Monitor investments.
 Keep accurate records.
 Consider tax consequences.
Managing your savings and investments
requires ongoing attention.
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Section 8.3
Reducing Risk and Sources of Information
Evaluating Investments
Always research and evaluate before you invest
so that you can make an informed decision.
While your money is earning, you also need to
continue to evaluate:
 Your current investment
 Future investment opportunities
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Section 8.3
Reducing Risk and Sources of Information
Monitoring Your Investments
Always keep track of the value of your stocks,
bonds, or mutual funds by checking price
quotations reported:
 On the Internet
 In newspapers
 On financial news programs
Keep a chart of the value of your investments to
check their progress over time.
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Section 8.3
Reducing Risk and Sources of Information
Keeping Accurate Records
Accurate record keeping helps you notice
opportunities to:
 Increase your profits
 Reduce losses
It can also help you decide whether to:
 Put more money in a stock, bond, or
other investment
 Sell a particular investment
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A Dollar a Day
Do you know that if you save a dollar a day—less than what
you would spend on a soda and a candy bar—and save or
invest it at 5 percent interest, in five years you will have more
than $2,000? In ten years you will have $4,600!
How much would you have in 40 years?
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Section 8.3
Reducing Risk and Sources of Information
tax-exempt
income
income that is not
taxed
tax-deferred
income
income that is
taxed at a later
date
Tax Considerations
In general, investment income falls into three
categories:
 Tax-exempt
 Tax-deferred
 Taxable
You must report cash dividends on your tax
return as 15%.
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Section 8.3
Reducing Risk and Sources of Information
capital gain
the profit from the
sale of assets
such as stocks,
bonds, or real
estate
capital loss
the sale of an
investment for
less than its
purchase price
Capital Gains and Capital Losses
Capital gains are taxed according to how long you
own an asset:
 Short term (12 months or less)
 Long term (longer than 12 months)
You can subtract up to $3,000 a year in capital
losses from your ordinary income.
Short-term capital gains are taxed as regular income,
whereas long-term capital gains are taxed at a much
lower rate.
This is yet another reason why you should invest for the long
term, instead of trying to “Time” the market.
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Section 8.3
Reducing Risk and Sources of Information
Sources of Investment Information
Because there is so much investment
information available, both complex and basic,
you need to be selective.
The important thing is to be sure that the source
of advice and information that you receive is:
 Accurate
 Reliable
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Section 8.3
Reducing Risk and Sources of Information
The Internet and Online Services
Most large investment firms have Web sites
where you can obtain a variety of information
and services, such as:
 Interest rates for certificates of deposit
 Prices of stocks, bonds, and other
securities
 Advice on starting an investment program
 Trading of securities through online
brokers
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Section 8.3
Reducing Risk and Sources of Information
Newspapers and News Programs
The financial page of your metropolitan
newspaper or The Wall Street Journal is another
source of investment information that is easy to
access.
In addition, you can find economic information
and financial news on:
 Many radio and television stations
 Television channels such as CNN Fn
(Financial)
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Section 8.3
Reducing Risk and Sources of Information
Business and Government Publications
You can find general news about the economy
as well as information about individual
companies in magazines such as:
 Barron’s
 BusinessWeek
 Forbes
 Fortune
 Harvard Business Review
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Section 8.3
Reducing Risk and Sources of Information
Other Publications
You can find information and advice designed to
improve your investment skills in magazines
such as:
 Money
 Consumer Reports
 Smart Money
 Kiplinger’s Personal Finance
In addition, national news magazines often
feature stories on the economy and finance.
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Section 8.3
Reducing Risk and Sources of Information
Government Publications
The United States federal government is also an
excellent resource of information—and much of
it is free. Two sources of useful financial
information are:
 The Federal Reserve Bulletin, published
by the Federal Reserve System
 Survey of Current Business, published by
the Department of Commerce
You can read articles from both of these
publications on the Internet.
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Section 8.3
Reducing Risk and Sources of Information
prospectus
a document that
discloses
information about
a company’s
earnings, assets
and liabilities, its
products or
services, a
particular stock,
and the
qualifications of its
management
Corporate Reports
The federal government requires that any
corporation selling new issues of securities must
provide investors with a prospectus.
All publicly owned corporations also send
investors quarterly reports and annual reports
that contain detailed financial data.
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Section 8.3
Reducing Risk and Sources of Information
Statistical Averages
You can keep track of the value of your
investments by following one or more
recognized statistical averages, such as:
The Standard & Poor’s 500 Stock Index
The Dow Jones Industrial Average
These averages are reported daily online and in
newspapers, and are meant to show the general
direction of the valuation of most stocks
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Section 8.3
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Investor Services
Five widely used and useful publications are:
 Standard & Poor’s Stock and Bond Guide
 Value Line Investment Survey
 Handbook of Common Stocks
 Morningstar Mutual Funds
 Wiesenberger Investment Companies
Yearbook
Both professionals and individual private
investors can refer to these publications to
become well-informed when making investment
decisions.
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Chapter 8
Saving and Investing
Key Term Review











emergency fund
speculative investment
dividends
retained earnings
investment liquidity
equity capital
common stock
preferred stock
corporate bond
government bond
mutual fund







diversification
financial planner
tax-exempt income
tax-deferred income
capital gain
capital loss
prospectus
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Chapter 8
Saving and Investing
Reviewing Key Concepts
1.
Explain why it is important to have a goal before making
investments.
Before investing, you should set financial goals that are compatible
with your values.
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Chapter 8
Saving and Investing
Reviewing Key Concepts
2.
Describe sources of funds for investing.
You can obtain money to start investing by:

Setting aside funds before you buy other things

Contributing to employer-sponsored retirement plans
and savings programs

Saving gifts of money and unexpected windfalls
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Chapter 8
Saving and Investing
Reviewing Key Concepts
3.
Describe a demographic group that may not prefer
investment risk. Describe another demographic group that
may be more comfortable with a greater degree of risk.
Beginning investors may be afraid of the risk associated with
some investments. However, it helps to remember that without
risk, it is impossible to obtain returns that make investments grow.
It may be easier to take risks when you:

Are younger

Have more experience as an investor
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Chapter 8
Saving and Investing
Reviewing Key Concepts
4.
Compare the main types of investment alternatives in terms
of their risk and liquidity.
The following are the main types of investment alternatives:

Stocks

Bonds

Mutual funds

Real estate
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Chapter 8
Saving and Investing
Reviewing Key Concepts
5.
Write an investment plan for yourself.
A savings or investment plan starts with a specific, measurable
goal. You can reach that goal through:

A savings account

An investment
You might also decide that you should begin saving money in an
emergency fund.
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Chapter 8
Saving and Investing
Reviewing Key Concepts
6.
Describe the role of the investor in the investment process.
To be a successful investor:

Develop a plan.

Put it into action.
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Chapter 8
Saving and Investing
Reviewing Key Concepts
7.
List four specific sources of financial information.
Five widely used and useful publications are:

Standard & Poor’s Stock and Bond Guide

Value Line Investment Survey

Handbook of Common Stocks

Morningstar Mutual Funds

Wiesenberger Investment Companies Yearbook
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Newsclip: Less Savings
Americans do not save as they once did. Weak savings mean
fewer investments in the economy, and that contributes to slower
economic growth.
Log On Go to finance07.glencoe.com and open Chapter 8.
Learn more about the different types of investments. Write down
the investments you would like to buy and why.
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