Chapter 8 Savings and Investing
Preparing for a Savings or Investment Program Section 8.1
Money to Get Started Before investing, make sure you have an emergency fund* Even small amounts add up Use special savings efforts to get money to invest Pay yourself first! Automatic withdrawal from paycheck Emergency fund—a savings account that you can access quickly to pay for unexpected expenses or emergencies
Safety vs. Risk The higher the risk, the higher the reward (but also a higher chance of loss) High Risk=Speculative investment* Low Risk=Conservative investment Speculative Investment—a high-risk investment that might earn a large profit in a short time
Investment Risk Level Only you can decide how much risk you are willing to take
Five Components of Investment Risk Inflation—return does not keep up with inflation Interest rate—could lose out on better interest rate Business failure—own stock in company; company fails Financial market—own stock in company/ies; market fails Global investment—invest in foreign market; foreign market fails
Investment Considerations Investment liquidity—the ability to buy or sell an investment quickly without substantially reducing its value
Money Rules #72
Savings and Investment Options and Considerations Section
Investment Alternatives Stocks Bonds Mutual Funds Real Estate
Stocks You buy “shares” of ownership in a company to provide them with operating funds Common stock* vs. Preferred stock* Common stock—a unit of ownership in a company that entitles the owner (stockholder) to voting privileges Preferred stock—a type of stock that gives the owner the advantage of receiving dividends before common stockholders
Bonds Buy and hold a bond, paid back to you plus interest Corporate bonds* vs. government bonds* 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 municipality, such as a city, to repay a specific sum of money with interest
Mutual Funds* Many people invest together in many stocks Fund manager makes decisions 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
Real Estate Own property that increases in value so that you can sell it at a profit OR own property to receive rental income
Diversification* “Don’t put all your eggs in one basket” Diversification—the process of spreading your assets among several different types of investments to reduce risk
Investment Considerations InvestmentRisk Level Rate of Return Liquidity Level Stocks Bonds Mutual Funds Real Estate
Income from Investments Is it tax exempt*, tax deferred*, or taxable? Types of investment income Dividends, Interest Income, Rental Income Capital gain* or capital loss* Tax-exempt income—income that is not taxed Tax-deferred income—income that is taxed at a later date Capital gain—is the profit from the sale of assets as stocks, bonds, or real estate Capital loss—the sale of an investment for less than its purchase price
Money Rules #61