Introduction to Investing Take Charge of Your Finances Family Economics and Financial Education

© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 2 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona G1 Saving and Investing Once an appropriate amount of liquid assets are reached Refocus goals from savings to investing Remember: The purpose of savings is to develop financial security.

© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 3 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona G1 What is Investing? The purchase of assets with the goal of increasing future income Focuses on wealth accumulation Appropriate for long-term goals What are examples of long-term goals that can be accomplished by investing?

© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 4 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona G1 Rate of Return Investments usually earn higher rates of return than savings tools Rate of Return – The total return on an investment expressed as a percentage of the amount of money invested Total Return Amount of Money Invested Rate of Return Remember: Return is the profit or income generated by savings and investing.

© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 5 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona G1 What is Mandy’s Rate of Return? Mandy saved $2,200 in a money market deposit account. After one year, she has a return of $110. What is Mandy’s rate of return? $110$2, = 5% Mandy’s rate of return on investment is 5%

© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 6 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona G1 What is Derek’s Rate of Return? Derek invested $900. When he withdrew his money from the investment, he had a total of $1,050. What is Derek’s rate of return? $150 $ = 16.7% Derek’s rate of return on investment is 16.7%

© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 7 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona G1 Risk POTENTIAL RETURN RISK Risk The uncertainty regarding the outcome of a situation or event Investment Risk The possibility that an investment will fail to pay the expected return or fail to pay a return at all

© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 8 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona G1 Investment Risk Risk is a trade-off for the potential to receive high returns All investments carry some level of risk Financial Risk Pyramid Illustrates the trade-offs between risk and return for a number of saving and investing tools What is the risk level of savings tools?

© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 9 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona G1 Financial Risk Pyramid Wealth Accumulation- Investments Financial Security- Savings Tools Speculation Increasing potential for higher returns Increasing risk

© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 10 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona G1 Inflation The rise in the general level of prices Inflation Risk The danger that money won’t be worth as much in the future as it is today Inflation risk should not be a concern with savings since the goal of savings is to provide current financial security The rate of return on an investment should be higher than the rate of inflation.

© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 11 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona G1 Investment Philosophy Each individual has a tolerance level for the amount of risk they are willing to take on Investment Philosophy An individual’s general approach to investment risk The greater the risk a person is willing to make on an investment, the greater the potential return will be. Generally divided into three categories: conservative, moderate, and aggressive

© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 12 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona G1 Portfolio Diversification Portfolio Diversification- reduces risk by spreading investment money among a wide array of investment tools Creates a collection of investments that will provide an acceptable return with an acceptable exposure to risk Assists with investment risk reduction Referred to as “Building a Portfolio.”

© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 13 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona G1 Types of Investment Tools StocksBonds Mutual Funds Index Funds Real Estate Speculative Investments

© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 14 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona G1 Stocks Stock – A share of ownership in a company Stockholder or shareholder – Owner of the stock Usually a stockholder owns a very small part of a company.

© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 15 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona G1 Return on Stocks The share of profits distributed in cash to stockholders Stockholder may or may not receive dividends- depends on company profit Dividends The current price that a buyer is willing to pay for stock If stock is sold for a market price higher than what was paid, stockholder will receive a return If stock is sold for a market price lower than what was paid, stockholder will lose money Market Price

© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 16 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona G1 Bonds A form of lending to a company or the government (city, state, or federal) The company or government pays annual interest to the investor until the maturity date is reached – The specified time in the future when the principal (or initial investment) amount of the bond is repaid to the bondholder Bonds are less risky than stocks but do not have the potential to earn as much as a stock.

© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 17 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona G1 Mutual Funds Mutual fund- Created when a company combines the funds of many different investors and then invests that money in a diversified portfolio of stocks and bonds Always research the fees charged by a mutual fund. Reduces investment risk by helping people diversify their portfolio Fees can be high Saves investors time

© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 18 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona G1 Index Fund Index fund – A mutual fund that was designed to reduce fees by investing in the stocks and bonds that make up an index Index- a group of similar stocks and bonds – Examples- Standard and Poor 500, Wilshire 5000 Offer high diversification with low fees What is the difference between a mutual fund and an index fund?

© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 19 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona G1 Real Estate Includes any residential or commercial property or land as well as the rights accompanying that land A family home is not considered an investment asset Can be risky and more time consuming but has potential for large returns Examples of real estate investments include rental units and commercial property.

© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 20 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona G1 Speculative Investments Have the potential for significant fluctuations in return over a short period of time – Examples- future, options, commercial paper, collectibles Recommended for people with an aggressive investment philosophy and a high level of financial security

© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 21 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona G1 DISCOUNT BROKER Buying and Selling Investments Investors must utilize a brokerage firm that acts as a buying and selling agent for the investor (except for when buying real estate and certain speculative investments). FULL SERVICE GENERAL BROKERAGE FIRM Complete investment transactions Offer investment advice and one-on- one attention from a broker Only complete investment transactions Offer no advice to investors but charge 40-60% less

© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 22 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona G1 Taxation Profits earned on investments are considered to be unearned income Income taxes MUST be paid on this money Includes all forms of returns: interest, dividends, and price appreciation Taxes are due on most investment returns in the year the unearned income is received

© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 23 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona G1 Tax-Sheltered Investments The government tries to encourage certain types of investments by making them tax-sheltered Tax-sheltered investments – Eliminate, reduce, defer, or adjust the current year tax liability Examples- retirement, child/dependent care, education expenses, health care expenses Tax-sheltered investments are not tax- free!

© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 24 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona G1 Tax-Sheltered Investments Taxes are either paid when the money is put into the account or when the money is taken out of the account There are limits to the amount of money that can be invested An individual should invest as much money as possible in tax-sheltered investments What is the benefit of a tax- sheltered investment if taxes still have to be paid?

© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 25 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona G1 Employee-Sponsored Investment Accounts Allow employees to reduce their tax liability and make investing automatic Money is automatically taken out of an employee’s paycheck Employers often contribute a portion of money to the investment with no additional cost from the employee It is recommended that a person utilize these investment tools as much as possible if they are offered.

© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 26 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona G1 Rule of 72 Allows a person to easily calculate when the future value of an investment will double the principal amount 72 Interest Rate Number of years needed to double the principal investment

© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 27 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona G1 Albert Einstein Credited for discovering the mathematical equation for compounding interest, thus the “Rule of 72.” At 10% interest rate, money doubles every 7.2 years, T=P(I+I/N) YN “It is the greatest mathematical discovery of all time.”

© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 28 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona G1 What Can the “Rule of 72” Determine? How many years it will take an investment to double at a given interest rate using compounding interest How long it will take debt to double if no payments are made The interest rate an investment must earn to double within a specific time period How many times money (or debt) will double in a specific time period

© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 29 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona G1 “Rule of 72” FYI The rule is only an approximation The interest rate must remain constant The equation does not allow for additional payments to be made to the original amount Interest earned is reinvested Tax deductions are not included within the equation

© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 30 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona G1 Doug’s Certificate of Deposit Invested $2,500 Interest Rate is 6.5% Doug invested $2,500 into a Certificate of Deposit earning a 6.5% interest rate. How long will it take Doug’s investment to double? % = years to double

© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 31 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona G1 Jessica’s Credit Card Debt $2,200 balance on credit card 18% interest rate Jessica has a $2,200 balance on her credit card with an 18% interest rate. If Jessica chooses to not make any payments and does not receive late charges, how long will it take for her balance to double? 72 18% =.18 4 years to double

© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 32 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona G1 Jacob’s Car $5,000 to invest Wants investment to double in 4 years Jacob currently has $5,000 to invest in a car after graduation in 4 years. What interest rate is required for him to double his investment? 72 4 years 18% interest rate

ANY QUESTIONS?