Unit 5: Saving & Investing Consumer Education Chapters 8 & 9

Benefits of Saving Saving – trading current spending for the ability to spend in the future What should I save for? Save for the Unexpected Save for Opportunities Save for Major Purchases Save for Flexibility Save to Achieve Your Goals

Saving Strategies Pay Yourself First Save by the Numbers Savings is an expense in your budget Save by the Numbers Save a % of your take-home pay, not a set amount Reward Yourself Low-cost rewards for saving Consider Your Values Enroll in Automatic Saving Payroll Deductions Checking Account Transfers Set up automatic transfers through online banking

FDIC – Commercial Banks ; NCUSIF – Credit Unions Savings Institutions Commercial Bank – a financial institution that serves individuals and businesses Savings Banks – financial institutions owned by their depositors Dividend – a share of the company’s profits Savings and Loan Associations – financial institutions that originally specialized in lending money to customers to buy homes (mortgages) Credit Unions – financial institutions that offer memberships to people who share a common bond; non-profit organizations Deposit Insurance: FDIC – Commercial Banks ; NCUSIF – Credit Unions

Savings Options Savings Account – an account at a banking institution in which you may deposit money, earn interest, and withdraw your funds at any time Certificate of Deposit (CD) – a deposit in a savings institution that earns a fixed interest rate for a specific period of time Money Market Account – a deposit for which the interest rate changes over time as interest rates in the economy change Annual Percentage Yield (APY) – the actual interest rate an account pays per year, calculated the same way by all banks

Government Bonds Bond – a written promise to pay a debt by a specified date Savings Bond – U.S. government bonds issued for amounts of $50 - $10,000 Face Value – the dollar value printed on a bond (the amount it is bought for)

Simple Interest Principal – money on deposit Interest (I) = Principal (P) x Rate (R) x Time (T) Principal – money on deposit Simple Interest – interest paid one time per year at the end of the year on the average balance in the savings account Compound Interest – interest paid on the principal and also on previously earned interest, assuming that the interest is left on deposit in the account

The Rule of 72 If an asset (money) grows x% a year, its value will double in 72 / x years

Annual interest rate: 4% Interest Compounded: Quarterly Date Interest Balance Jan. 1, 20xx $900.00 March 31, 20xx $9.00 $909.00 June 30, 20xx $9.09 $918.09 Sept. 30, 20xx $9.18 $927.27 Dec. 31, 20xx $9.27 $936.54 I = PRT Q1: I = $900.00 X .04 X .25 I = $9.00 Balance = $900.00 + $9.00 = $909.00 Q2: I = $909.00 X .04 X .25 I = $9.09

Investing Basics Investing – saving in a way that earns income Risk – the chance that an investment will decrease in value Return – income earned on an investment The higher the potential rate of return, the greater the risk Diversification – distributing funds among a variety of investments to minimize overall risk

Investing in Corporations Corporate Stock – a unit of ownership in a corporation that you can buy Stockholders – investors who own a corporation because they own its stock Stockbroker – a person who handles the transfer of stocks and bonds between buyer and seller Brokerage Firm – a company that specializes in helping people buy and sell stocks and bonds

Investing in Corporations Stock Exchange – a location where orders to buy or sell stock are sent and carried out National Association of Securities Dealers Automated Quotation System (NASDAQ) – an electronic stock-trading system that links brokerage firms

Types of Stock Dollar Cost Averaging – investing roughly equal amounts of money at regular intervals Preferred Stock – a non-voting share of ownership in a corporation that pays a fixed dividend Common Stock – a voting share of ownership in a corporation for which the dividend varies, as determined by the corporation’s board of directors Preferred Stock carries less risk because preferred shareholders receive dividends first Returns (dividends) are not guaranteed

Stock Classifications Blue Chip Stocks – large, well established corporations Growth Stocks – smaller or younger corporations Large Cap Stocks – total stock value of $10 billion or more Mid Cap Stocks – total stock value $2-10 billion Small Cap Stocks – total stock value less than $2 billion Sector Stocks – corporations who operate in a specific part of the economy Cyclical and Non-Cyclical Stocks – success linked to the success of the economy International Stocks – corporations based in other countries

Corporate Bonds Corporate Bonds – bonds sold by corporations to finance business activities, which usually pay a fixed interest rate and are paid after a specific term Junk Bonds – corporate bonds that are high-risk investments. Also known as high-yield bonds Bond Rating Services: Moody’s Standard & Poor’s (S&P) AAA – safest C & D – riskiest

Mutual Funds Mutual Fund – a business that accepts deposits from many people to invest in various ways Portfolio – selection of stocks or bonds that a mutual fund purchases Load – a sales fee that you pay when you invest in a mutual fund Front-end load – when you buy Back-end load – when you sell No-load – no fee because the fund has no sales people

Retirement and Other Investments Tax-deferred – a main benefit of many retirement plans; allow you to postpone paying tax on the income you invest until you retire 401(k) plans – a tax-deferred retirement plan offered to employees by their employer Vested – point at which you can keep employer’s contributions to your retirement account Individual Retirement Account (IRA) – a retirement savings plan that has special tax benefits bit is not employer-sponsored 403(b) plan – a tax-deferred retirement plan for teachers, hospital workers, ministers, and some other public employees

Mutual Fund Classifications Index Funds – Balanced Funds – Large Cap Funds – Mid Cap and Small Cap Funds – Aggressive Funds – Sector Funds – International Funds – Bond Funds – Tax-Free Funds – Exchange Traded Funds –