Saving and Investing Economics Ms. McRoy

Aim What is the difference between saving and investing?

Did you know? According to the U.S. Bureau of Labor Statistics, Americans spend 97% of their disposable (after-tax) income. We only save 3%!! How much do you think a person should save each month? 20% of each paycheck!

“The higher the potential return, the higher the risk!” What’s the difference? Saving: setting aside income so that it is not spent. (e.g. creating an emergency fund in your savings account) Investing: the use of savings to buy something that is expected to increase in value. Rule of Investments: “The higher the potential return, the higher the risk!”

The Importance of Long-Term Saving Compound Interest: A = Final Amount P = Principle (initial investment) r = Annual interest rate (e.g. 0.05) n = number of times the interest is compounded per year t = number of years Imagine you decided to put $100 into an account that pays an interest rate of 5% that is compounded annually… What will your account balance be after 4 years?

Compound Interest (cont’d) Year Principal + Prior Year's Interest Interest Total Year 1 $100 $5 $105 Year 2 $110 Year 3 $115 Year 4 $6 $121 Notice that your interest is being calculated based on your principal and interest! After 10 years you would have ~$163 by DOING NOTHING!

Rule of 70 (for compound interest) What is it? 70/ the interest rate (per period) = the number of periods needed for your savings to double Application: Using our last example: 70/5 = 14 years

What’s the key rule of investments, again? Investing Any money that you do not plan on using in the near future, you should invest. Investing: the use of savings to buy something that is expected to increase in value. What’s the key rule of investments, again?

Investment Strategies Speculation: the act of actively trading a assets for financial gain. “buy low, sell high” strategy Growth: the act of purchasing an asset for long-term growth and income generation. “buy and hold” strategy (e.g. interest on bonds, dividends on stocks)

Ways to Save and Invest Commodities Antiques/Collectables Real Estate Stocks Mutual Funds Company Bonds U.S. Government Bonds Certificates of Deposit Savings Account Cash High Risk/ High Potential Return Low Risk/ Low Potential Return

Ways to Save and Invest Commodities Commodities are raw materials most often used as inputs in the production of other goods or services. There is little differentiation between a commodity coming from one producer and another.  Some traditional examples of commodities include grains, gold, beef, oil and natural gas Typically traded on a commodities futures exchange.

Ways to Save and Invest Antiques/Collectable An antique is an old collectable item. It is collected or desirable because of its age, beauty, rarity, condition, utility, personal emotional connection, and/or other unique features.  E.g. A U.S. letter box from the 1800’s.

Ways to Save and Invest Real Estate Investing in buying homes and renting them out. You take on financial asset risks (e.g. need to take out an additional mortgage) as well as physical asset risks as the land lord (need to maintain the property, fix things that break) What if the tenant doesn’t pay the rent? You still need to pay the mortgage! Investing by buying a home to raise your family in, and maintaining it with the goal of selling it for a higher value some day in the future.

Ways to Save and Invest (cont’d) Stock/Share A certificate of ownership in a corporation. You can make money if the company issues dividends, or if the value of the stock increases from the time you bought it to the time you sold it. Riskiness varies by company. Generally more risky than bonds.

Ways to Save and Invest (cont’d) Common stock: Voting rights Potential profit from dividends Receive payments AFTER preferred stockholders in firm liquidation Preferred stock: No voting rights Guaranteed rate of dividends (when issued) Receive payments BEFORE common stockholders in firm liquidation

Ways to Save and Invest (cont’d) Blue chip stocks: Stocks with a reputation for quality, reliability, and the ability to operate profitably in good times and bad Typically has a market capitalization in the billions, is generally the market leader or among the top three companies in its sector, and is more often than not a household name Known for steady dividends Sector Examples Consumer Goods Wal-Mart, Procter & Gamble, Coca-Cola, Home Depot Financials Goldman Sachs, Wells Fargo, JPMorgan Chase Energy ExxonMobil, Chevron Industrials Boeing, General Electric, 3M, Caterpillar

Ways to Save and Invest (cont’d) Growth stocks: Shares in a company whose earnings are expected to grow at an above-average rate relative to the market A growth stock usually does not pay a dividend, as the company would prefer to reinvest retained earnings in capital projects. Many technology companies are growth stocks Value stocks: A stock that tends to trade at a lower price relative to it's fundamentals (i.e. dividends, earnings, sales, etc.) and thus considered undervalued by a value investor. Common characteristics include a high dividend yield and/or low price-to-earnings ratio. Income stocks: pays regular, often steadily increasing dividends, and offers a high yield that may generate the majority of overall returns Speculative stocks

Ways to Save and Invest (cont’d) Mutual funds A mutual fund gets a pool of money by accepting funds from thousands of individual investors. It invests its pool of money in a collection of different stocks, bonds, and other securities. In other words, it spreads the money out. http://www.investopedia.com/terms/m/mutualfund.asp

Ways to Save and Invest (cont’d) Bonds A certificate issued by a government or corporation in exchange for a loan. Need to look at bond ratings. Corporate/company bonds tend to be more volatile than government bonds.

Ways to Save and Invest (cont’d)

Ways to Save and Invest (cont’d) Certificates of Deposit (CD’s) A deposit that a depositor agrees to keep in the bank for a specified time. Offer higher rates of return than a savings account. Typically held from 3 months – 5 years before cashing out.

Ways to Save and Invest (cont’d) Savings Account A bank deposit that earns interest. The average savings account has a measly 0.06% APY (annual percentage yield, or interest) Source: money.cnn.com/2013/10/01/pf/savings-account-yields/ Cash Least risky, lowest return. Actually, technically, a negative ROI!

How can you build wealth? Start early Give your money time to grow Buy and hold Keep your money invested through the ups and downs. Do not “time the market.” Diversify Don’t put all your eggs in one basket.

Business Cycle

Business Cycle

Tracking your Investments Major Stock Market Indices S&P 500:  An American stock market index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ The Dow Jones Industrial Average (aka the DJIA or “The Dow”): A stock market index that shows how 30 blue-chip stocks, based in the United States, have traded The ”industrial” portion of the name is largely historical

Tracking your Investments (cont’d) Major Stock Market Indices NASDAQ: A stock market index that is heavily weighted towards information technology companies Russell 2000: A small-cap stock market index of the bottom 2,000 stocks in the Russell 3000 Index The Russell 2000 is the most common benchmark for mutual funds that identify themselves as "small-cap", while the S&P 500 index is used primarily for large capitalization stocks.

Aim What is the difference between saving and investing?