19 Savings and Investment Strategies C H A P T E R 19 Savings and Investment Strategies 19-1 Saving and Investment Planning 19-2 Stock Investments 19-3 Bonds and Mutual Funds 19-4 Real Estate Investments 19-5 Other Investments

KEY TERMS Saving – the storage of money for future use Investing – using your savings to earn more money

SAVING AND INVESTMENT BASICS Savings and investment activities Determine investment goals The growth of savings Interest Compound interest – earning interest on previously earned interested which results in faster growth of savings; computed on the amount saved plus the interest previously earned

QUARTERLY COMPOUND INTEREST

SAVING AND INVESTMENT CHOICES Savings plans Savings account – a savings plan with a low balance where you can deposit and withdraw money as needed Certificate of deposit (CD) – allows you to earn a higher interest rate than a regular savings account; requires a minimum deposit and must be left on deposit for a specified period of time Money market account – pays a variable interest rate based on various government and corporate securities; do not require long-term deposits

SAVING AND INVESTMENT CHOICES CONTINUED Securities Stock investments – when you buy a share of stock becoming part owner of a company; purchase made directly or indirectly through mutual funds (common way of investing) Bond investments – lending money to a company or government agency to use for their business activities through purchase of a bond Mutual funds – allow investors to spread out their risk among many investments

SAVING AND INVESTMENT CHOICES CONTINUED Alternative investments Real estate – purchasing homes or other property for stability or income reasons (Ex. Housing, farmland, apartment buildings, shopping malls) Commodities – grain, livestock, precious metals, currency, and financial instruments; investing in commodities is considered very risky Collectibles – old coins, works of art, antique furniture, and other rare items are often bought with the hopes that their value will increase

EVALUATING SAVINGS AND INVESTMENTS Safety and risk Potential return Yield – the percentage of money earned on your savings or investment over a year Liquidity – the ease with which an investment can be changed into cash without losing its value Taxes

EXAMPLES OF DIFFERENT YIELDS $100 Invested for 20 Years at Different Yields with Annual Compounding

INVESTMENT PYRAMID

KEY TERMS Preferred stock – has priority over common stock in the payment of dividends Common stock – represents general ownership in a corporation and a right to share in its profits Stockbroker – a licensed specialist in the buying and selling of stocks and bonds Stock exchange – a business organization that accommodates the buying and selling of securities Market value – the price at which a share of stock can be bought and sold in the stock market

STOCK SELECTION Consumer spending – profits of companies that sell products and services to households are directly affected by buying habits Employment – as people obtain or lose jobs, the amount of money they have for spending will affect company profits Company factors Stock information sources Economic factors Inflation – higher prices can result in lower spending by consumers, reducing company profits Interest rates – as the cost of money changes, company profits can increase or decline

KEY TERMS Municipal bond – bonds issued by local and state governments (also called munis) Corporate bond – bonds issued by corporations Mutual fund – an investment fund set up and managed by a company that receives money from many investors

GOVERNMENT BONDS Municipal bonds U.S. savings bonds Other federal securities Federal notes (T-notes) Treasury bills (T-bills) Treasury bonds (T-bonds)

MUTUAL FUNDS A mutual fund is an investment fund set up and managed by companies that receive money from many investors.

TYPES OF MUTUAL FUNDS Aggressive-growth stock funds Income funds International funds Sector funds Bond funds Balanced funds

MUTUAL FUND VALUES Shares of the mutual fund Value of each share Net asset value (NAV) Operating expenses Earnings

KEY TERMS Real estate – land and anything else that is attached to it Mortgage – a legal document giving the lender a claim against the property if the principal, interest, or both are not paid as agreed Equity – the difference between the price at which you could currently sell your house and the amount owed on the mortgage Assessed value – the amount that your local government determines your property to be worth for tax purposes

BENEFITS OF HOME OWNERSHIP Tax benefits Increased equity Pride of ownership

COSTS OF HOME OWNERSHIP Property taxes Interest payments Property insurance Maintenance

KEY TERMS Futures contract – an agreement to buy or sell an amount of a commodity at a specified price in the future