Chapter 10 Basics of Saving and Investing

How Are Saving and Investing Related? Savings is money set aside for the future. Investing is a strategy to earn more on your money than the rate of inflation. Wealth is the accumulation of assets over time. 10-1 Reasons for Saving and Investing Slide 2

How Do Saving and Investing Meet Personal Goals? Short-Term Goals Contingency planning Vacation planning Medium-Term Goals Buying a car Paying for college Planning a wedding Long-Term Goals Providing for a family Buying a house 10-1 Reasons for Saving and Investing Slide 3

How Does Investing Prepare You for Retirement and Beyond? Retirement is the period of time when you are not working but are able to meet expenses. Sources of income include: Retirement plans Social security Savings Investments 10-1 Reasons for Saving and Investing Slide 4

Investment Growth Over Time Amount Invested Interest Rate Investment Term Maturity Value $10,000 investment 6% 20 years $32,071 30 years $57,435 $1,000 investment 8% $10,063 40 years $21,725 $1,000 per year investment 5% $33,066 $66,439 $120,800 $100 per month investment 7% 25 years $81,007 $121,997 $262,481 10-1 Reasons for Saving and Investing Slide 5

Success Skills Having a Will and Health Care Directive A will is a document that passes title of property after a person dies. A simple will describes your wishes for distribution of property. A trust will leaves your estate in trusts to benefit your children and other heirs. A health care directive is also a “living will.” It describes your wishes at the end of life. 10-1 Reasons for Saving and Investing Slide 6

How Is Risk Related to Return? The higher the risk, the greater your possible return. Risk-free investments are guaranteed by the government—U.S. savings bonds, Treasury bills. Return on Investment (ROI) is the amount that savings or investments grow expressed as a percentage. 10-2 Principles of Saving and Investing Slide 7

Return on Investment Example 1: Bought an investment for $500; received dividends of $18 for the year Return: $18 Rate of return: $18 ÷ $500 = 3.6% (annual rate of return) Example 2: Bought an investment for $500 on March 1; sold it on October 1 for $525.   Return: $25 Rate of return: $25 ÷ $500 = 5% Note: The 5% return was received after only 7 months. The annual return would be higher. Calculate the annual ROI as follows: 0.05 ÷ 7 months × 12 months = 8.6% (annual rate of return) 10-2 Principles of Saving and Investing Slide 8

What Types of Risk Do Investors Face? Investment risk is the potential for change in the value of an investment. Inflation risk Industry risk Political risk Stock risk 10-2 Principles of Saving and Investing Slide 9

What Are Tax Advantages of Investing? Tax deferral is a postponement of taxes to be paid. Taxes on gains are not paid until the money is withdrawn. Tax exemption means savings and investments are not taxed. Example: Series EE and Series I savings bonds are tax-free if used for education. 10-2 Principles of Saving and Investing Slide 10

Building Communications Skills Good News Messages Use a direct approach. Place the answer or main point of the message early in the message. Include details in later paragraphs. Be clear, leaving no doubt about the answer or point to be shared. Be complete and concise. 10-2 Principles of Saving and Investing Slide 11

What Are Systematic Saving and Investing Strategies? Systematic saving involves regularly setting aside cash to achieve goals. Systematic investing is a planned approach to making investments on a regular basis. Market timing involves buying and selling stocks based on what the market is expected to do. 10-3 Strategies for Saving and Investing Slide 12

Stock Trend Line Investment tracking involves making investment choices by following stock prices over time. 10-3 Strategies for Saving and Investing Slide 13

How Can You Reduce Investment Risk? 10-3 Strategies for Saving and Investing Slide 14

How Can You Maximize Investment Return? A bull market exists when stock prices are steadily increasing. A bear market exists when prices are steadily decreasing. Economic conditions (growth or decline) can affect investment strategies. 10-3 Strategies for Saving and Investing Slide 15

Focus On . . . Dollar-Cost Averaging The systematic purchase of an equal dollar amount of the same stock at regular intervals 10-3 Strategies for Saving and Investing Slide 16