Saving and Investing Make your money work for you

Pay Yourself First Save this each week At % InterestIn 10 years you will have $7.005%$4,720 $14.005%$9,440 $21.005%$14,160 $28.005%$18,880 $35.005%$23,600

Can You Believe… 49% of Teens P.Y.F. 79% of Teens use savings/checking accounts 5% use certificates of deposits 33% of Teens seek advice on investment 51% of Teens who invest in the stock market are Guys, 29% are girls 42% of Teens save money for college, 30% save for car

Time Value of Money Relationship between time, money, and rate of return (interest) Earned interest-payment received for allowing a financial institution/corporation to use your money

How to meet financial goals? 1. Time- More time to save, more money you will have 2. Money- More you save, more you will have 3. Rate of interest- Higher rate you earn, more money you will have

Inflation If $2 is left in your room for 2 years, it is worth $1.75 at the end of the 2 years due to inflation Inflation: the prices of goods & services increasing over time. Examples: In 1994, candy bars never cost more than $0.50. Now they cost $1.00 Gas used to cost $0.87 a gallon in 1994 and now???

Inflation U.S. inflation has increased.5% to over 18% in a year; the average is 3-4% Inflation calculator Taxes- drain on savings/investments Income- federal/ state gov’t collect share Taxed on job income, savings interest, Selling stocks/bonds. You pay on nearly all earnings you receive

Risk Even lenders face risk Inflation- big threat to investment that only pays interest but that you are not adding to. No risk free investment Research investment, then invest

1 st decision in investment? Owner or Lender? Traditional Savings U.S. Savings Bonds Certificates of deposits Lender Stocks Stockholder owns portion of company Historically, Owners outperformed lenders Owner

Income Investments-lenders Savings account = Low risk, low interest U.S. Savings Bonds = Gov’t pays cash to investors in the form of interest. Set time period, Higher interest rate than savings. NPR Report on Savings BondsNPR Report on Savings Bonds Certificate of Deposit = Loans to Banks/ credit unions. 3 months, 6 months, 1 year ( Longer the time, higher the interest) Slightly higher than savings bonds. Money Market = Offered through banks/credit unions. Work like checking accounts. Can take money out with no penalty, but higher investment is needed. Corporate/Gov’t Bonds = Highest interest rate. Gov’t safer, time periods can be 2 months to 30 years. Longer time period, the higher the interest rate

Income Investments-Owners Stocks represent ownership in company Buy low- sell high Capital Gain- difference between purchase price and selling price (taxable) Real Estate Collectibles Mutual Funds-pools money from several investors and purchases stocks. Uses a fund manager who makes buy/sell decisions. Offers diversification

Choosing a Savings Account Factors that determine the dollar yield on an account: Interest rate ( also called rate of return, or annual yield) All money earned comes from this factor The following factors reduce money earned and can even turn it into a loss: Fees, charges, and penalties Usually based on minimum balance requirements, or transaction fees

If you invest $1000 each year ($19.20 per week) Interest Rate 5 yrs10 yrs15 yrs20 yrs 5%$5,525$12,578$21,578$33,065 6%$5,637$13,181$23,276$36,786 7%$5,751$13,816$25,129$40,995 8%$5,867$14,487$27,152$45,762 9%$5,985$15,193$29,361$51,160 10%$6,105$15,937$31,772$57,257 11%$6,228$16,722$34,405$64,203 12%$6,353$17,548$37,279$75,052

Savings VS Investment Difference = time Savings- set aside for short-term goals Savings is safe & earns small amount of interest Invest- set aside for future income, benefit, or profit Invest- no guarantee, in it for long haul, opportunity to make more money than savings

Types of Savings Accounts Passbook Account Depositor receives a booklet in which deposits, withdrawals, and interest are recorded. Compare your interest rates between banks and credit unions Funds are easily accessible (liquid)

Statement Accounts Basically the same as a passbook account except depositor receives monthly statements instead of a passbook Accounts are accessible through ATM’s Interest rates are the same as a passbook account Funds are easily accessible (liquid)

Interest Earning Checking Accounts Combines benefits of checking and savings Depositor earns interest on any unused money in his/her account

Money Market Deposit Accounts Checking and savings account Interest rate paid built on a complex structure that varies with size of balance and current level of market interest rates Can access your money from an ATM, a teller, or by writing up to three checks a month

Benefits/ TradeOffs Immediate access to your money Average yield (rate of return) higher than regular savings accounts Usually requires a minimum balance of $1,000-$2500 Limited number of checks can be written each month

Certificates of Deposit (CD) Bank pays a fixed amount of interest for a fixed amount of time This is a great way to diversify your investments

Benefits/ Trade Offs No risk Simple No fees Offers higher interest rates than savings accounts Restricted access to your money (not liquid) Withdrawal penalty if cashed before expiration date (penalty might be higher than the interest earned

Types of CD’s Traditional--Deposit a fixed amount of money for a specific term and receive a predetermined interest rate. Cash out at the end of the term, or roll over for another term. Rising Rate/Bump Up CD- with higher rates at various intervals, such as every six months Stock-indexed/Brokerage CD’s Callable CD’s- with higher rates and long- term maturities, as high as years. However, the bank may “call” the account back after a stipulated period, such as one or two years, if interest rates drop.

Types of CD’s Global CD- combine higher interest with a hedge on future changes in the dollar compared to other currencies. Hedge is an investment made with the intention of minimizing the impact of adverse movements in interest rates or securities pricess Promotional CD’s- attempt to attract savers with gifts or special rates.

Value of Money Changes over time. When Money is working for you, it grows in value or compounds. Compounding interest-idea of earning interest on interest

Simple vs Compound Interest Simple Interest Calculation: Dollar Amount x Interest rate x Length of Time (in years) = Amount earned $100 in a savings account that paid 6% simple interest, during the first year you would earn $6 in interest $100 x.06 x 1 =6 At the end of 2 years you would have earned $12.00 The account would continue to grow at a rate of $6 per year, despite the accumulated interest

Compounded Interest Interest is paid on original amount of deposit, plus any interest earned. (Original $ amount + Earned Interest) x Interest Rate x Length of Time = Amount Earned $100 in savings that pay 6% interest compounded annually, the first year you would earn $6 $100 x.06 x 1=6 $ = $106

Compounded Interest With compounded interest, the second year you would earn $6.36 in interest $106 x.06 x 1 -$6.36 $106 + $6.36 = $ You want to put your money in accounts that compound more often

Watch your money grow Your monthly deposit of $ for 10 years with an interest rate 0f 6.500% compounded monthly with a starting balance of $1,000 YearBalance6$ $ $ $ $ $ $ $ $ $ Final Balance $

Rule of 72 To determine about how many years it will take to double your money: 72 divided by Interest rate =Years to double your investment

Rule of 72 To determine the interest rate that will double your money in a set number of years: 72 divided by years to double investment = interest rate required

Rule of divided by1 % interest 72 years 72 divided by3 % interest24 years 72 divided by6 % interest12 years 72 divided by9 % interest8 years 72 divided by12 % interest6 years 72 divided by15 % interest4 yrs 10 months

Rule of 72 3-H 72 Interest Rate = Years Needed to Double Investment 72 Interest Rate Required = Years Needed to Double Investment

Let’s invest only $5.00 each month and see how important it is for you to get a little bit higher return on your investment. The following table illustrates what 3% more interest will do for you Year1%3%6%9%12%15%

Time is on your side Most people do not start their investment portfolio until it’s too late It does not take a lot of money to build financial independence if you start investing early. The importance of time can not be underestimated. It’s one of the most important elements in your financial plan. Most people fail to use time to their advantage because they allow procrastination to erode their savings plan

Invest Early Suppose you are 25 and have a goal of $100,000 cash at retirement age. You could accomplish this by saving only $10.22 per month at 12%. I know it seems amazing but it is true. And it’s also true that anyone can mange to save $10.22 per month, no matter what their income. But if you are 55 and have and have the same goal- $100,000 at 65 you must save $ a month. 43 times as much as you would have needed monthly at 25.

Invest Early Age 25 Save $10.22 monthly Age 35 Save $ monthly (3 times more) Age 45Save $ monthly (10 times more) Age 55Save $ monthly (43 times more)

Savings Accounts Balance requirements Some accounts require a certain balance before paying any interest. On Money market accounts, most banks will pay different interest rates for different size balances (higher balance earns a higher rate) Balance calculation method Most calculate daily. Some use average of all daily balances.

Truth in Savings Act The Truth in Savings Act requires financial institutions to disclose the following information on savings account plans they offer: Fees on deposit accounts The interest rate Other terms and conditions The annual percent yield (APY)

APY Annual percentage yield which is the percentage rate expressing the total amount of interest that would be received on a $100 deposit based on the annual rate and frequency of compounding for a 365 day year, rather than 360, 366 or some other number. This law eliminates confusion caused by the more than eight million variations of interest calculation methods previously used by financial institututions.

Bonds A bond is an IOU certifying that you loaned money to a government or corporation and outlining the terms of repayment A buyer may purchase a bond at a discount. The bond has a fixed interest rate for a fixed period of time. When the time is up, the bond is said to have “matured” and the buyer may redeem the bond for the full face value

Types of Bonds Corporate- sold by private companies to raise money for the corporation If the company goes bankrupt, bondholders have first claim to the assets before stockholders (safer risk)

Types of Bonds Municipal Issued by any non federal government Interest paid comes from taxes or from revenues from special projects. Earned interest is exempt from federal income tax

Types of Bonds Federal Government The safest investment you can make. Even if US government goes bankrupt, they are obligated to repay bonds.

Bond Basics Accrued Interest- Interest deemed to be earned on a security but not yet paid to the investor Ask price- price being sought for the security by the seller Bid- the price at which a buyer offers to purchase a security Callable bond- bonds which are redeemable by the issuer prior to the maturity date at a specified price at or above par

Bond Basics Call premium: a dollar amount, usually stated as a percent of the principal amount call, paid by the issuer as a penalty for the exercise of a call provision

Bond Basics Default: failure to pay principal or interest when due. Federal Funds Rate: The interest rate charged by banks on loans to other banks. The Federal Reserve’s ability to add or withdraw reserved from the banking system gives it close control over this rate.

Bonds Bond ratings are like grades. AAA is the highest. D is the lowest. Investment grade bonds: safe bonds because the issuers are stable and dependable. Junk Bonds: a debt obligation with a Ba or BB or lower, generally paying interest above the return on more highly rated bonds.

Stocks Stock represents ownership of a corporation. Stockholders own a share of the company and are entitled to a share of the profits as well as a vote in how the company is run Company profits may be divided among shareholders in the form of dividends. Dividends are usually paid quarterly. Larger profits can be made through an increase in the value of the stock on the open market.

Stocks advantages/disadvantages If the market value goes up, the gain can be considerable. Money is easily accessible (liquid) If the market goes down, the loss can be considerable Selecting and managing stock often requires study and the help of a good brokerage firm

Penny Stock In the U.S., a penny stock is a common stock that trades for less than $5 a share and are traded over the counter (OTC) through quotation services such as the OTCBB or the Pink Sheets. Although a penny stock is said to be "thinly traded," share volumes traded daily can be in the hundreds of millions for a sub-penny stock. Legitimate information on penny stock companies can be difficult to find and a stock can be easily manipulated.

Treasury Bills (t-bills) Sold in terms ranging from a few days to 52 weeks. Bills are typically sold at a discount (you might pay $990 for a $1,000 bill). When the bill matures, you would be paid $1,000. The difference between the purchase price and face value is interest. Secure, short term investment

Mutual Funds Professionally managed portfolios made up of stocks, bonds, and other investments Individuals buy shares, and fund uses money to purchase stocks, bonds, and other investments Profits returned to shareholders monthly, quarterly, or semi-annually in the form of dividends Advantage is that it allows small investors to take advantage of professional account management and diversification normally only available to large investors

Types of Mutual Funds Balanced Fund- includes a variety of stocks and bonds Global Bond Fund- has corporate bonds of companies from around the world Global Stock Fund has stocks from companies in many parts of the world Growth Fund emphasizes companies that are expected to increase in value; also has higher risk

Types of Mutual Funds Income Fund- features stock and bonds with high dividends and interest Industry Fund- invests in stocks of companies in a single industry (such as technology, health care, banking) Municipal Bond Fund- loaning state and local governments money for returns Regional Stock Fund- involves stocks of companies from one georgraphic region of the world (such as Asia, Latin America etc)

REAL ESTATE Ways to invest in real estate: Buy a house, live in it, and sell it at a profit Buy income property (such as an apartment house or a commercial building) and rent it Buy land and hold it until it rises in value

Real Estate Advantages/ Disadv. Excellent protection against inflation Can be difficult to convert into cash A specialized type of investment requiring study and knowledge of business

Capital Gains Profits from the sale of a capital asset such as stocks, bonds, or real estate. These profits are tax-deferred; you do not have to pay the tax on these profits until the asset is sold. Long-term capital gains occur on investments held more than 12 months. Short term capital gains occur on investments held less than 12 months

Tax Deferred Savings Allows to postpone taxes while building investment Saving for future- part of financial planning IRA (individual retirement account) 401k and 403b through employers Withdrawals from accounts planned for retirement -tax brackets are lower Long- Term investment Taxes/penalties on money withdrawn before age 59 1/2

RETIREMENT PLANS Plans that help individuals set aside money to be used after they retire Federal income tax not immediately due on money put into a retirement account, or on the interest it makes Income tax paid when money is withdrawn Penalty charges apply if money is withdrawn before retirement age, except under certain circumstances Income after retirement is usually lower, so tax rate is lower

Types of Retirement Plans IRA (Individual Retirement Account) Allows a person to contribute up to $5,000 earning per year. Contributions can be made in installments or in a lump sum IRA Contribution Limits YEAR AGE 49 & BELOW AGE $3,000 $3, $4,000 $4, $4,000 $5, $5,000 $6,000

ROTH IRA While the $5,000 annual contribution to this plan is not tax deductible, the earnings on the account are tax-free after five years. The funds from the Roth IRA may be withdrawn after age 59 if the account owner is disabled, for educational expenses, or for te purchase of a first home

IRA vs Roth IRA Tax deductible contributions (depending on income level) Withdraws begin at age 59 1/2 and are mandatory by 70 1/2. Taxes are paid on earnings when withdrawn from the IRA Contributions are not tax deductible No Mandatory Distribution Age All earnings and principal are 100% tax free if rules and regulations are followed

IRA vs Roth IRA Funds can be used to purchase a variety of investments (stocks, bonds, certificates of deposits, etc.) Available to everyone; no income restrictions All funds withdrawn (including principal contributions) before 59 1/2 are subject to a 10% penalty (subject to exception). Funds can be used to purchase a variety of investments (stocks, bonds, certificates of deposits, etc.) Available only to single- filers making up to $95,000 or married couples making a combined maximum of $150,000 annually. Principal contributions can be withdrawn any time without penalty (subject to some minimal conditions).

401 K Allows a person to contribute to a savings plan from his or her pre-tax earnings, reducing the amount of tax that must be paid. Employer matches contributions up to a certain level

Keough Plan Allows a self-employed person to set aside up to 15% of income to be able to participate in a type of a 401 K.

Financial Planning Pyramid Penny Stock Commo- dities Collectibles Speculative Stock / Bonds / Mutual Funds Real Estate Blue-Chip Common Stock Growth Mutual Funds High-Grade Convertible Bonds High-Grade Preferred Stock Balanced Mutual Funds High-Grade Corporate Bonds or Mutual Funds High-Grade Municipal Bonds or Mutual Funds Money Market Accounts or Mutual Funds Certificates of Deposit U.S. Savings Bonds Insured Savings / Checking Accounts Treasury Issues Highest Risk Highest Earnings Lower Risk Lower Earning s 3-J NEFE High School Financial Planning Program Unit Three – Investing: Making Money Work for You

Diversification Reduction of risk by spreading your dollar in different investments

Protect Yourself from Investment Fraud Become informed about investments and industries before investing Talk with others who have made similar investments Obtain information from state and federal regulatory agencies Never buy over the phone without first investigating the situation Avoid investment opportunities promising large returns in a short time that seem “too good to be true”-they probably are…..

Common Frauds Pyramid Schemes High risk penny stocks and fraudulent securities Fraudulent Franchises and business opportunities