Saving and Investing

Why Save?

 Saving : setting aside income for a period of time so that it can be used later  People save for purchases that require more funds than available, for emergencies, and for retirement.

 Results of Saving  Economies benefit from individuals who save because people have more money to invest or spend, leading to expanding business.  Where to Save  There are many saving options available to customers including commercial banks, savings and loan association, savings banks, and credit unions.  When choosing a place to save, think about trade- offs.

 Statement savings accounts accrue a low interest but allow immediate access to funds.  Statement Savings Account : account similar to passbook savings except that the depositor receives a monthly statement showing all transactions  The depositor can usually withdraw funds at any time without paying a penalty.

 Money market accounts accrue high interest with immediate access through checks, but have a high minimum balance requirement.  Money Market Deposit Account : account that pays relatively high rates of interest, requires a minimum balance, and allows immediate access to money  Customers can usually make withdrawals from a money market account in person at any time but can only write a certain amount of checks against the account.

 Time deposits refers to a wide group of savings plans or certificates of deposit (CDs) with a high interest rate that increases over time.  A depositor cannot remove funds before a certain time period or maturity without paying a penalty.  Time Deposits : savings plans that require savers to leave their money on deposit for certain periods of time

 The period of time at the end of which deposits will pay a stated rate of interest is called maturity.  The date of maturity can vary from seven days to eight years or more.  Time deposits are often called Certificates of Deposit (CDs), or savings certificates.  Certificates of Deposits : time deposits that state the amount of the deposit, maturity, and rate of interest being paid

 Insuring Deposits  Before the 1930s, people could lose all the money in their accounts if the bank failed.  Presiden Franklin Roosevelt signed legislation, creating the Federal Deposit Insurance Corporation, to protect deposits after a number of banks failed during the Great Depression.  Now the federal government insures bank accounts (in FDIC member banks) up to $250,000, giving people security when making deposits.

Investing: Taking Risks with Your Savings

 Stock Returns  Stockholders : people who have invested in a corporation and own some of its stock  Corporations are required to issue stock.  Stocks entitle the buyer to future profits and assets of the corporation.  Stockholders make money through dividends, return on bought stock, or by speculating— buying stock hoping it will increase in price so they can sell it at profit.

 Capital Gains and Losses  A capital gain is money earned by selling stock for more than you paid for it.  A capital loss is money lost by selling stock for less than you paid for it.  Taxes must be paid on capital gains whether it is increased stock value or increased property value.

 Bonds  A bond is a certificate promising to repay a loan at a stated interest rate.  A bondholder is NOT part-owner of the organization.

 Tax-Exempt Bonds  Tax-Exempt bonds earn tax-free interest.  Tax-Exempt bonds are good investment for wealthier people who would otherwise pay high taxes on interest earned from investments.

 Savings Bonds  With savings bonds you pay half of the bond’s face value and the interest increases yearly until the face value is reached.  The United States has issued war bonds, a type of savings bond, in the past to raise money for the military.

 T-Bills, T-Notes, and T-Bonds  T-Bills, T-Notes, and T-Bonds are government bonds exempt from state and local tax and mainly for larger investments.  The notes are sold in minimums of $1,000.  Treasury bills mature in 3 months to 1 year.  Treasury notes have maturity dates of 1-10 years.  Treasury bonds mature in 10 or more years.

 Stocks are bought/sold through brokers.  Broker : person who acts as a go-between for buyers and sellers of stocks and bonds  If an investor in interested in buying or trading corporate shares, he or she can contact a brokerage firm, which will perform the service for a fee.

 Stock Exchanges  Stocks are traded at stock exchanges.  Brokerage firms communicate with the busy floors of the stock exchanges.  The larges stock exchange is the New York Stock Exchange (NYSE).  Most of the companies traded on stock exchanges are among the largest, most profitable corporations in the country.

 Over-the-Counter Markets  Stocks that are not traded in a specific place are called over-the-counter stocks.  Companies on Over-the-Counter Markets are usually smaller companies.  Unlike organized stock exchanges, over-the-counter stocks are not traded in a specific place, rather brokerage firms hold shares of stock that they hold for investors.

 Bond Markets  Bonds are sold on exchanges and over-the-counter markets.  Mutual Funds  Mutual Funds are investment companies that combine many investors’ funds to buy a large variety and quantity of stocks.  Some mutual funds mirror index funds.  Managed mutual funds have managers who adjust and mix the stocks bought, attempting to generate the highest yield.

 Money Market Funds  Money market mutual funds allow investors to write checks against the money in the fund.  Money market funds usually use investors’ money to buy the short-term debt of businesses and banks.  Mutual funds and money market funds are not insured by the federal government.

 The Securities and Exchange Commission regulates brokerage firms, stock exchanges, and most businesses that issue stock.  Congress passed the Securities Act to avoid another stock market crash.  The Act requires a prospectus to be given to each potential buyer of stocks or bonds.

Special Savings Plans and Goals

 Most companies have pension plans, such as 401k, that provide retirement income.  Some people will combine a retirement plan with their Social Security checks because Social Security alone is not enough.  Personal or private pension plans have the benefit of tax savings.

 Individual Pension Plans  Established by the Keogh Act of 1962 and designed to help self-employed people set up their own pensions.  The Keogh plan is an individual retirement plan for self-employed people where they can save up to 15% of income.

 IRAs  Traditional IRAs allow you to contribute up to $3,000 per year, which is not taxed when put in, and any earnings and interest are not taxed until money is withdrawn.  Roth IRAs allow you to save up to $3,000 per year, which is taxed when put in, interest and earnings are never taxed, and money is not taxed when withdrawn.

 Real Estate as an Investment  Real estate is a popular form of investing for the future.  Housing generally increases in value over time.  Buying undeveloped land is a more risky investment.  It is hard to turn real estate into cash on short notice.

 Saving involves a trade-off like every other activity.  There are many factors involved in deciding how much to save versus how much to invest.  How much do you spend on your fixed expenses?  What are your reasons for saving?  How much interest can you earn on your savings and, therefore, how fast will savings grow?  How much income do you think you will be earning in the future?

 Invest in several different types of accounts to lower your overall risk (diversify).  If you cannot afford any losses, use banks or savings bonds.  Your values may affect your investment choices.