Copyright © 2008 Pearson Education Canada 8-1 Chapter 8 Saving and Investing

8-2 Copyright © 2008 Pearson Education Canada How Much Do Canadians Save? Most Canadians don’t save enough Spend more than they earn Tend to have very low or negative savings rates

8-3 Copyright © 2008 Pearson Education Canada Four Reasons to Save 1. Emergencies 2. Liquidity 3. Short-term goals 4. Long-term goals

8-4 Copyright © 2008 Pearson Education Canada 1. Save for an Emergency Readily accessible funds For unexpected expenses E.G. 3 months’ take home pay Savings account, term deposit, CSB’s Insurance protection Property Dependants

8-5 Copyright © 2008 Pearson Education Canada 2. Save for Liquidity Needs For unevenness in cash flow To pay for infrequent large expenses E.G. One months’ take-home pay Deposit that permits checking

8-6 Copyright © 2008 Pearson Education Canada 3. Save for Short-term Goals Things to be accomplished in next five years Snowmobile, car, holiday, computer, home down-payment Low risk securities With appropriate maturities

8-7 Copyright © 2008 Pearson Education Canada 4. Save for Long-term Goals Typical goals Enhance financial security Achieve financial independence Achieve comfortable lifestyle during retirement Start planning early Invest in securities that have prospects for long-term growth

8-8 Copyright © 2008 Pearson Education Canada Two Approaches to Saving 1.Pay yourself first Take savings off the top of each paycheck Before spending anything 2.Pay yourself last Save what is left at the end of each pay period Not recommended

8-9 Copyright © 2008 Pearson Education Canada Rules for Saving Set goals Plan Regular contributions

8-10 Copyright © 2008 Pearson Education Canada Saving Versus Investing Saving Means not spending Passive approach to wealth accumulation Little risk but little return Investing Committing capital to earn a return Active approach to wealth accumulation More risk but more larger return

8-11 Copyright © 2008 Pearson Education Canada Why Invest? Growth Hobby

8-12 Copyright © 2008 Pearson Education Canada Two Basic Ways to Invest 1.Debt Lending money Deposits accounts, bonds, treasury bills, mortgages 2.Equity Acquiring ownership Business, real estate, jewelry, stocks, gold, silver

8-13 Copyright © 2008 Pearson Education Canada Investment Objectives Return on investment Current income Liquidity Inflation protection Management effort Tax reduction

8-14 Copyright © 2008 Pearson Education Canada Forms of Investment Return 1.Income Profit, dividends, interest, rent 2.Capital gain Capital appreciation Increase in asset value

8-15 Copyright © 2008 Pearson Education Canada Characteristics of Investments Risk/return trade-off Liquidity Marketability Term Management effort required Income tax treatment

8-16 Copyright © 2008 Pearson Education Canada Factors Inversely Related to Return on Investment Safety of principal Accessibility of funds Liquidity Inattention to securities management

8-17 Copyright © 2008 Pearson Education Canada Investment Risks Inflation risk Loss of purchasing power Interest rate risk Inverse relationship Market risk Price of asset may fall Business risk Business performs poorly

8-18 Copyright © 2008 Pearson Education Canada Risk Management Balance investments and other risks Life cycle risk Older people prefer less risk Income and risk People with secure income tolerate more risk Diversify investments Variety of investments Spread risk

8-19 Copyright © 2008 Pearson Education Canada Minimizing Risk Influenced by Time spent studying investments Knowledge about the future

8-20 Copyright © 2008 Pearson Education Canada Knowledge Economic conditions in general The specific marketplace Stock market Bond market Real estate market Specific stocks and bonds and real estate

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