Preparing for a Savings or Investment Program Chapter 8

Saving and Investing Section 8.1 Objectives  How to establish goals for a savings or investment program  How to discuss ways to obtain funds for investing  How to identify the factors that affect your investment choices

Establishing Your Financial Goals Goals should be specific and measurable Your goals should correspond with your values Ask yourself these questions as you make goals  How do I want to spend my money?  How much money do I need to satisfy my goals?  How will I get the money?  How long will it take to save the money?  How much risk am I willing to take when I invest?  What conditions in the economy or in my life could change my investment goals?  Are my goals reasonable, considering my circumstances or future circumstances?  Am I willing to make sacrifices to save?  What will happen if I do not meet my goals?

Perform a Financial Check-Up Balance your budget  Spend less than you make  Limit credit card usage Have insurance  Cover losses from car, home, health Start an emergency fund  Save enough for 3-9 months of expenses Have other sources of cash  Have line of credit available or cash advance capability for serious emergencies

Money to Get Started Pay yourself first  Treat investment like a normal expense Employer sponsored retirement plans  401k or 403b Elective savings programs  IRA or Roth IRA Special savings effort  Periodic cuts on spending Gifts, inheritances, and windfalls

Value of Long-term Savings Plans How much money do you think you would have at the age of 60 if you invested $2,000 every year starting at the age of 20 at 10% interest? $885,180

Rate of Return %2,00010,83224,01259,556112,170190,052 5%2,00011,05225,15666,132132,878241,600 6%2,00011,27426,36273,572158,116309,520 7%2,00011,50227,63281,990188,922399,280 8%2,00011,73428,97491,524226,560518,120 9%2,00011,97030,386102,320272,620675,780 10%2,00012,21031,874114,550328,980885,180 11%2,00012,45633,444128,406398,0401,163,660 12%2,00012,70635,098144,104482,6601,534,180

Safety and Risk Safety – chance of losing money is small Risk – cannot be certain of investment Speculative investment – high risk which might earn large profit in short time Young investors tend to take bigger risks, less to lose Older investors are conservative so they can protect savings

Safety and Risk SafeCan VaryHigh Risk Govt bonds and securities  Treasury bills  Treasury notes  Treasury bonds  Municipal bonds  US Savings Bonds Savings accounts CDs Stocks Corporate bonds Mutual funds Real estate Commodities Options Precious metals and gems Collectibles such as coins, stamps, and comic books These are considered speculative investments, may earn large profits in short time, but high risk involved Chance of losing money small Cannot be certain about the profit of investment

Five Components of Risk Inflation  Return may not keep up with rapid inflation Interest Rate  Fixed rates may hurts you is outside rate rise Business Failure  Lose money on stocks/bonds when business is bad Financial Market  Could be affected by social and political conditions Global Investment  May be risky, keep in mind economics and political stability

Investment Income Dependable sources  CDs, US savings bonds, US treasury bills – will know exactly how much and when you will get it Stock and bonds  Research the company and past payouts Real estate rentals Speculative investments  Only for those experienced in these markets

Investment Growth Best ones are common stocks and growth stocks Growth companies usually reinvest profits so immediate dividends not likely, but will grow in value

Investment Liquidity The ability to buy and sell quickly with substantially reducing its value Market conditions may prevent regaining original investment

Savings and Investment Options Section 8.2

Section 8.2 Objectives How to identify the main types of savings and investment alternatives How to explain the steps involved in developing a personal investment plan

Types of Investments Stocks Corporate Bonds Government Bonds Mutual Funds Real Estate

Stocks Stockholders buy equity in a company and in turn become a part owner Two types:  Common Stock  Preferred Stock Consider before investing  Must find someone to sell to if you want out  Current value is partially determined by how much you could sell it for  No guarantee of dividend payments

Common Stock Provides ownership in company Entitles owner to voting privileges Sometimes provides dividends Can provide growth profits if $ value rises Owner could gain more shares by “stock splits”

Preferred Stock Gives advantage of receiving dividends before common stockholders Consider these before investment in any stock  Company does not have to repay what you paid for stock  Current value of stock is partially determined by how much someone is willing to pay  Company does not have to pay dividends

Corporate and Government Bonds A bond is a written pledge of company or govt. to repay a specific amount of money, along with interest Matures anywhere from 1 to 30 year with interest paid every 6 months if they can afford it Two key factors affect value of bond  Whether it will be repaid at maturity  Whether the corporation/govt. will be able to pay interest until maturity

Mutual Funds Investors pool money to buy stocks, bonds, and other securities Professional managers who work for investment companies select purchases Great for inexperience investors to have knowledge available for purchases Loss of one fund could be offset by gain in another

Real Estate Goal is to own property that increases in value to sell at a profit or receive rental income When investing compare with similar properties for pricing, know what financing is available, and cost of property taxes When purchasing ask:  Why are they selling?  Is it in good condition?  What is condition of other properties in area?  Is there a chance it will decrease in value? When selling ask:  Can you find an interested buyer?  Can they get the financing to purchase it?

Evaluating Investment Alternatives Level 1 Financial Security Level 4 Speculation Level 3 Growth Level 2 Safety and Income Options, commodities, precious metals and gems, speculative stocks, junk bonds, collectibles Income and growth stocks, mutual funds, real estate, convertible bonds US Treasury securities, conservative corporate bonds, state and municipal govt. bonds, income and utility stocks Cash, CDs, savings accounts, money market accounts, US govt.bonds Low Risk High Risk Diversify to spread risk

Developing a Personal Investment Plan Establish investment goals Decide how much money you will need and by when Determine the amount of money you have invest List al the investments you want to evaluate Reduce your list of possible investments to a reasonable number Choose at least two investments so you have some diversity Recheck regularly to make changes

Reducing Risk and Sources of Information Section 8.3

Section 8.3 Objectives How to describe your role in a personal investment program How to identify sources of financial information

Financial Planners Two things to consider  1) Your income level  2) Your willingness to make your own financial decisions If you make less than $45,000 a year, you may not need one

Types of Financial Planners Fee-only planners  Charge hourly rate ($75 - $200) or flat fee ($500 - several thousand), may also charge annual fee of.04 to 1% of value on investments they handle Fee-offset planners  Charge hourly or annual, but reduce it with earnings they make buying/selling investments Fee-and-commission planners  Charge a fixed fee for financial plan, earn commissions from products they sell Commission-only planners  Earn all money thru commission they make on sales of investments

Selecting a Financial Planner Look for a planner who will do the following:  Assess your current financial situation  Offer a clearly written plan with investment recommendations  Discuss the plan with you and answer questions  Help you keep track of your progress  Guide you to other financial experts and services as needed Every state varies on certification and licensing required

Managing Your Investments Evaluate investments Monitor investments  Keep track using Internet and newspaper Keep accurate records  Keep purchase records, commissions and fees you have paid Consider tax consequences  Tax exempt, tax deferred, taxable

Sources of Investment Information Internet Newspapers and TV News Programs  Wall Street Journal and CNN Fn Business Publications  BusinessWeek, Forbes, Fortune, Consumer Reports Government Publications  Federal Reserve Bulletin Corporate Reports  Prospectus that discloses information about company selling securities Statistical Averages  Standard & Poor’s 500 Stock Index or Dow Jones Industrial Investor Services  Newsletters and publication from financial people