Unit I - Personal Finance Building Wealth: Saving & Investing

Building Wealth Who is wealthy? Joe FlashGrandma Smith Income - $150,000/ year Retired / $1800 month SS check Wife & 2 kids 21, 600 / year Retired, lives alone Cars BMW / 2010 Ford 150 Car – 1999 Toyota Corolla House – 5 Bedroom, 4 bath House – three bedroom gated community, media room2 bath. & pool. What is the missing information?

Personal Finance – Key Terms Income - the money received for the exchange of services (labor), or from other sources, as rents or investments. Ex. Wages (salary), interest on savings, dividend payments, lottery winnings, etc. Assets- money (or equity) and or other valuable belongings (real estate, stocks, bonds, jewelry, etc) Liabilities – financial obligations (loans (cars, home, student), credit cards, etc) Principle – the original amount of money borrowed in a loan. Interest – 1) the money paid for borrowing money 2) the money earned on deposited or loaned money Liquidity – the ease of access to your cash, or in which an asset can converted to cash. (ex. Checking account very liquid- ATM, Valuable painting not liquid)

Unit I - Personal Finance Financial Planning – using rational savings & investment decisions to achieve a future goal. Setting long & short term goals * Short Term goals – saving for clothes, weekend trip, or new golf club. * Long Term – prom, spring break college, trip to Europe, retirement, etc. Questions to ask: 1.What does it cost (price & other)/ how much $$ do I need? 2.What do I have to do to achieve this goal? 3.How long will it take?

Saving & Investing Savings – money deposited in a bank or other financial institution* (security) for later use. - Short term goals- clothes, cars, vacations, emergencies, etc. Investment- money used today to purchase an asset with expectation, not the guarantee, that the asset will increase in value. - Long term goals – college education, retirement, vacation home, etc.

Savings / Banking Banks 2 major functions 1. Store money providing interest bearing accounts. (banks pay you interest (small %) on accounts for the use of your money) - Currently accounts Insured up to $250,000*/FDIC 2. Loan Originator – Provide loans (financing) to individuals & businesses (Mortgages, Car, College, etc) charging interest,– (consumers pay to use the money). ***Remember businesses are consumers too, they borrow money for capital investments (ex. new office equipment, factories, etc) Banks profit – The difference between the interest paid to customers (Saving Accts & CD’s) & the interest earned on loans (Cars, Mortgages. Etc.) = profits for banks Pay 2% on savings accounts / charge 7% on a car loan = 5% profit for the bank!) Additional Services provided by banks & other financial institutions: ▫Checking accounts / debit ▫Investments for customer: CD’s & Money Market Accounts

Saving Money: Account Options Saving Accounts – Interest paid on Money in Account (More $$ more return) * Interest Low (Little Risk= low return) * Minimum Deposit Required* (ex. You have to keep at least $1000 in account) * Guaranteed - $250,000 * Liquid – easily converted to cash (You have access to your money with no penalty) CDs – Certificates of Deposit (Timed Accounts) * Requires a deposit for a specified time period (ex. 5 year at 6%) * Deposits – range from $250 - $100,000 * Higher Rates than other accounts & fixed * Guaranteed - $250,000 * Reduced Liquidity – penalties for early withdraw - Liquidity vs. return- in general, the more liquid an account the lower the return. Why?

Other Financial Institutions -S & L’s (Savings & Loans) – same functions as bank (store money/ make loans) but centered on consumers (not businesses) & focused on home mortgages (loans) -Credit Unions (Non-profits) owned by the members of the C.U. and offering banking services. Georgia Teachers Credit Union Lockheed Credit Union

Saving Start early & contribute often (every pay check) Simple interest is interest paid only on the principle/ Deposit. (ex. $100 at 5% for one year = $5, so you end up with $105) Compound interest is interest paid on the principle & the accumulated interest. (so, after the second year of $100 at 5%, you will be paid interest on the $105 (year 2 balance = $110.25, year 3 $115.76) – growing or compounding the money you originally invested, and so on.

Investing Investment - using money or capital in order to gain profitable returns (interest), income, or appreciation in value. Types of Investments: S tock (Corporations) - selling shares (pieces) of the company to the public (each share represents a % of ownership. ▫So, if 10,000 shares are sold to the public & you own 100 shares you own 1% of the company. Why do companies like Coca-Cola, Wal-Mart, & Home Depot sell stock? What are the costs & benefits of selling stock? Examples of companies that do not sell stock? Who owns a corporation? Stocks provide 2 things: Income - Stockowners receive a dividend or percent of the year end profits (more stock = more income*). Investment - Stockowners can hold the stock hoping the value of the company will increase & sell at a higher price. (imagine if you bought Microsoft Stock in the 1980’s!!!)

Bonds Bonds are issued by a corporation or govt. (city, state, or federal) in exchange for a loan (money borrowed) from the investor. - So, when you buy a saving bond, you are loaning the govt. money, they pay you back & pay you interest. Bond holders earn interest (percentage of the original amount borrowed) at intervals specified in the contract. (ex. 2% pay quarterly for five years)

Mutual Fund – Diversification Investments in which money from many investors is pooled together & invested in a variety of stocks & bonds. Advantages: ▫investors do not have to personal manage their investments ▫Risk is spread out among a number of different investments Investment Banks offer a variety of mutual fund options: high risk / high yield low risk / low return

Other investments opportunities Real Estate – commercial or residential Art Antiques Rare / scarce collectibles Etc.

Investing: Risk vs. Return In general, the greater risk you take, the higher the potential reward. Little risk = little return High Risk / High return Low risk / low return Real Estate Stock – Start ups Stocks – Blue Chip Corporate Bonds, State & Municipal Bonds saving accounts & CD’s – U.S. Bonds