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Published byGodwin Short Modified over 8 years ago
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Why you need to Invest
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You’ve probably heard the term “Investing” before, but there’s a good chance that you aren’t quite sure what it means An investment is anything that you buy or contribute money towards in the hopes of having that item generate a profit for you in the future by creating income or by being able to sell the item at a higher price than what you paid for it
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Here are some examples of investments Real Estate Antiques Gold Sports Memorabilia Coins Education Stocks As you can see, they can range from everyday items to high finance
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Investors usually fall into one of two categories Income Investors These investors try to use their investments as a way to make money on which to live instead of holding a job for another company Examples: Landlord Financial investor Retirement Investors These investors try to use their investments as a way earn money that they will receive after they retire. This will help them maintain a lifestyle once they stop earning income at a job
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It seems like all adults are concerned with retirement…why? Once you retire, you stop receiving income from your job, but you still need money for your daily expenses Food Housing Transportation Leisure activities Most people have a plan for retirement. The most common options are: Social Security Pensions Personal Retirement Accounts
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Pensions Some professions do not pay into Social Security, but have their contributions put into a retirement plan called a PENSION. Benefits are paid based on years of service and salary earned, and are guaranteed In the past, many private companies used to offer pension plans, but very few still do Most government workers, teachers, fire fighters and police officers are on pension plans (and are ineligible for Social Security) Personal Retirement Plans These are retirement plans that allow individuals to have money deducted from their paycheck to be invested by reputable companies It allows the individual freedom to choose investments Benefit levels depend on how well the investments do and are not guaranteed. Some employers will match contributions to the plan Popular plans include 401(k)s and Roth IRAs
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Social Security Social Security is a government program started in 1935 in the middle of the Great Depression (1929-1939) In the early 1930s after the start of the Great Depression, it was estimated that half of the senior citizens in the US did not have enough income to support themselves President Franklin D Roosevelt signed the Social Security Act into law How does it work? Workers have money taken out of every paycheck in the form of a Social Security Tax Once the worker retires, he or she receives a monthly check from the Social Security Administration. Specific amounts are based on age of retirement and how long taxes were paid into the system. In 2012, the average worker received $1230 per month Every American citizen receives a unique identification number known as your Social Security Number. It is often used to identify you on important documents, and if stolen can cause you huge identity theft problems.
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Problems with Social Security Social Security pays retirees from a fund containing all of the taxes collected from workers. Currently, the surplus in the account is valued at $2.7 trillion dollars However Approximately 56 million people get SS benefits today, that number is projected to grow to 91 million by 2035 Unless laws change about Social Security, the $2.7 trillion surplus will be gone by 2033…making it possible that those retiring after 2033 may receive a lower dollar amount per month or worse Many adults are not counting on receiving Social Security Benefits when they retire, or realize that it may not be enough to support the lifestyle they want. They must find another way to fund their retirement
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Like it or not, investing will more than likely be a part of your future… And believe it or not, the earlier you start to invest, the better off you are in the future Why? Because of Compounding Interest The money you initially invest is called the principle, and extra money earned is called interest If interest is compounding, it means that the interest becomes part of the principle, so you earn interest on your interest This causes your principle to grow at a faster rate and earn you more money
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Here’s an example: if you were to make a single investment of $100 at different interest rates…. Year 5% (Certificate of Deposit) 10% (historic rate of return on the stock market) 15% (if you were skilled and/or lucky in the stock market) 20% 1$100 5$128$161$201$249 10$163$259$405$619 15$208$418$814$1,541 25$339$1,083$3,292$9,540 Look at the difference that compounding the interest makes Same initial investment and same amount of time
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Here’s another example…. Sandy Starts investing at age 15 Invests $1000 per year for 10 years (from age 15 to age 25) Invests in the stock market and earns 12% interest on her investment Stops adding money to her investment at age 25, but keeps what is already there in the stock market Carl Starts investing at age 40 Invests $10,000 per year for 25 years (from age 40 to age 65) Also invests in the stock market and earns 12% interest on his investment Started with a $10,000 investment Ends up with 1.8 million dollars when she retires at age 65 Started with a $250,000 investment Ends up with 1.5 million dollars when he retires at age 65 As you can see, investing early allows your investment money to work more effectively for you
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All investments involve RISK profit loss Your investment may result in a profit, but it may also result in a loss When investing, you should know that there is a strong relationship between risk and reward The higher the potential reward of an investment… the higher the risk of losses….
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One of the most common things to invest in are Financial Securities which are investments that give their holders the right to receive some form of return or profit There are many different types of securities, but four of the most common are Savings and Money Market Accounts Government Bonds StocksMutual Funds Each type has a different level of risk….
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Savings and Money Market Accounts This is the lowest risk or safest investment you can make because the government guarantees your money up to $100,000 through the FDIC (Federal Deposit Insurance Corporation)
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Your investment grows because you earn an interest percentage on your deposit. The “Rule of 72” explains how long it will take for you to double your original investment Higher interest rates obviously are better than lower ones Current rates on savings and money market accounts are between.7% and 1.3%
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Government Bonds A bond is a loan in which the borrower promises to pay the lender a fixed rate of interest over the term of the loan The federal government issues Treasury Bonds or Treasury Notes when it needs to borrow money Since the government guarantees the bond, it is considered to be a safe investment You might be a lender to the government if you were given a savings bond by someone State and local governments can also issue bonds, known as “municipal bonds”, but these are riskier than federal bonds Interest rates on government bonds are currently around 1.5%
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Stocks To raise money to run and/or expand the business, a company can sell STOCK A stock is an ownership share in a corporation One unit of stock is called a share If a corporation is profitable, the owners of the stock (who are called stockholders or shareholders) may also receive a portion of the earnings called a dividend The price of a stock is tied to how well the corporation performs Investors like to buy stocks at low prices and then sell the stocks when the price rises and keep the difference in profits. Stocks are a much riskier investment because there is no guarantee that the stock will increase in price, and it is very possible that the investor may lose money on a stock
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It is a collection of stocks and other assets that are managed by a financial expert called a Fund Manager This type of investment is often used by investors who do not have the time to research traditional stocks However, the investor has very little impact on the decisions of the fund manager Mutual Funds Mutual Funds have varying levels of risk as well. Some are “aggressive” or higher risk while others are moderate risk
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The Pyramid of Risk and Return
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