1. Unit 5: Saving & Investing Consumer Education Chapters 8 & 9

2. Benefits of Saving  Saving – trading current spending for the ability to spend in the future  What should I save for?  Save for the Unexpected  Save for Opportunities  Save for Major Purchases  Save for Flexibility  Save to Achieve Your Goals

3. Saving Strategies  Pay Yourself First  Savings is an expense in your budget  Save by the Numbers  Save a % of your take-home pay, not a set amount  Reward Yourself  Low-cost rewards for saving  Consider Your Values  Enroll in Automatic Saving  Payroll Deductions  Checking Account Transfers  Set up automatic transfers through online banking

4. Savings Institutions  Commercial Bank – a financial institution that serves individuals and businesses  Savings Banks – financial institutions owned by their depositors  Dividend – a share of the company’s profits  Savings and Loan Associations – financial institutions that originally specialized in lending money to customers to buy homes (mortgages)  Credit Unions – financial institutions that offer memberships to people who share a common bond; non-profit organizations Deposit Insurance: FDIC – Commercial Banks ; NCUSIF – Credit Unions

5. Savings Options  Savings Account – an account at a banking institution in which you may deposit money, earn interest, and withdraw your funds at any time  Certificate of Deposit (CD) – a deposit in a savings institution that earns a fixed interest rate for a specific period of time  Money Market Account – a deposit for which the interest rate changes over time as interest rates in the economy change  Annual Percentage Yield (APY) – the actual interest rate an account pays per year, calculated the same way by all banks

6. Government Bonds  Bond – a written promise to pay a debt by a specified date  Savings Bond – U.S. government bonds issued for amounts of $50 - $10,000  Face Value – the dollar value printed on a bond (the amount it is bought for)

7. Simple Interest  Interest (I) = Principal (P) x Rate (R) x Time (T)  Principal – money on deposit  Simple Interest – interest paid one time per year at the end of the year on the average balance in the savings account  Compound Interest – interest paid on the principal and also on previously earned interest, assuming that the interest is left on deposit in the account

8. The Rule of 72  If an asset (money) grows x % a year, its value will double in 72 / x years

10. Investing Basics  Investing – saving in a way that earns income  Risk – the chance that an investment will decrease in value  Return – income earned on an investment  The higher the potential rate of return, the greater the risk  Diversification – distributing funds among a variety of investments to minimize overall risk

11. Investing in Corporations  Corporate Stock – a unit of ownership in a corporation that you can buy  Stockholders – investors who own a corporation because they own its stock  Stockbroker – a person who handles the transfer of stocks and bonds between buyer and seller  Brokerage Firm – a company that specializes in helping people buy and sell stocks and bonds

12. Investing in Corporations  Stock Exchange – a location where orders to buy or sell stock are sent and carried out  National Association of Securities Dealers Automated Quotation System (NASDAQ) – an electronic stock-trading system that links brokerage firms

13. Types of Stock  Dollar Cost Averaging – investing roughly equal amounts of money at regular intervals  Preferred Stock – a non-voting share of ownership in a corporation that pays a fixed dividend  Common Stock – a voting share of ownership in a corporation for which the dividend varies, as determined by the corporation’s board of directors  Preferred Stock carries less risk because preferred shareholders receive dividends first  Returns (dividends) are not guaranteed

14. Stock Classifications  Blue Chip Stocks – large, well established corporations  Growth Stocks – smaller or younger corporations  Large Cap Stocks – total stock value of $10 billion or more  Mid Cap Stocks – total stock value $2-10 billion  Small Cap Stocks – total stock value less than $2 billion  Sector Stocks – corporations who operate in a specific part of the economy  Cyclical and Non-Cyclical Stocks – success linked to the success of the economy  International Stocks – corporations based in other countries

15. Corporate Bonds  Corporate Bonds – bonds sold by corporations to finance business activities, which usually pay a fixed interest rate and are paid after a specific term  Junk Bonds – corporate bonds that are high-risk investments. Also known as high-yield bonds  Bond Rating Services:  Moody’s  Standard & Poor’s (S&P)  AAA – safest  C & D – riskiest

16. Mutual Funds  Mutual Fund – a business that accepts deposits from many people to invest in various ways  Portfolio – selection of stocks or bonds that a mutual fund purchases  Load – a sales fee that you pay when you invest in a mutual fund  Front-end load – when you buy  Back-end load – when you sell  No-load – no fee because the fund has no sales people

17. Mutual Fund Classifications  Index Funds –  Balanced Funds –  Large Cap Funds –  Mid Cap and Small Cap Funds –  Aggressive Funds –  Sector Funds –  International Funds –  Bond Funds –  Tax-Free Funds –  Exchange Traded Funds –

18. Retirement and Other Investments  Tax-deferred – a main benefit of many retirement plans; allow you to postpone paying tax on the income you invest until you retire  401(k) plans – a tax-deferred retirement plan offered to employees by their employer  Vested – point at which you can keep employer’s contributions to your retirement account  Individual Retirement Account (IRA ) – a retirement savings plan that has special tax benefits bit is not employer-sponsored  403(b) plan – a tax-deferred retirement plan for teachers, hospital workers, ministers, and some other public employees