Savings & Investing.

Savings & Investing

Savings Tools Are: Safe Liquid Used For: Large Purchases Emergencies
Financial Security

5 Savings Tools Are: Checking Account Savings Account
Money Market Account Certificate of Deposit U. S. Savings Bond

With the Exception of US Savings Bonds
Savings Tools are Safe Why? Government Insured/Guaranteed With the Exception of US Savings Bonds FDIC-Federal Depository Insurance Corporation up to $250,000 Federal government agency that insures depository institutions

Choosing a Savings Tool
By understanding the features of different savings tools, an individual can choose which tools will help them reach their financial goals.

Depository Institutions
Features of savings tools vary between different depository institutions Interest rates Accessibility options Fees Penalties Minimum balance requirements

Depository Institutions
Research and compare savings tools at different depository institutions in order to find the best option Not limited to one depository institution Can have different savings tools at different depository institutions

Checking Account DEFINITION INTEREST
Account used to transfer funds electronically and by writing checks INTEREST May or may not earn interest If does earn Interest, rate will be the lowest of the savings tools

Checking Account ACCESSIBILITY Most liquid of all the savings tools
Funds are easily accessed by: Checks Automated teller machines (ATMs) Debit cards Telephone Internet

Checking Account FEATURES Can have minimum balance requirements
Can charge transaction fees Can have a limit on the number of checks written monthly Reduces the need to carry large amounts of cash Before opening a checking account, learn all of the requirements and restrictions.

Checking Account ADDITIONAL INFORMATION
If interest is earned on the account, you must report it on your income taxes (unearned income) in the year it was earned You will receive a form 1099 that tells you the total interest you earned for the year

Savings Account DEFINITION INTEREST
Account to safely hold money you don’t want to spend INTEREST Interest earning Higher interest rates than checking accounts

Savings Account ACCESSIBILITY
More liquid than all savings tools except a checking account Funds may be accessed or transferred between accounts through: Automated teller machines Telephones Internet Debit Card

Savings Account FEATURES Allows for frequent deposits or withdrawals
Easily accessible (the same as checking except no checks) Money storage for financial security Available at depository institutions May require a minimum balance or have a limited number of withdrawals per month

Savings Account ADDITIONAL INFORMATION
Interest earned on the account must be reported on your income taxes (unearned income) in the year it was earned You will receive a form that tells you the total interest you earned for the year

Money Market Deposit Account
DEFINITION This is a kind of combination checking/savings account.

INTEREST Minimum balance requirement with tiered interest rates The amount of interest earned depends on the account balance For example: a balance of $10, will earn a 4% interest rate while a balance of $2,500 would only earn 3% $1,000-$5,000 3% $5,001-$10,000 4% $10,001-$15,000 5% $15,001-$20,000 6%

ACCESSIBILITY Less liquid than checking and savings accounts Accessibility is limited to a certain number of transactions per month (usually 3-6)

FEATURES Minimum amount required to open the account, often $1,000 If the average monthly balance falls below a specified amount, the account will earn a lower interest rate for the entire month

ADDITIONAL INFORMATION Interest earned on the account must be reported on your income taxes (unearned income) in the year it was earned You will receive a form 1099 that tells you the total interest you earned for the year

Certificate of Deposit
DEFINITION An insured interest earning savings tool that allows restricted access to the funds Deposits have to be held for a certain length of time Usually 7 days to 8 years INTEREST Varies depending upon the time length and amount of money deposited The longer the period of time, the higher the interest rate

ACCESSIBILITY Less liquid than checking, savings, and money market deposit accounts Large fees are assessed if funds are withdrawn before the end of the designated time period

FEATURES Minimum deposits range from $100-$250,000 Low risk and no fees if funds are held for the designated time period

ADDITIONAL INFORMATION Interest earned on the account must be reported on your income taxes (unearned income) in the year it was earned even if you don’t touch the money You will receive a form 1099 that tells you the total interest you earned for the year

US Savings Bond E now EE DEFINITION
Current bonds purchased for face value from the U.S. Government Loan given to the government As of 2012, all bonds are electronic—no paper

US Savings Bond INTEREST
Earns interest up to 30 years then mature (stops)

US Savings Bond ACCESSIBILITY Least liquid of all the savings tools
Access to funds is restricted Can only be redeemed after 1 year with a substantial penalty Can be redeemed after 5 years with 3 months of interest penalty After that no penalty

Savings Bond FEATURES Cannot be transferred; whoever owns it must cash it in—if die, goes to estate Purchased for $25 - $10,000 Any one SS# is allowed a total yearly bond purchase of no more than $10,000

Savings Bond ADDITIONAL INFORMATION Taxes
Interest earned on a bond is tax exempt until redeemed (cashed in) Once cashed in or when bond matures (30 years), interest earned on the bond must be reported on your income taxes (unearned income) If the bond and its interest are used to pay for higher education the interest it earned will be tax exempt when redeemed

Liquidity Cash Clothing Houses Electronics Savings Accounts
Assets: Everything an individual owns with monetary value. Liquidity: How quickly and easily an asset can be converted to cash. Examples of Assets Cash Clothing Houses Electronics Savings Accounts Automobiles Furniture

Liquidity Checking Account Savings Account
Most Liquid Least Lowest Interest Highest Interest Checking Account Savings Account Money Market Deposit Account Certificate of Deposit Savings Bond

Different savings tools can be utilized to assist in reaching personal financial goals Higher interest rates are a trade-off for lower liquidity Higher Interest Lower Liquidity

When and how often access is needed to funds helps determine which savings tool to use An individual wants to develop an emergency savings fund They need a very liquid account A savings account is very liquid and accessible in emergency situations Additional info savings

Savings Tools Scenarios
Read each Savings Tool Scenario Discuss which savings tool would be recommended for each scenario

Savings Tools Scenario #1
Sean is a high school student that just received his first paycheck from his new part-time job at the local grocery store. He currently has no expenses to pay, and his goal is to save every paycheck from his job to buy a new car in two years. He needs to find a savings tool that will help him reach his financial goal. Which savings tool would you recommend Sean utilize and why?

Brittany recently moved into her first apartment. Before, she was living with her parents and had very few expenses to keep track of. Now that she has to pay rent and utilities for her apartment, she needs to find a savings tool that will help her manage her money and ensure she can pay her bills every month. Which savings tool would you recommend Brittany utilize and why?

Bryan has a goal to become financially secure by developing an emergency fund. He has been saving twenty percent of his net income for the past year and now has $2,000. He plans to maintain this balance and only use this money for emergency expenses. Which savings tool would you recommend Bryan utilize and why?

Portion of current income not spent on consumption
Saving vs. Investing Purchase of assets with the goal of increasing future income or wealth used for long-term goals Investing Portion of current income not spent on consumption Savings

Savings vs. Investing Money saved is used to pay for:
Emergencies Large Purchases Financial Security Money saved is used to pay for: Higher Education Buying a Home Retirement Money invested is used to pay for:

In most cases, investments are not as liquid as savings.
Liquid Assets In most cases, investments are not as liquid as savings. More Liquid Savings Tools Less Liquid Investments Savings are known as liquid assets, because they are easily accessible (turned into cash) in emergency situations. Of your assets, which are the most liquid? 40

Why are Saving & Investing Important?
Savings Investing Provides the foundation for financial security Enhances and helps build wealth 41

Saving vs. Investing Activity
Directions: A characteristic of saving or investing will be identified Decide which you think is correct Discuss the answer

Characteristic: Builds Wealth Saving or Investing: Investing

Characteristic: More Liquid Saving or Investing: Saving

Characteristic: Used to pay for emergencies Saving or Investing: Saving

How is Wealth Measured? Net worth statement - Describes an individual or family’s overall financial condition on a specified date Assets Liabilities Net Worth The components include: Assets – Everything a person owns with monetary value Liabilities – Debts (what is owed to others) Net Worth – the amount of money left when liabilities are subtracted from assets (indicates wealth)

The Choices You Make Today Impact Your Future!
Saving and investing… Increase Assets Decrease Liabilities Changed the font the old one (rage italic) was too hard to read Increased Wealth! 47

True or False? Identify if each statement is true or false… □ If Janie makes a one time investment of $500 at age 20 in a tool that earns the historic 12% average, by age 60 the $500 will become $46,525. If Samuel invests $3,000 annually from ages (a total of $30,000 invested) in a tool earning 10% interest, he will have $1.2 million dollars by age 65. They are both true. Now we are going to learn how! 48

Three factors affect how an investment will grow.
Time Value of Money Money paid out or received in the future is not equivalent to money paid out or received today Three factors affect how an investment will grow. Interest Rate Money Time

Interest is the price of using money.
Interest Rate Interest is the price of using money. Interest rate is the percentage rate paid on the money invested or saved Are you earning interest on any money?

How Do Interest Rates Affect Time Value of Money?
More Money Interest Rate $1,000 invested for 5 years Interest Rate Amount Investment is Worth 1% $1,051.01 3% $1,159.27 5% $1,276.28 7% $1,402.55 9% $1,538.62

The longer an individual invests, the more money he/she will make.
Time Interest Rate Money Time The longer an individual invests, the more money he/she will make.

A Little Goes a Long Way Sally Saver puts away $3,000 per year for 10 years, at age 22. She earns 10% on her investment. Sally invests a total of $30,000 and has earned $1,205,063 by the age of 65 Ed Uninformed waits until he is 28 and contributes $3,000 at 10% for 37 years Ed invests a total of $111,000 and accumulates $1,079,856 by the age of 65 53

Amount of Money Interest Rate Money Time The larger the amount of money invested, the larger the return on investment will be

Amount of Money Amount of Money Larger Return
7% interest compounded annually for 5 years Amount of Principal Investment Return on Investment $100.00 $40.26 $1,000.00 $402.55 $10,000.00 $4,025.52

Maximizing Your Return
Time: Invest for as long as possible! Amount of Money: Invest as much as possible, as often as possible! Interest: Invest at the highest interest rate possible! Use compounding interest that compounds as frequently (annually, semi-annually, quarterly, monthly, daily) as possible!

Smart Investing OR Which would you choose?
An investment earning an interest rate of 2% An investment earning an interest rate of 2.1% OR

Simple Interest vs. Compounding Interest
Interest earned on the principal investment Earning interest on the principal AND past interest Principal is the original amount of money invested or saved

$1,000 invested at 5% interest rate compounded quarterly for 1 year
$1,000 x .05 x 3/12=$12.50 $1,000 + $12.50=$1,012.50 $1, x .05 x 3/12=$12.66 $1, $12.66=$1,025.16 $1, x .05 x 3/12=$12.81 $1, $12.81=$1,037.97 $1, x .05 x 3/12=$12.98 $1, $12.98=$1,050.95 Return to slide 60

Compounding vs. Simple interest
Compounding Interest for a Single Sum = $1,402.55 Why? By reinvesting the interest earned, the interest payment keeps growing as interest is compounded on interest

Simple Interest Equation: Step 1
(Principal) r (Interest Rate) t (Time Period) I (Interest Earned) $1,000 .07 5 $350 $1,000 invested at 7% interest rate for 5 years 61

Simple Interest Equation: Step 2
(Principal) I (Interest Earned) A (Amount Investment is Worth) $1,000 invested at 7% interest rate for 5 years $1,000 $350 $1,350 62

Compounding Interest Equations
There are two equations for compounding interest Single sum of money Money invested only once at the beginning of an investment Equal number of investments spread over time Equal amounts of money is invested multiple times (once a month, once a year, etc.)

Compounding Interest Equation – Single Sum
Total # of times compounded ( ) Interest Rate # of times compounded per year +1 =n; then take n Amount Investment is Worth Answer from above x Principal= $1,000 invested at 7% interest rate compounded quarterly for 5 years (.07÷4) +1= = x $1,000=$ 64

Compounding Interest Equation – Single Sum
Total # of times compounded ( ) Interest Rate # of times compounded per year +1 =n; then take n Amount Investment is Worth Answer from above x Principal= $1,000 invested at 5% interest rate compounded quarterly for 1 year (.05÷4) +1= = x $1,000=$1,050.95 Go back to slide 59 for comparison 65

Compounding Interest Equation- Equal Investment Amounts Over Time
PMT x (1+i)n-1 = A i Payment x (1+Interest Rate)Time Period-1 = Amount Investment is Worth Interest Rate $1,000 invested every year at 7% annual interest rate for 5 years $1,000 x (1+.07)5-1 = $5,750.74 .07 66

is the profit or income generated by savings and investing.
Definitions Return is the profit or income generated by savings and investing. Unearned income is income derived from sources other than employment, such as interest.

An investment earning compounding interest An investment earning simple interest OR

Single Sum vs. Investments Over Time
Compounding Interest for a Single Sum = $ Compounding Interest for Investments Over Time = $ To make the most of your money, utilize compounding interest and continue to invest!

Amount Investment is Worth
Compounding Interest The number of times interest is compounded has an effect on return Interest compounding frequently will yield higher returns $1,000 invested at 7% for 5 years Compounding Method Amount Investment is Worth Daily $1,419.02 Monthly $1,417.63 Quartely $1,414.78 Semi-Annually $1,410.60 Annually $1,402.55

An investment with an interest rate compounded monthly An investment with an interest rate compounded yearly OR

Amount of Money Invested
Rate of Return Investments usually earn higher rates of return than savings tools Rate of Return The total return (earned) on an investment expressed as a percentage of the amount of money invested Remember: Return is the profit or income generated by savings and investing. Total Return Amount of Money Invested Rate of Return

What is Mandy’s Rate of Return?
Mandy saved $2,200 in a money market deposit account. After one year, she has a return of $110. What is Mandy’s rate of return? $110 $2,200 .05 = 5% Mandy’s rate of return on investment is 5%

What is Derek’s Rate of Return?
Derek invested $900. When he withdrew his money from the investment, he had a total of $1,050. What is Derek’s rate of return? $1, $ $150 Return $150 $900 .167 = 16.7% Derek’s rate of return on investment is 16.7%

Risk RISK POTENTIAL RETURN Risk Investment Risk
The uncertainty regarding the outcome of a situation or event Investment Risk The possibility that an investment will fail to pay the expected return or fail to pay a return at all

Investment Risk Financial Risk Pyramid
Risk is a trade-off for the potential to receive high returns All investments carry some level of risk Financial Risk Pyramid Illustrates the trade-offs between risk and return for a number of saving and investing tools What is the risk level of savings tools?

Financial Risk Pyramid
Wealth Accumulation- Investments Financial Security- Savings Tools Speculation Increasing potential for higher returns Increasing risk

Inflation The rise in the general level of prices
The rate of return on an investment should be higher than the rate of inflation. Inflation Risk The danger that money won’t be worth as much in the future as it is today Inflation risk should not be a concern with savings since the goal of savings is to provide current financial security

Investment Philosophy
Each individual has a tolerance level for the amount of risk they are willing to take on The greater the risk a person is willing to make on an investment, the greater the potential return will be. Investment Philosophy An individual’s general approach to investment risk Generally divided into three categories: conservative, moderate, and aggressive

Portfolio Diversification
Portfolio Diversification- reduces risk by spreading investment money among a wide array of investment tools Creates a collection of investments that will provide an acceptable return with an acceptable exposure to risk Referred to as “Building a Portfolio.” Assists with investment risk reduction

Types of Investment Tools
Stocks Bonds Mutual Funds Index Funds Real Estate Speculative Investments

Usually a stockholder owns a very small part of a company.
Stocks Stock A share of ownership in a company Stockholder or shareholder Owner of the stock Usually a stockholder owns a very small part of a company.

Return on Stocks Dividends Market Price
The share of profits distributed in cash to stockholders Stockholder may or may not receive dividends- depends on company profit Dividends The current price that a buyer is willing to pay for stock If stock is sold for a market price higher than what was paid, stockholder will receive a return If stock is sold for a market price lower than what was paid, stockholder will lose money Market Price

Corporate Bonds A loan to a company
The company pays annual interest to the investor until the maturity date is reached The specified time in the future when the principal (or initial investment) amount of the bond is repaid to the bondholder If company fails, bondholders are given some money before stockholders Bonds are less risky than stocks but do not have the potential to earn as much as a stock.

Mutual Funds Mutual fund- Created when a company combines the funds of many different investors and then invests that money in a diversified portfolio of stocks and bonds that is professionally managed. Always research the fees charged by a mutual fund. Reduces investment risk by helping people diversify their portfolio Saves investors time Fees can be high

What is the difference between a mutual fund and an index fund?
A mutual fund that was designed to reduce fees by investing in the stocks that make up an index Index- a group of similar stocks and bonds Examples- Standard and Poor 500, Nasdaq Composite Index, Dow Jones Industrial Average Offer high diversification with low fees What is the difference between a mutual fund and an index fund?

Real Estate Includes any residential or commercial property or land as well as the rights accompanying that land A family home is not considered an investment asset Can be risky and more time consuming but has potential for large returns Examples of real estate investments include rental units and commercial property.

Speculative Investments
Have the potential for significant fluctuations in return over a short period of time Examples- futures, options, commercial paper, collectibles Recommended for people with an aggressive investment philosophy and a high level of financial security

futures Contract to buy a specific amount of an investment at a specific time in the future for a specific amount of money. Example Farmer would sell 5000 bushels of wheat for $3.50/bushel for delivery on December 1, 2016.

Stock Option The right to buy or sell a specific amount of shares for a specific amount of money in a specified period of time (you don’t have to do this) Example As a bonus, the company you work for gives you a stock option to purchase 100 shares of company stock at $6/share until June 30, 2016.

Commercial Paper A short-term loan given to a company
Not usually backed by collateral so generally purchased at a discount Example Coca-Cola offers commercial paper with a face value of $100 for $80 that matures June 30, 2016 You pay $80 and at the end of June you get $100

Buying and Selling Investments
Investors must utilize a brokerage firm that acts as a buying and selling agent for the investor (except for when buying real estate and certain speculative investments). Full service general brokerage firm Discount Broker Offer investment advice and one-on-one attention from a broker Complete investment transactions Only complete investment transactions Offer no advice to investors but charge 40-60% less

Services Offered for Investing
Retirement Planning Saving for Retirement Nearing or In Retirement Life Events College Planning Tax Life Insurance Estate Planning Charitable Giving Financial Guidance

Investment Companies Goldman Sachs JP Morgan Chase Morgan Stanley
Citigroup Merrill Lynch Barclays Lazard Credit Suisse Deutche Bank Wells Fargo

Taxation Profits earned on investments are considered to be unearned income Income taxes MUST be paid on this money Includes all forms of returns: interest, dividends, and price appreciation Taxes are due on most investment returns in the year the unearned income is received

Tax-Sheltered Investments
The government tries to encourage certain types of investments by making them tax-sheltered Tax-sheltered investments Eliminate, reduce, or defer taxes Examples- retirement plans (IRA), education expenses (529 plan), health care expenses (employer-funded plan) Tax-sheltered investments are not tax-free!

Tax-Sheltered Investments
If taxes are not eliminated, then the taxes are either paid when the money is put into the account or when the money is taken out of the account There are limits to the amount of money that can be invested An individual should invest as much money as possible in tax-sheltered investments What is the benefit of a tax-sheltered investment if taxes still have to be paid?

Employee-Sponsored Investment Accounts
Allow employees to reduce their tax liability and make investing automatic Money is automatically taken out of an employee’s paycheck Employers often contribute a portion of money to the investment with no additional cost from the employee It is recommended that a person utilize these investment tools as much as possible if they are offered.

Number of years needed to double the principal investment
Rule of 72 Rule of 72 Allows a person to easily calculate when the future value of an investment will double the principal amount 72 Interest Rate Number of years needed to double the principal investment

“It is the greatest mathematical discovery of all time.”
Albert Einstein Credited for discovering the mathematical equation for compounding interest, thus the “Rule of 72.” At 10% interest rate, money doubles every 7.2 years, T=P(I+I/N)YN “It is the greatest mathematical discovery of all time.”

What Can the “Rule of 72” Determine?
How many years it will take an investment to double at a given interest rate using compounding interest How long it will take debt to double if no payments are made The interest rate an investment must earn to double within a specific time period How many times money (or debt) will double in a specific time period

“Rule of 72” FYI The rule is only an approximation
The interest rate must remain constant Can’t add money, pay money (loan), or take money out Don’t convert % to decimals or vice versa

Doug’s Certificate of Deposit
Doug invested $2,500 into a Certificate of Deposit earning a 6.5% interest rate. How long will it take Doug’s investment to double? Invested $2, Interest Rate is 6.5% 72 ÷ 6.5 11 Yrs =

Jessica’s Credit Card Debt
Jessica has a $2,200 balance on her credit card with an 18% interest rate. If Jessica chooses to not make any payments and does not receive late charges, how long will it take for her balance to double? $2,200 balance on credit card % interest rate 72 ÷ 18 4 Yrs =

Jacob’s Car 18% interest rate 4 years 72 $5,000 to invest
Jacob currently has $5,000 to invest in a car after graduation in 5 years. What interest rate is required for him to double his investment? $5,000 to invest Wants investment to double in 5 years 72 4 years 18% interest rate 14.4% 5

Julie’s College Julie wants to save for college. She is 5 years old now and has a possible investment that earns 8% interest. She has $2,000 currently. How long will it take for her investment to double? 72 8 9 years

How much money would Julie have when she was 14?
Answer the following: How long did she have the investment? How many times will the investment double while she had the investment?

14 – 5 = 9 yrs that she had the investment
so Question 1) How long did she have the investment? she’s 14 yrs old now and was 5 yrs old when she started 14 – 5 = 9 yrs that she had the investment And Question 2) How many times will the investment double while she had the investment? 9 yrs that she had the investment and 9 yrs to double 9 ÷ 9 =1 time that it doubles so $2,000 x 2 (doubled)= $4,000

Question 1) How long did she have the investment?
23 years old? Question 1) How long did she have the investment? she’s 23 yrs old now and was 5 yrs old when she started 23 – 5 = 18 yrs that she had the investment And Question 2) How many times will the investment double while she had the investment? 18 yrs that she had the investment and 9 yrs to double 18 ÷ 9 =2 times that it doubles so $2,000 x 2 (doubled)= $4,000 $4,000 x 2 (doubled)= $8,000

Question 1) How long did she have the investment?
42 years old? Question 1) How long did she have the investment? she’s 42 yrs old now and was 5 yrs old when she started 42– 5 = 37 yrs that she had the investment And Question 2) How many times will the investment double while she had the investment? 37 yrs that she had the investment and 9 yrs to double 37 ÷ 9 =4 times that it doubles (approximately) so $2,000 x 2 (doubled)= $4,000 $4,000 x 2 (doubled)= $8,000 $8,000 x 2 (doubled)= $16,000 $16,000 x 2 (doubled)= $32,000

Questions to Ask Advisor Expectations Certification Heart Pocketbook
Need Unbiased Suggestions Advisor Expectations Prepare a Needs Analysis Won’t Make any Specific Recommendations Initially Try to Help you Understand your Financial Situation

Advisor Expectations Prepare a Needs Analysis
Won’t Make any Specific Recommendations Initially Try to Help you Understand your Financial Situation

Make Saving and Investing Automatic
Saving and investing should be considered a fixed expense that is automatic Pay yourself first is a saving strategy that means to set aside a predetermined portion of money for saving before any money is used for spending

How can savings and investing
become automatic? Automatic Transfers &/or Payroll Deduction

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