1. Introduction to Investing
"Take Charge of Your Finances"
Analyze factors affecting the rate of return on investments.
PF.SI.6

2. Saving and Investing
Once an appropriate amount of liquid assets are reached
Remember: The purpose of savings is to develop financial security
Recommend refocusing goals from saving to investing

3. What is Investing?
Purchase of assets with the goal of increasing future income
Focuses on wealth accumulation
Appropriate for long-term goals
What are examples of long-term goals that can be accomplished by investing?

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

5. 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%

6. 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?
$150
$900
.167 = 16.7%
Derek’s rate of return on investment is 16.7%

7. All investment tools carry some level of risk
POTENTIAL RETURN
RISK
Risk- uncertainty regarding the outcome of a situation or event
Investment Risk- possibility that an investment will fail to pay the expected return or fail to pay a return at all
What is the risk level of savings tools?
All investment tools carry some level of risk

8. Inflation Rise in the general level of prices
Strive to have the rate of return on investment 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 is usually not a concern with savings since the goal of savings is to provide current financial security

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

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

11. Return on Stocks Dividends Market Price Definition What is received?
Share of profits distributed in cash to stockholders
Current price that a buyer is willing to pay for stock
Definition
If stock is sold for a market price higher than what was paid
If stock is sold for a market price lower than what was paid
Stockholder may or may not receive dividends- depends on company profit
What is received?
Stockholder will receive a return
Stockholder will lose money

12. Annual interest is paid to investor
Bonds
Form of lending to a company or the government (city, state, or federal)
Definition
Bonds are less risky than stocks but usually do not have the potential to earn as high of a return
Annual interest is paid to investor
Return
Once the maturity date is reached, the principal is repaid to the bondholder

13. Reduces investment risk
Mutual Funds
Advantage
Disadvantage
Mutual fund- when a company combines the funds of many different investors and then invests that money in a diversified portfolio of stocks and bonds
Reduces investment risk
Make sure to research the fees charged by a mutual fund
Saves investors time
Fees may be high

14. Index Fund Index Index Fund
A group of similar stocks and bonds- Standard and Poor 500
A mutual fund that invests in the stocks and bonds that make up an index

15. Usually charge lower fees than mutual funds
Index Fund
Advantage
Disadvantage
High diversification
What is the difference between a mutual fund and an index fund?
Still charge fees
Usually charge lower fees than mutual funds

16. Real Estate
Any residential or commercial property or land as well as the rights accompanying that land
A family home is usually 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

17. Speculative Investments
High risk investments
Have the potential for significant fluctuations in return over a short period of time
Commercial Paper
Futures
Options
Collectibles

18. Financial Risk Pyramid
The risk level for specific investment tools may vary
Speculative Investment Tools
Futures
Commercial Paper
Increasing potential for higher returns
Increasing risk
Options
Collectibles
Stocks
Real Estate
Investment Tools
Mutual Funds
Index Funds
Bonds
Money Market Deposit Account
Savings Tools
Checking Account
Savings Account
Certificate of Deposit
Savings Bonds

19. Investment Philosophy
Everyone 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, aggressive

20. 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

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

22. Taxation Profits earned on investments are unearned income
Taxes are often owed on unearned income
Taxes are due on most investment returns in the year the unearned income is received

23. Tax-Sheltered Investments
Government tries to encourage certain types of investments by making them tax-sheltered
Tax-sheltered investments are usually not tax-free!
Tax-sheltered investments- eliminate, reduce, defer, or adjust the current year tax liability
Retirement
Child/dependent care
Education expenses
Health care expenses

24. When are taxes for tax-sheltered investments usually paid?
Money is invested and taxes are paid
Money grows untaxed with help from compounding interest
Money is withdrawn
Money is invested
Money grows untaxed with help from compounding interest
Money is withdrawn and taxes are paid OR
What is the benefit of a tax-sheltered investment if taxes still have to be paid?
There are often limits to the amount that can be invested

25. Employer-Sponsored Investment Accounts
Type of tax-sheltered investment
Money is automatically taken out of employee’s paycheck
Employers often contribute a portion of money to the investment with no additional cost from the employee
Employee contributes 7% of paycheck to investment account
Example:
Employer contributes the same amount of money to the employee’s investment account
Employee benefits from having double the amount of money invested!

26. Advantages to Employer-Sponsored Investments
Makes investing automatic
Reduces tax liability
It is recommended that a person utilize these investment tools as much as possible if they are offered
Possibility for employer to match investment

27. Number of years needed to double the principal investment
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

28. “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.”

29. What Can the “Rule of 72” Determine?
How many years it will take an investment to double at a given interest rate
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

30. “Rule of 72” FYI Only an approximation
Interest rate must remain constant
Interest rate is not converted to a decimal
Equation does not allow for additional payments to be made to the original amount
Interest earned is reinvested
Tax deductions are not included

31. 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 $2,500
Interest Rate is 6.5% 72
6.5
11 years to double

32. 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
18% interest rate 72 18
4 years to double

33. 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 4 years. What interest rate is required for him to double his investment?
$5,000 to invest
Wants investment to double in 4 years 72
4 years
18% interest rate

34. Future Value
Wanna know what your investment will be worth in 30 years? Here’s how
FV = PV ∙ (1 + i)t
PV = Present Value
i = Interest Rate
T = Time (Number of payments)

35. What’s it gonna be worth?
Mark parents invested $300 at his birth with an interest rate of 10%. What will their investment be worth when Mark is 36?
FV = 300 (1+.10)36
Solve = $9,273.80

36. Your Turn
Mark has invested $300 at age 16 into a money market account earning 6% What will his investment be worth when he is 52?
Hint – figure out how many payments he will earn on the investment by taking 52 and subtracting 16!

37. Mark’s Investment 300 is the Present Value 6% interest rate
36 Payments
FV = 300 (1+.06)36
Solve =

38. The Perks of Interest
Saving for long-term goals is easier when money grows through investments
Interest allows money to grow even if you stop adding to it!

39. You invest $100 dollars with 5% interest for 3 years.
Simple Interest
Interest calculated on the original investment only
Year 1
$100 X .05 = $5
Year 2
Year 3
Final
$115 Earned
Example
You invest $100 dollars with 5% interest for 3 years.

40. What is Derek’s total amount?
Derek invested $900 for three years at 5% simple interest.
Year 1
$900 X .05 = $45
Year 2
Year 3
Final
$135 Interest Earned

41. Earns interest on the investment and the interest earned
Compound Interest
Earns interest on the investment and the interest earned
Year 1
$100 X .05 = $5
Year 2
$105 X .05 = $5.25
Year 3
$ X .05 = $5.51
Final
$ Interest Earned
Example
You invest $100 dollars with 5% interest for 3 years w/ Compound Interest

42. What is Derek’s total amount?
Derek invested $900 for three years at 5% compound interest.
Year 1
$900 X .05 = $45
Year 2
$945 X .05 = $47.25
Year 3
$ X .05 = $49.61
Final
$ Interest Earned

43. Simple VS Compound Simple $900 $945 $990 $1035 Compound $992.25$

44. It Adds Up
You may not think so, but the longer you leave your money in there the larger your investment becomes! Especially when you use compound interest!

45. Summary What is the relationship between risk and return?
How can a person reduce investment risk?
Who should a person contact to purchase investment tools?
What are the six main investment tools?
What is a tax-sheltered investment?
What is the Rule of 72?