Saving and Investing

1. 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

2. 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?

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

4. 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? Derek’s rate of return on investment is 16.7%

5. 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

6. Inflation 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

7. Types of Investment Tools

8. Stocks A share of ownership in a company Owner of the stock Usually a stockholder owns a very small part of a company

9. Return on Stocks 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

10. 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

11. Mutual Funds 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

12. 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

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

14. 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

15. Speculative Investments Commercial Paper Options Collectibles Futures