Saving and Investing

1. Saving and Investing Make your money work for you

2. Pay Yourself First

3. Can You Believe… 49% of Teens P.Y.F. 79% of Teens use savings/checking accounts 5% use certificates of deposits 33% of Teens seek advice on investment 51% of Teens who invest in the stock market are Guys , 29% are girls 42% of Teens save money for college, 30% save for car

4. Time Value of Money Relationship between time, money, and rate of return (interest) Earned interest-payment received for allowing a financial institution/corporation to use your money

5. How to meet financial goals? 1. Time- More time to save, more money you will have 2. Money- More you save, more you will have 3. Rate of interest- Higher rate you earn, more money you will have

6. Inflation If $2 is left in your room for 2 years, it is worth $1.75 at the end of the 2 years due to inflation Inflation: the prices of goods & services increasing over time. Examples: In 1994, candy bars never cost more than $0.50. Now they cost $1.00 Gas used to cost $0.87 a gallon in 1994 and now???

7. Inflation • U.S. inflation has increased .5% to over 18% in a year; the average is 3-4% • Inflation calculator • Taxes- drain on savings/investments • Income- federal/ state gov’t collect share • Taxed on job income, savings interest, Selling stocks/bonds. You pay on nearly all earnings you receive

8. Risk • Even lenders face risk • Inflation- big threat to investment that only pays interest but that you are not adding to. • No risk free investment • Research investment, then invest

9. 1st decision in investment? Owner or Lender? Traditional Savings U.S. Savings Bonds Certificates of deposits Lender Stocks Stockholder owns portion of company Historically, Owners outperformed lenders Owner

10. Income Investments-lenders Savings account = Low risk, low interest U.S. Savings Bonds = Gov’t pays cash to investors in the form of interest. Set time period, Higher interest rate than savings. NPR Report on Savings Bonds Certificate of Deposit = Loans to Banks/ credit unions. 3 months, 6 months, 1 year ( Longer the time, higher the interest) Slightly higher than savings bonds. Money Market = Offered through banks/credit unions. Work like checking accounts. Can take money out with no penalty, but higher investment is needed. Corporate/Gov’t Bonds = Highest interest rate. Gov’t safer, time periods can be 2 months to 30 years. Longer time period, the higher the interest rate

11. Income Investments-Owners Stocks represent ownership in company Buy low- sell high Capital Gain- difference between purchase price and selling price (taxable) Real Estate Collectibles Mutual Funds-pools money from several investors and purchases stocks. Uses a fund manager who makes buy/sell decisions. Offers diversification

12. Choosing a Savings Account • Factors that determine the dollar yield on an account: • Interest rate ( also called rate of return, or annual yield) • All money earned comes from this factor • The following factors reduce money earned and can even turn it into a loss: • Fees, charges, and penalties • Usually based on minimum balance requirements, or transaction fees

13. If you invest $1000 each year($19.20 per week)

14. Savings VS Investment Difference = time Savings- set aside for short-term goals Savings is safe & earns small amount of interest Invest- set aside for future income, benefit, or profit Invest- no guarantee, in it for long haul, opportunity to make more money than savings

15. Types of Savings Accounts • Passbook Account • Depositor receives a booklet in which deposits, withdrawals, and interest are recorded. • Compare your interest rates between banks and credit unions • Funds are easily accessible (liquid)

16. Statement Accounts • Basically the same as a passbook account except depositor receives monthly statements instead of a passbook • Accounts are accessible through ATM’s • Interest rates are the same as a passbook account • Funds are easily accessible (liquid)

17. Interest Earning Checking Accounts • Combines benefits of checking and savings • Depositor earns interest on any unused money in his/her account

18. Money Market Deposit Accounts • Checking and savings account • Interest rate paid built on a complex structure that varies with size of balance and current level of market interest rates • Can access your money from an ATM, a teller, or by writing up to three checks a month

19. Immediate access to your money Average yield (rate of return) higher than regular savings accounts Usually requires a minimum balance of $1,000-$2500 Limited number of checks can be written each month Benefits/ TradeOffs

20. Certificates of Deposit (CD) • Bank pays a fixed amount of interest for a fixed amount of time • This is a great way to diversify your investments

21. No risk Simple No fees Offers higher interest rates than savings accounts Restricted access to your money (not liquid) Withdrawal penalty if cashed before expiration date (penalty might be higher than the interest earned Benefits/ Trade Offs

22. Types of CD’s • Traditional--Deposit a fixed amount of money for a specific term and receive a predetermined interest rate. Cash out at the end of the term, or roll over for another term. • Rising Rate/Bump Up CD- with higher rates at various intervals, such as every six months • Stock-indexed/Brokerage CD’s • Callable CD’s- with higher rates and long-term maturities, as high as 10-15 years. However, the bank may “call” the account back after a stipulated period, such as one or two years, if interest rates drop.

23. Types of CD’s • Global CD- combine higher interest with a hedge on future changes in the dollar compared to other currencies. Hedge is an investment made with the intention of minimizing the impact of adverse movements in interest rates or securities pricess • Promotional CD’s- attempt to attract savers with gifts or special rates.

24. Value of Money • Changes over time. • When Money is working for you, it grows in value or compounds. • Compounding interest-idea of earning interest on interest

25. Simple vs Compound Interest Simple Interest Calculation: • Dollar Amount x Interest rate x Length of Time (in years) = Amount earned • $100 in a savings account that paid 6% simple interest, during the first year you would earn $6 in interest • $100 x .06 x 1 =6 • At the end of 2 years you would have earned $12.00 • The account would continue to grow at a rate of $6 per year, despite the accumulated interest

26. Compounded Interest • Interest is paid on original amount of deposit, plus any interest earned. • (Original $ amount + Earned Interest) x Interest Rate x Length of Time = Amount Earned • $100 in savings that pay 6% interest compounded annually, the first year you would earn $6 • $100 x .06 x 1=6 • $100 + 6 = $106

27. Compounded Interest • With compounded interest, the second year you would earn $6.36 in interest • $106 x .06 x 1 -$6.36 • $106 + $6.36 = $112.36 • You want to put your money in accounts that compound more often

28. Watch your money growYour monthly deposit of $100.00 for 10 years with an interest rate 0f 6.500% compounded monthly with a starting balance of $1,000

29. Rule of 72 • To determine about how many years it will take to double your money: • 72 divided by Interest rate =Years to double your investment

30. Rule of 72 • To determine the interest rate that will double your money in a set number of years: • 72 divided by years to double investment = interest rate required

31. Rule of 72

32. 72 Years Needed to Double Investment = Interest Rate 72 = Interest Rate Required Years Needed to Double Investment Rule of 72 3-H

33. Let’s invest only $5.00 each month and see how important it is for you to get a little bit higher return on your investment. The following table illustrates what 3% more interest will do for you

34. Time is on your side • Most people do not start their investment portfolio until it’s too late • It does not take a lot of money to build financial independence if you start investing early. • The importance of time can not be underestimated. It’s one of the most important elements in your financial plan. Most people fail to use time to their advantage because they allow procrastination to erode their savings plan

35. Invest Early • Suppose you are 25 and have a goal of $100,000 cash at retirement age. You could accomplish this by saving only $10.22 per month at 12%. I know it seems amazing but it is true. And it’s also true that anyone can mange to save $10.22 per month, no matter what their income. But if you are 55 and have and have the same goal- $100,000 at 65 you must save $446.36 a month. 43 times as much as you would have needed monthly at 25.

36. Invest Early

37. Savings Accounts • Balance requirements • Some accounts require a certain balance before paying any interest. • On Money market accounts, most banks will pay different interest rates for different size balances (higher balance earns a higher rate) • Balance calculation method • Most calculate daily. Some use average of all daily balances.

38. Truth in Savings Act • The Truth in Savings Act requires financial institutions to disclose the following information on savings account plans they offer: • Fees on deposit accounts • The interest rate • Other terms and conditions • The annual percent yield (APY)

39. APY • Annual percentage yield which is the percentage rate expressing the total amount of interest that would be received on a $100 deposit based on the annual rate and frequency of compounding for a 365 day year, rather than 360, 366 or some other number. This law eliminates confusion caused by the more than eight million variations of interest calculation methods previously used by financial institututions.

40. Bonds • A bond is an IOU certifying that you loaned money to a government or corporation and outlining the terms of repayment • A buyer may purchase a bond at a discount. The bond has a fixed interest rate for a fixed period of time. When the time is up, the bond is said to have “matured” and the buyer may redeem the bond for the full face value

41. Types of Bonds • Corporate- sold by private companies to raise money for the corporation • If the company goes bankrupt, bondholders have first claim to the assets before stockholders (safer risk)

42. Types of Bonds • Municipal • Issued by any non federal government • Interest paid comes from taxes or from revenues from special projects. Earned interest is exempt from federal income tax

43. Types of Bonds • Federal Government • The safest investment you can make. Even if US government goes bankrupt, they are obligated to repay bonds.

44. Bond Basics • Accrued Interest- Interest deemed to be earned on a security but not yet paid to the investor • Ask price- price being sought for the security by the seller • Bid- the price at which a buyer offers to purchase a security • Callable bond- bonds which are redeemable by the issuer prior to the maturity date at a specified price at or above par

45. Bond Basics • Call premium: a dollar amount, usually stated as a percent of the principal amount call, paid by the issuer as a penalty for the exercise of a call provision

46. Bond Basics • Default: failure to pay principal or interest when due. • Federal Funds Rate: The interest rate charged by banks on loans to other banks. The Federal Reserve’s ability to add or withdraw reserved from the banking system gives it close control over this rate.

47. Bonds • Bond ratings are like grades. AAA is the highest. D is the lowest. • Investment grade bonds: safe bonds because the issuers are stable and dependable. • Junk Bonds: a debt obligation with a Ba or BB or lower, generally paying interest above the return on more highly rated bonds.

48. Stocks • Stock represents ownership of a corporation. Stockholders own a share of the company and are entitled to a share of the profits as well as a vote in how the company is run • Company profits may be divided among shareholders in the form of dividends. Dividends are usually paid quarterly. • Larger profits can be made through an increase in the value of the stock on the open market.

49. If the market value goes up, the gain can be considerable. Money is easily accessible (liquid) If the market goes down, the loss can be considerable Selecting and managing stock often requires study and the help of a good brokerage firm Stocks advantages/disadvantages

50. Penny Stock • In the U.S., a penny stock is a common stock that trades for less than $5 a share and are traded over the counter (OTC) through quotation services such as the OTCBB or the Pink Sheets. Although a penny stock is said to be "thinly traded," share volumes traded daily can be in the hundreds of millions for a sub-penny stock. Legitimate information on penny stock companies can be difficult to find and a stock can be easily manipulated.