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Savings and investment planning. 19-1. Savings and Investment Basics. Savings and investment activities Savings is the storage of money for future use. Try to deposit 10 % of income per year Down payment, emergencies. After building up savings most people start investing.
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Savings and Investment Basics • Savings and investment activities • Savings is the storage of money for future use. • Try to deposit 10 % of income per year • Down payment, emergencies. • After building up savings most people start investing. • Determine Investment goals • Current Income growth • Long-term growth
Three reasons to save • Emergency fund • Purchases • Building wealth • Benefits of having an emergency fund • Less stress • Prepared for the unexpected • Don’t have to borrow money when a financial crisis comes up
Savings and Investment Basics cont • The Growth of Savings • Interest- The money you receive for letting others use your money. • Compound Interest- is computed on the amount saved plus the previously earned interest. • Can be compounded daily, monthly, yearly. • http://www.youtube.com/watch?v=8eHDZSgNFbs • http://www.daveramsey.com/article/investing-calculator/lifeandmoney_investing/#/advanced_entry_form • i.e. page 481.
Savings plans • Savings account • Usually has a zero minimum balance. • You can deposit and withdrawal money. • You earn interest on the money in the account. • Certificate of Deposit (CD) • Allows you to earn higher interest rate than a regular savings • Usually has a minimum deposit ($100-$1,000) • You must leave your money in the account for a specific amount of time (usually several years) • If taken out early you will be penalized. • Money Market Account • Pays a variable interest rate based on various government and corporate securities (stocks, bonds, mutual funds.) • Interest paid reflects the current rate of interest being paid in the money markets. • Does not require long term deposits, but does require large initial investment.
Securities • Stock Investments • Is when you buy part ownership of a company. • Many times is made through mutual funds • If stock prices rise higher than the purchase price you have a capital gain. • If they go lower than the purchase price you have a capital loss. • Bond Investments • Is when you lend money to a business or government agency. • A bond represents a debt that they must pay you back with interest. • Mutual Funds • Instead of buying individual stocks or bonds people can buy into a mutual fund. • An investment company buys ownership of multiple stocks and bonds. • Usually multiple types of companies are bought • Less risky than regular stock buying.
Alternative investments • Real Estate • Usually real-estate is an investment that will grow in value. • Could be buying a house, rental property, apartment building, industrial building, vacation home, land. • Commodities • Things such as grain, livestock, precious metals, currency. • Investors purchase commodity contracts in hopes of higher market prices in the near future. • Collectables • Rare things that increase in value. • i.e. coins, old cars, works of art.
Evaluating savings and Investments • Safety and Risk • Savings accounts at most financial institutions are insured up to $250,000. • Not all investments have the same degree of safety • Stocks usually go up and down. • Diversification – to spread around one’s investment dollars among several different types of investments to help lower risk.
Evaluating savings and Investments • Potential Return • Yield- Percentage of money earned on your savings or investment over a year. • Usually higher yields have higher risks of loss. • Usually government investments pay less interest than private investments. • Investors will not accept high risk unless it has high reward. • Truth in Savings law- Requires financial institutions to give customers information comparing savings accounts.
Evaluating savings and Investments • Liquidity- how fast an investment can be turned into cash. • Taxes • Most investments are taxed • Some are taxed before you invest your money • Some are tax free until you take the money out of your investment.
Evaluating savings and Investments • Taxes • Earnings from certain types of savings and investments are taxed. • Reduces the amount you will receive.