Introduction to Saving and Investing

1. Introduction to Saving and Investing "Take Charge of Your Finances" Advanced Level

2. Objectives • Know the difference between saving and investing • Be familiar with the time value of money • Be able to compare investment options • Recognize the risks and rewards of investing • Know how to integrate investing into your financial planning

3. Saving • The storage of funds for future use. • PYF (Pay Yourself First) • When you receive your paycheck, pay yourself first. This means that before you pay your bills or buy anything, you should put something into your savings account—even if it is a small amount. Try saving a percentage of your take-home pay.

4. How should you view your paycheck? • 70-20-10 Rule • 70% Spent • 20% Saved • 10% Invested • Flexible expenses can be decreased in order to increase the amount a person is able to invest • PYF ( Pay Yourself First) • 20% Saved • Fixed Expense

5. 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

6. 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?

7. 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

8. 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? Mandy’s rate of return on investment is 5%

9. 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%

10. Time Value of Money • Money to be paid out or received in the future is not equivalent to money paid out or received today. • Refers to the relationship between time, amount of money invested, and rate of interest. ***

11. Time Value of Money • The more money you have to save or invest, the more money you are likely to earn • The higher the rate of interest you earn, the more money you are likely to have • The sooner you invest your money, the more time it has to make new money

12. 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

13. Inflation Inflation Rise in the general level of prices Decrease in the spending power of the dollar 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

14. Earned Interest • Payment you receive for allowing a financial institution or corporation to use your money • Your bank may lend some of your money to other customers • The bank compensates you by paying you interest on your savings account.

15. Types of Investment Tools

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

17. 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

18. 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

19. 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

20. 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

21. Certificate of Deposit • Savings alternative • Money is left on deposit • Specific periods of time set to earn specific rate of return • Low risk • Higher interest rates • Downfall is that it is less liquid • Possible penalty for early withdraw

22. Speculative Investments Commercial Paper Options Collectibles Futures

23. 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 Index Funds Mutual Funds Bonds Money Market Deposit Account Savings Tools Savings Bonds Certificate of Deposit Checking Account Savings Account

24. 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

25. Retirement Plans • Pension • A retirement plan that is funded at least in part by an employer. • Some plans provide you with a fixed amount of money in retirement • Some plans use profit sharing and make an annual contribution to your retirement • Some offer a 401K (next slide) • Some tax-exempt employers offer a 403b • Pre-tax (tax deferred), you decide to put money into it, but your employer doesn’t contribute

26. Retirement Plans • 401K • Employer-Sponsored and directed • Automatically deducted from paycheck • Tax deferred (pre-tax) • Employer may match contributions! • You should always contribute the maximum your employer will contribute • IRA • Self-directed retirement plan • Can be in addition to employee retirement plans. IRS—sets limitations and these limitations change annually

27. Two Common IRA’s • Traditional IRA –A traditional IRA is a tax-deferred retirement savings account. You pay taxes on your money only when you make withdrawals in retirement. Deferring taxes means all of your dividends, interest payments and capital gains can compound each year without being hindered by taxes - allowing an IRA to grow much faster than a taxable account. • Roth IRA – A Roth IRA is a retirement savings account that allows your money to grow tax-free. You fund a Roth with after-tax dollars, meaning you've already paid taxes on the money you put into it. In return for no up-front tax break, your money grows and grows tax free, and when you withdraw at retirement, you pay no taxes. That's right - every penny goes straight in your pocket.

28. Rule of 72 Allows a person to easily calculate when the future value of an investment will double the principal amount

29. 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.”

30. 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 How many times money (or debt) will double in a specific time period The interest rate an investment must earn to double within a specific time period

31. “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

32. 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%

33. 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

34. Jacob’s Car 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

35. Use the Rule of 72 to Calculate the answers to each of the following questions. • What interest rate would be necessary to double a $100 investment in 24 years? • 2. How many years would it take to double $100 if it earned interest at a rate of 8% per year? • 3.What interest rate would be necessary to double a $100 investment in 11 years? • 4. How many years would it take to double $100 if it earned 7.75% interest per year?

36. Rule of 72 Worksheet/Notes • Complete and then we’ll go over it.

37. Simple Interest • Interest earned on the principal investment • Principal • Only applied to the original investment Interest= Principal X Rate X Time $3.00= $100 X .03 X 1 year

38. Compounding Interest • Earning interest on interest • “Making your money work for you” • Developed because compounding interest causes money to make money • A = P (1+ i)n • If you wanted to find out how much you would have after 5 years • A is the amount in the account • P is the principal (which is the original amount invested) • the interest rate (i) is expressed as a decimal • n is the number of years compounded.

39. The Power of CompoundingAnnually A = P (1+ i)n$10

40. The Power of CompoundingDifferent Times/YearA=P(1+r/n)nt$100 for one year$100 for two years