investing in your future developed by: joel schumacher associate specialist jschumacher@montana.edu...

Investing in Your Future

Developed by:

Joel Schumacher

Associate Specialist

jschumacher@montana.edu

Dept. of Agricultural Economics & Economics

MSU Extension

What are your goals?

This year:• Improve your free throw shooting?• Improve your grades?• Buy a car?

In the next few years:• Have a grand champion project at the fair?• Improve your ACT score?• Go to college?

How are you going to achieve your goal?

Jay’s Goal• Jay wants to be a starter on next year’s basketball

team.

How does Jay achieve this goal?• Jay gives up time he could have spent doing other

things.• Jay spends this time in the gym improving his

basketball skills.

How are you going to achieve your goal?

Kayla’s Goal• Kayla wants to buy a car

How does Kayla achieve this goal?• Spends less money on food, music & clothes

• Kayla gives up some of these items to save money• Kayla saves this money to help purchase a car

• Spends more time working at a job• Kayla gives up time she could have spent doing other things• Kayla’s employer pays her for time & effort• Kayla uses this money to help purchase car

What does college cost?

Tuition & Mandatory Fees• Carroll College $25,198• Rocky Mountain $22,892• MSU $6,428• MSU-Billings $5,470• MSU-Northern $4,642• Montana Tech $6,094• UM $5,775• UM-Western $3,945* Tuition & Mandatory Fees for full time students, 2011-2012

College Costs

What % of MT College Graduates have student debt?• 68%

What was the average student debt?• $22,346

Source: Project on Student Debt (2009)

How can I invest in my future?

We all have one resource? Time

• Time can be used to “work” to earn money.

• Time can be used to learn new skills that will improve our future opportunities.

Where is this money coming from?

Job Gifts (birthday, Christmas) Allowance 4-H Animal Project Sale Others places?

Next Question:• Where do I put my money until I need it?

Part II: Investments

Investment Options

Insured Assets• Savings Account, CDs

Bonds• Corporate, Government, Savings Bonds

Stocks• Common & Preferred

Hard Assets• Livestock, Real Estate, Gold

Mutual Funds

Insured Investments

Types of Investments Savings Accounts Certificates of Deposit Some Money Market Accounts Checking Accounts

What is the current national average rate for 6 month CDs?

A. 0.78%

B. 1.19%

C. 1.92%

D. 2.40%

E. 3.12%

Insured Investments Low Risk

• Generally these accounts pay interest as a set interest rate• Insured by FDIC or NCUA

Historically Lower Returns• $100 invested 1/1/1990 would be worth:

12/31/2009• 6-Month CD: $253• S&P 500: $326• Gold: $285

20 Year Average Return: 4.59% annually

Insured Investments Federal Deposit Insurance Corporation (FDIC)

National Credit Union Administration (NCUA)

• $250,000 per person per category

If the bank fails…• FDIC takes over the bank• It sells the pieces to other banks• Then pays depositors up to the insurance limits

Lower Volatility

Savings Bonds

Basic Information:• Savings Bond is a very small loan from you to the

federal government• These bonds earn interest for 30 years or until you

redeem them• Individuals under age 18 can purchase them directly• Can be purchased in amounts of $25 and up• Can be purchased online (www.treasurydirect.gov) or

many financial institutions• Interest may be tax free if used for educational

expenses

Savings Bonds

Two Types of Savings Bonds• Series I:

• Part of the interest rate is fixed for the life of the bond.• Part of the interest rate is based on inflation.

• Series EE:• Rate is adjusted semi-annually• Based on average rate of 10 year Treasury Securities.

Bonds

A bond is a loan from an investor to a company or organization

Who issues bonds?• Big Businesses• School Districts• City, County, State and Federal Governments• Water and Sewer Districts• Airport & Port Authorities

How a Bond Works:

Step :2 Investors buy the rights to these payments.The investors become "bond holders"

Step 1: Company offers a five year bondwith annual 6% interest payments

Face value of the bond is $1,000

January 1, 2012 $60January 1, 2013 $60January 1, 2014 $60January 1, 2015 $60January 1, 2016 $1,060

Payment Schedule

Bond Pricing

The company holds a “bond” auction• Investors bid on bonds. • The company doesn’t know the price until the sale.

Bonds from issuers with strong credit ratings will sell for higher prices.

Calculating Current Yield

Divide the Interest Payment by the Price of the bond

Current

Price Interest Yield

$ 975 $60 6.15%

$1,000 $60 6.00%

$1,050 $60 5.71%

Bond Risks Default Risk:• The bond issuer might not make the bond payments• Some bonds have collateral

Inflation Risk:• Interest payments on bonds generally don’t adjust for

inflation

Stocks A share of stock represents ownership of a

company

Residual Interest Holder• Everybody else gets paid before shareholders• Suppliers, Employees, Bond Holders, Banks,

Utility Companies, etc.

• Everything that is left belongs to shareholders

Risks & Rewards of Stocks

Higher Volatility

Historically Higher Returns• $100 invested 1990 would be worth:

2009• 6-Month CD: $253• S&P 500: $326• Gold: $285

20 Year Average Return: 7.6%

Higher Volatility

Stocks

Ways to make money from a stock:

1. The Share Price IncreasesCapital Appreciation

2. The Stock issues a DividendIncome

Stocks

Share Price Equals:

+ Value of assets

- Value of liabilities

+ Present value of future earnings

Do we know what these values are?

Hard Assets

Examples:• Real Estate• Precious metals: Gold, Silver, etc.• Collectibles: Art, Baseball Cards, Coins• Ag Commodities: Corn, Cattle, Wheat, etc.• Energy Commodities: Oil, Natural Gas, Coal

Hard Assets

Different Risks than for Monetary Assets

• Livestock require upkeep (feed, shots, etc.)

• Livestock can die, be stolen, or fail to produce a calf.

• How quickly can you convert it to cash if you need the money?

Mutual Funds

A mutual fund share represents a small piece of ownership in a large investment pool.

Each mutual fund has different investment goals.• Examples:

• Fund X invests only in stocks of US companies. • Fund Y invests in stocks and bonds of manufacturing

companies based in Europe.

Mutual Funds

Advantages:

• Diversification: • You own dozens of stocks and bonds buy purchasing just

one share of a mutual fund.

• Professional Investment Management: • The fund has a professional investment management team

that manages the fund.

Steps to Get Started

Put your goals in writing• How much will they cost?• When do you want to achieve the goal?

Where will your savings come from?• Job, animal sale, gifts

Where will you put your money until you need it?• How much risk are you willing to take?

Other Issues for Young Investors

Minimum Investment Rules• Lower rates for accounts will small balances• Mutual Fund companies often require $500 to

$10,000 to open an account.

Restrictions on ownership for minors• Might need a joint account to own stocks & bonds

Investing at a Young Age

Key Points

• Save for a reason. What is your reason?

• What is your goal? How much and when?

• Where will you put your money until you need it?

Questions