Ch. 19-1Ch. 19-1

Saving and Investment PlanningSaving and Investment Planning

Saving- Storage of money for future use.Saving- Storage of money for future use.

Financial experts recommend that people Financial experts recommend that people save 10-15% of their income. save 10-15% of their income.

Investing- Using your savings in order to Investing- Using your savings in order to earn more money.earn more money.

The number 1 rule in investing is The number 1 rule in investing is DIVERSIFICATION! Diversification spreads DIVERSIFICATION! Diversification spreads around the risk. around the risk.

Liquidity- availabilityLiquidity- availability

The more liquid, the less return.The more liquid, the less return.

The less liquid, the greater returnThe less liquid, the greater return

The higher the risk, the greater the possible The higher the risk, the greater the possible return should bereturn should be

The lower the risk, the lower the possible return The lower the risk, the lower the possible return should beshould be

Different types of investing: Different types of investing:

Different types of investing:Different types of investing: Savings accountSavings account

Money Market accountMoney Market account

CDCD

StockStock

BondBond

Mutual FundMutual Fund

CollectiblesCollectibles

Real EstateReal Estate

Savings account- Pay VERY little interest, Savings account- Pay VERY little interest, but is an extremely safe and liquid but is an extremely safe and liquid investment. investment.

A savings account today will yield A savings account today will yield between .5% and 1.5%between .5% and 1.5%

Money Market Account- Pays a variable Money Market Account- Pays a variable interest rate based on various government interest rate based on various government and corporate securities. and corporate securities.

Usually requires a higher deposit than a CD Usually requires a higher deposit than a CD

pays a little less interest, but is more liquid. pays a little less interest, but is more liquid.

Certificate of Deposit (CD)- Allows you to Certificate of Deposit (CD)- Allows you to earn more than in a savings account. earn more than in a savings account. Usually requires a minimum deposit and must Usually requires a minimum deposit and must

be invested for a certain period of time be invested for a certain period of time (penalized if taken out early). (penalized if taken out early).

Very safe, not as liquid investment. Very safe, not as liquid investment.

Stock investments- Becoming part owner Stock investments- Becoming part owner of a company. of a company.

Purchasing single stocks is extremely riskyPurchasing single stocks is extremely risky

can potentially yield a very high return. can potentially yield a very high return.

Bond investments- Lending money to a Bond investments- Lending money to a company or the government. company or the government.

Like a CD, there is a minimum amount Like a CD, there is a minimum amount required and it must be invested for a certain required and it must be invested for a certain period of time. period of time.

Mutual Fund- Money is pooled together Mutual Fund- Money is pooled together from multiple investors and is invested from multiple investors and is invested among many different companies. among many different companies.

Mutual funds are the best long-term investment. Mutual funds are the best long-term investment.

The stock market has averaged a 12% return The stock market has averaged a 12% return since its inception. since its inception.

A mutual fund spreads around the risk of your A mutual fund spreads around the risk of your investment. investment.

There are many different types of mutual funds: There are many different types of mutual funds:

Large, medium, small cap, Large, medium, small cap,

domestic, international domestic, international

Large Cap- Large companies (less risk, less Large Cap- Large companies (less risk, less potential return)potential return)

Medium Cap- Medium sized companies (more Medium Cap- Medium sized companies (more risk, more potential return)risk, more potential return)

Small Cap- Small companies (Most risk, most Small Cap- Small companies (Most risk, most potential return)potential return)

Domestic- AmericanDomestic- American

International- Non-AmericanInternational- Non-American

Investing for the FutureInvesting for the Future

College savingCollege saving

Save in an Education Savings Account Save in an Education Savings Account (ESA)(ESA)

You can save $2,000 (after tax) per year, per You can save $2,000 (after tax) per year, per child. child.

Start when the child is bornStart when the child is born 18 years later, invest $36,00018 years later, invest $36,000 At a 12% growth, that amounts to $126,000 At a 12% growth, that amounts to $126,000

Tax freeTax free

College SavingsCollege Savings

Do NOT save for college using savings Do NOT save for college using savings bonds.bonds.

This will earn 5-6%This will earn 5-6%

Do NOT save for college using pre-paid Do NOT save for college using pre-paid college tuition.college tuition.

This will earn 7% (inflation)This will earn 7% (inflation)

Investing for the futureInvesting for the future

IRA/Roth IRA- Accounts that are designed for IRA/Roth IRA- Accounts that are designed for saving for retirement. saving for retirement.

Roth IRA vs. IRA- Both are basically the same Roth IRA vs. IRA- Both are basically the same thing, however, an IRA is pre-taxed money and thing, however, an IRA is pre-taxed money and a Roth IRA is after-taxa Roth IRA is after-taxmoney. money.

Each individual can invest $5,000 in an IRA Each individual can invest $5,000 in an IRA annually. If you invest in a Roth IRA, you take annually. If you invest in a Roth IRA, you take the money out tax free upon retirement. the money out tax free upon retirement.

Traditional IRATraditional IRA Tax deductible contributions (depending on income level) Tax deductible contributions (depending on income level)

Withdraws begin at age 59 1/2 and are mandatory by 70 1/2. Withdraws begin at age 59 1/2 and are mandatory by 70 1/2.

Taxes are paid on earnings when withdrawn from the IRA Taxes are paid on earnings when withdrawn from the IRA

Funds can be used to purchase a variety of investments (stocks, Funds can be used to purchase a variety of investments (stocks, bonds, certificates of deposits, etc.) bonds, certificates of deposits, etc.)

Available to everyone; no income restrictions Available to everyone; no income restrictions

All funds withdrawn (including principal contributions) before 59 All funds withdrawn (including principal contributions) before 59 1/2 1/2

Early withdrawals are subject to a 10% penalty (subject to Early withdrawals are subject to a 10% penalty (subject to exception). exception).

Roth IRARoth IRA Contributions are not tax deductible Contributions are not tax deductible

No Mandatory Distribution Age No Mandatory Distribution Age

All earnings and principal are 100% tax free if rules and All earnings and principal are 100% tax free if rules and regulations are followed regulations are followed

Funds can be used to purchase a variety of investments Funds can be used to purchase a variety of investments (stocks, bonds, certificates of deposits, etc.) (stocks, bonds, certificates of deposits, etc.)

Available only to single-filers making up to $95,000 or married Available only to single-filers making up to $95,000 or married couples making a combined maximum of $150,000 annually. couples making a combined maximum of $150,000 annually.

Principal contributions can be withdrawn any time without Principal contributions can be withdrawn any time without penalty (subject to some minimal conditions). penalty (subject to some minimal conditions).

6 Things that Hinder Retirement:6 Things that Hinder Retirement:

Keeping up with the JonesesKeeping up with the Joneses LIVE WITHIN YOUR MEANSLIVE WITHIN YOUR MEANS

Bad HabitsBad Habits Cigarettes are around $5.00 per pack. Cigarettes are around $5.00 per pack. 1 pack a day=$1,800 per year=$91,000 in 1 pack a day=$1,800 per year=$91,000 in

your working lifetime.your working lifetime. Alcohol costs around $4.00/beerAlcohol costs around $4.00/beer 2 beers/day-$2,920/year=$146,000 in your 2 beers/day-$2,920/year=$146,000 in your

working lifetimeworking lifetime

Under-funding your retirementUnder-funding your retirement 10-15% of your income should go towards 10-15% of your income should go towards

retirement.retirement. $5,000 per person per year into a Roth IRA$5,000 per person per year into a Roth IRA

Too much debtToo much debt Debt can KILL your retirement. Live within Debt can KILL your retirement. Live within

your means. Don’t borrow money for stuff.your means. Don’t borrow money for stuff.

6 Things that Hinder Retirement:6 Things that Hinder Retirement:

Spending too much on entertainmentSpending too much on entertainment Entertainment is often sporadic and not planned. Entertainment is often sporadic and not planned.

Spending too much money eating out, going to Spending too much money eating out, going to concerts, going to sporting events, etc. can REALLY concerts, going to sporting events, etc. can REALLY add up fast.add up fast.

Have an entertainment budget, and STICK TO IT!Have an entertainment budget, and STICK TO IT!

Purchasing depreciating itemsPurchasing depreciating items Cars, boats, computers, etc. all LOSE value as time Cars, boats, computers, etc. all LOSE value as time

goes on. goes on. DON’T buy new if you can avoid it.DON’T buy new if you can avoid it. Buying a new car/boat is the WORST thing that you Buying a new car/boat is the WORST thing that you

can do with your money!can do with your money!

6 Things that Hinder Retirement:6 Things that Hinder Retirement:

Car payment vs. investingCar payment vs. investing

A new car is the absolute WORST thing that you A new car is the absolute WORST thing that you can spend your money on!can spend your money on!

Once a car leaves the car lot, it loses 20% of its Once a car leaves the car lot, it loses 20% of its value.value.

95% of self-made millionaires do NOT buy new cars. 95% of self-made millionaires do NOT buy new cars. It is the worst investment that you can make.It is the worst investment that you can make.

The average car payment among Americans is $464 The average car payment among Americans is $464

If you took that $464 and invested it every If you took that $464 and invested it every month instead of making a car payment, month instead of making a car payment, how much money would you have in 40 how much money would you have in 40 years (Age 25-65)?years (Age 25-65)?

If you took that $464 and invested it every If you took that $464 and invested it every month instead of making a car payment, month instead of making a car payment, how much money would you have in 40 how much money would you have in 40 years (Age 25-65)?years (Age 25-65)?

$$5,458,854.455,458,854.45