Chapter 7

Saving and Investing

Focus Questions

Why should you save? What is the difference between saving and

investing?

pay yourself first (a little can add up)

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Save this each week … at % interest … in 10 years you’ll have $7.00 5% $4,720 14.00 5% $9,440 21.00 5% $14,160 28.00 5% $18,880 35.00 5% $23,600

You can buy … two fast food meals or one movie ticket (and a candy bar) or save $7.00 this week.

You can buy … two small cheese pizzas or one large pepperoni pizza, delivered or one new CD or save $14.00 this week.

What can you give up to save for your financial goals?

What is Saving? Saving—the setting aside of income for a

period of time so that it can be used later. Results of saving?

When an individual saves, the economy as a whole benefits because savings provides money for others to invest or spend.

FDR created the FDIC (Federal Deposit Insurance Corporation) to protect all savings after the Depression.

People deposit savings to get interest.

Financial Institutions loan $ to businesses

Trucks Equipment

Plant Computers

Businesses use $ to expand and improve

Businesses pay interest to financial institutions

Interest is returned to saver/depositor

Where Do You Save?

Some people save at home Financial Institutions Savings Plans

Something with interest. Interest is the payment people receive when they lend

money or allow someone else to use their money.

Savings Account Passbook Savings Account

Account for which a depositor receives a booklet in which deposits, withdrawals, and interest are recorded.

Statement Savings Account Account similar to a passbook except that the depositor

receives a monthly statement showing all transactions.

Money-Market Deposit Account Account that pays a higher interest rate and allows you to

write checks. The trade-off is that you must keep a higher minimum balance.

Time Deposits

Time Deposits Savings plans that require savers to leave their

money on deposit for a certain amount of time. The period is known as maturity. CD’s—Certificate on Deposit

simple interest calculation Dollar Amount x Interest rate x Length of Time (in years) = Amount Earnedexample

If you had $100 in a savings account that paid 6% simple interest, during the first year you would earn $6 in interest.

$100 x 0.06 x 1 = $6 At the end of two years you would have earned $12. The account would continue to grow at a rate of $6 per year, despite the accumulated interest.

compound interest calculation Interest is paid on original amount of deposit, plus any interest earned.(Original $ Amount + Earned Interest) x Interest Rate x Length of Time = Amount Earnedexample If you had $100 in a savings account that paid 6% interest compounded annually, the first year you would earn $6.36 in interest.

$100 x 0.06 x 1 = $6$100 + $6 = $106

With compound interest, the second year you would earn $6.36 in interest. The calculation the second year would look like this:

$106 x 0.06 x 1 = $6.36$106 + 6.36 = $112.36

How simple and compound interest are calculated

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Relating Saving to the Economy

How can saving benefit the economy?

Investing

Taking risks with your savings Types of investing

Stocks Bonds Mutual Funds Real Estate

Stocks Corporations are formed by selling shares of stock

(also called securities). A stock gives you ownership of a corporation. Thus you

are called a stockholder. Stockholders make money by dividends and

speculation. A dividend is money paid to each stockholder during a

time of profit. Speculation is the money earned by selling your stock

back during a profit time. Money gained or lost during a stock holding time is

known as capital gains and capital loss.

Capital Gain/Loss Capital Gain Example

On December 1, you buy 100 shares of Best Buy @ $45 per share.

You hold on to the shares until July 15 at which time they are selling for $52 per share.

What is your capital gain? $52 x 100 = $5200 $45 x 100 = $4500 Capital gain = $700

Capital Loss Example On December 1, you buy

100 shares of Best Buy @ $45 per share.

You hold on to the shares until July 15 at which time they are selling for $42 per share.

What is your capital loss? $45 x 100 = $4500 $42 x 100 = $4200 Capital loss = $300

Bonds

A bond is a certificate issued by a company or the government in exchange for borrowed money. In return it promises to pay a stated rate of

interest over a stated period of time, and then to repay the borrowed amount (principal) in full at the end of that time.

Types of Bonds Tax-exempt bonds

Sold by local and sate governments without federal, state, or local tax. Interest is not taxable

Savings bonds Sold by the federal government. You receive interest updates every 6 months Interest is Taxable

T-Bills Minimum $10,000—matures in 3 months to 1 year Interest is only taxable by federal govn’t

T-Note Minimum $1000-$5000—matures in 2-10 years. Interest is only taxable by federal govn’t

T-Bond Minimum $1000-$5000—matures in 10 or more years. Interest is only taxable by federal govn’t

Difference Between Stocks and BondsStocks Bonds

All corporations issue or offer to sell stock. That is what makes them a corporation

Corporations are not required to issue bonds

Stocks represent ownership Bonds represent debt

Stocks do not have a fixed dividend rate (except preferred stocks)

Bonds pay a fixed amount of interest

Dividends on stock are paid only if the corporation makes a profit

Interest on bonds must always be paid whether there is a profit or not

Stocks do not have a maturity date Bonds have a maturity date

Stockholders can elect a board of directors who control the corporation

Bondholders usually have no voice in or control over how the corporation is run

Stockholders have a claim against the property and income of a corporation

Bondholders have a claim against the property and income of a corporation that must be met before claims

of any stockholders

How do you buy stocks and bonds? Stocks are bought and sold

through brokers on a stock exchange either at a brokerage firm or on the internet. A broker is a go between for

buyers and sellers NYSE—New York Stock

Exchange Stocks can also be acquired

on your own. These are called over-the-counter stocks. NASDAQ has the largest

volume of over-the-counter stocks

Bonds Bonds are sold over-the-

counter and on the Internet

Mutual Funds and Money Market Funds Mutual Funds

Investing in the stock market where your money is pooled with many other individuals to buy stocks, bonds, or other investments. Usually a diversified

portfolio of stocks and bonds.

Most are invested into one of two indexes. DJIA S&P

Money Market Fund A type of mutual fund used

to buy the short term debt of businesses and banks

You may write a check against the amount you have in that fund.

Government Regulations

SEC Securities and Exchange Commission

Regulates brokerage firms, stock exchanges, most businesses that issue stock.

Investigates any dealings among corporations that affect the value of stock Mergers

Is property the route to wealth?

Special Savings Plans and GoalsRetirement

Special Savings Plans and Goals Investing for retirement

Pension plans are the most popular of the retirement income plans. 401K is the most popular A portion of your check is withheld and a company matches that

amount to be paid with interest upon retirement or buyout.

60 Minutes: The 401K Fallout

Special Savings Plans and Goals Investing for retirement

Pension plans are the most popular of the retirement income plans. 401K is the most popular A portion of your check is withheld and a company matches that

amount to be paid with interest upon retirement or buyout. Individuals can set up their own plans:

Keogh Plan—15% of your income, deductible for yearly taxes Traditional IRA—Set up for people earning less than $30,000 a year.

You can contribute up to $5000 a year and deduct that amount from your taxes.

Roth IRA—You can contribute up to $5000 a year. This amount is not tax deductible now, but rather later the interest earned is tax deductible.

IRAs – an example of a return on investment

contributions made only between ages of 22–30 (9 years) $2,000 contributed each year Total investment of $18,000 At an interest rate of 9%, by age 65 will have $579,471

contributions made only between ages of 31–65 (35 years) $2,000 made contributed each year Total investment of $70,000 At an interest rate of 9%, by age 65 will have $470,249

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Real Estate as an Investmentways to invest Buy a house, live in it, and sell it later at a profit. Buy income property (such as an apartment house or a commercial building)

and rent it. Buy land and hold it until it rises in value.advantages Excellent protection against inflation.disadvantages Can be difficult to convert into cash. A specialized type of investment requiring study and knowledge of business.capital gains: profits from the sale of a capital asset such as stocks, bonds, or real

estate. These profits are tax-deferred; you do not have to pay the tax on these profits until the asset is sold. Long-term capital gains occur on investments held more than 12 months. Short-term capital gains occur on investments held lessthan 12 months.

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How Much Do You Save?

Evaluate your amount of risk If investing, spread your investments out—

diversification How much do you value now or later?

the rule of 72

How many years will it take to double my money?

72 DIVIDED BY= YEARS TO DOUBLE A SUM OF MONEY

INTEREST RATE

At what interest rate will my money double in a set number of years?

72 DIVIDED BY = INTEREST RATE REQUIREDYEARS TO DOUBLE INVESTMENT

Relating Investing to the Economy

How does investing play a part in the economy?

Career Opportunity Stock Broker

Job Description Relay investors’ stock orders to the floor of a securities

exchange Offer financial counseling and advice on the purchase or

sale of particular securities. Qualifications

College Degree Pass a state licensing exam and the General Securities

Registered Representative Exam Median Salary:$38,800 Job Outlook: Above Average