copyright © 2008 pearson education canada 8-1 chapter 8 saving and investing

Copyright © 2008 Pearson Education Canada8-1

Chapter 8

Saving and Investing

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Copyright © 2008 Pearson Education Canada

How Much Do Canadians Save? Most Canadians don’t save enough

Spend more than they earn Tend to have very low or negative

savings rates

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Four Reasons to Save

1. Emergencies2. Liquidity3. Short-term goals4. Long-term goals

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1. Save for an Emergency Readily accessible funds

For unexpected expenses E.G. 3 months’ take home pay

Savings account, term deposit, CSB’s

Insurance protection Property Dependants

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2. Save for Liquidity Needs For unevenness in cash flow To pay for infrequent large

expenses E.G. One months’ take-home pay

Deposit that permits checking

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3. Save for Short-term Goals Things to be accomplished in next

five years Snowmobile, car, holiday,

computer, home down-payment Low risk securities

With appropriate maturities

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4. Save for Long-term Goals Typical goals

Enhance financial security Achieve financial independence Achieve comfortable lifestyle during

retirement Start planning early Invest in securities that have

prospects for long-term growth

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Two Approaches to Saving

1. Pay yourself first Take savings off the top of each

paycheck Before spending anything

2. Pay yourself last Save what is left at the end of each

pay period Not recommended

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Rules for Saving Set goals Plan Regular contributions

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Saving Versus Investing Saving

Means not spending Passive approach to wealth

accumulation Little risk but little return

Investing Committing capital to earn a return Active approach to wealth accumulation More risk but more larger return

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Why Invest? Growth Hobby

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Two Basic Ways to Invest

1. Debt Lending money

Deposits accounts, bonds, treasury bills, mortgages

2. Equity Acquiring ownership

Business, real estate, jewelry, stocks, gold, silver

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Investment Objectives Return on investment Current income Liquidity Inflation protection Management effort Tax reduction

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Forms of Investment Return

1. Income Profit, dividends, interest, rent

2. Capital gain Capital appreciation

Increase in asset value

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Characteristics of Investments Risk/return trade-off Liquidity Marketability Term Management effort required Income tax treatment

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Factors Inversely Related to Return on Investment Safety of principal Accessibility of funds Liquidity Inattention to securities

management

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Investment Risks Inflation risk

Loss of purchasing power Interest rate risk

Inverse relationship Market risk

Price of asset may fall Business risk

Business performs poorly

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Risk Management Balance investments and other risks

Life cycle risk Older people prefer less risk

Income and risk People with secure income tolerate more

risk

Diversify investments Variety of investments

Spread risk

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Minimizing Risk Influenced by

Time spent studying investments Knowledge about the future

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Knowledge Economic conditions in general The specific marketplace

Stock market Bond market Real estate market

Specific stocks and bonds and real estate

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copyright © 2008 pearson education canada 8-1 chapter 8 saving and investing

Documents

pearson education canada

silver slide

larger return slide

securities management

longterm growth slide

growth hobby slide

asset value slide

income tax treatment