8-2
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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
8-3
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Four Reasons to Save
1. Emergencies2. Liquidity3. Short-term goals4. Long-term goals
8-4
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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
8-5
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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
8-6
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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
8-7
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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
8-8
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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
8-10
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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
8-12
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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
8-13
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Investment Objectives Return on investment Current income Liquidity Inflation protection Management effort Tax reduction
8-14
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Forms of Investment Return
1. Income Profit, dividends, interest, rent
2. Capital gain Capital appreciation
Increase in asset value
8-15
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Characteristics of Investments Risk/return trade-off Liquidity Marketability Term Management effort required Income tax treatment
8-16
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Factors Inversely Related to Return on Investment Safety of principal Accessibility of funds Liquidity Inattention to securities
management
8-17
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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
8-18
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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
8-19
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Minimizing Risk Influenced by
Time spent studying investments Knowledge about the future
8-20
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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