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Investing in Your Future Developed by: Joel Schumacher Associate Specialist [email protected] Dept. of Agricultural Economics & Economics MSU Extension

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Page 1: Investing in Your Future Developed by: Joel Schumacher Associate Specialist jschumacher@montana.edu Dept. of Agricultural Economics & Economics MSU Extension

Investing in Your Future

Developed by:

Joel Schumacher

Associate Specialist

[email protected]

Dept. of Agricultural Economics & Economics

MSU Extension

Page 2: 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?

Page 3: Investing in Your Future Developed by: Joel Schumacher Associate Specialist jschumacher@montana.edu Dept. of Agricultural Economics & Economics MSU Extension

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.

Page 4: Investing in Your Future Developed by: Joel Schumacher Associate Specialist jschumacher@montana.edu Dept. of Agricultural Economics & Economics MSU Extension

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

Page 5: Investing in Your Future Developed by: Joel Schumacher Associate Specialist jschumacher@montana.edu Dept. of Agricultural Economics & Economics MSU Extension

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

Page 6: Investing in Your Future Developed by: Joel Schumacher Associate Specialist jschumacher@montana.edu Dept. of Agricultural Economics & Economics MSU Extension

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)

Page 7: Investing in Your Future Developed by: Joel Schumacher Associate Specialist jschumacher@montana.edu Dept. of Agricultural Economics & Economics MSU Extension

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.

Page 8: Investing in Your Future Developed by: Joel Schumacher Associate Specialist jschumacher@montana.edu Dept. of Agricultural Economics & Economics MSU Extension

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?

Page 9: Investing in Your Future Developed by: Joel Schumacher Associate Specialist jschumacher@montana.edu Dept. of Agricultural Economics & Economics MSU Extension

Part II: Investments

Page 10: Investing in Your Future Developed by: Joel Schumacher Associate Specialist jschumacher@montana.edu Dept. of Agricultural Economics & Economics MSU Extension

Investment Options

Insured Assets• Savings Account, CDs

Bonds• Corporate, Government, Savings Bonds

Stocks• Common & Preferred

Hard Assets• Livestock, Real Estate, Gold

Mutual Funds

Page 11: Investing in Your Future Developed by: Joel Schumacher Associate Specialist jschumacher@montana.edu Dept. of Agricultural Economics & Economics MSU Extension

Insured Investments

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

Page 12: Investing in Your Future Developed by: Joel Schumacher Associate Specialist jschumacher@montana.edu Dept. of Agricultural Economics & Economics MSU Extension

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%

Page 13: Investing in Your Future Developed by: Joel Schumacher Associate Specialist jschumacher@montana.edu Dept. of Agricultural Economics & Economics MSU Extension

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

Page 14: Investing in Your Future Developed by: Joel Schumacher Associate Specialist jschumacher@montana.edu Dept. of Agricultural Economics & Economics MSU Extension

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

Page 15: Investing in Your Future Developed by: Joel Schumacher Associate Specialist jschumacher@montana.edu Dept. of Agricultural Economics & Economics MSU Extension

Lower Volatility

Page 16: Investing in Your Future Developed by: Joel Schumacher Associate Specialist jschumacher@montana.edu Dept. of Agricultural Economics & Economics MSU Extension

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

Page 17: Investing in Your Future Developed by: Joel Schumacher Associate Specialist jschumacher@montana.edu Dept. of Agricultural Economics & Economics MSU Extension

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.

Page 18: Investing in Your Future Developed by: Joel Schumacher Associate Specialist jschumacher@montana.edu Dept. of Agricultural Economics & Economics MSU Extension

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

Page 19: Investing in Your Future Developed by: Joel Schumacher Associate Specialist jschumacher@montana.edu Dept. of Agricultural Economics & Economics MSU Extension

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

Page 20: Investing in Your Future Developed by: Joel Schumacher Associate Specialist jschumacher@montana.edu Dept. of Agricultural Economics & Economics MSU Extension

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.

Page 21: Investing in Your Future Developed by: Joel Schumacher Associate Specialist jschumacher@montana.edu Dept. of Agricultural Economics & Economics MSU Extension

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%

Page 22: Investing in Your Future Developed by: Joel Schumacher Associate Specialist jschumacher@montana.edu Dept. of Agricultural Economics & Economics MSU Extension

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

Page 23: Investing in Your Future Developed by: Joel Schumacher Associate Specialist jschumacher@montana.edu Dept. of Agricultural Economics & Economics MSU Extension

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

Page 24: Investing in Your Future Developed by: Joel Schumacher Associate Specialist jschumacher@montana.edu Dept. of Agricultural Economics & Economics MSU Extension

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%

Page 25: Investing in Your Future Developed by: Joel Schumacher Associate Specialist jschumacher@montana.edu Dept. of Agricultural Economics & Economics MSU Extension

Higher Volatility

Page 26: Investing in Your Future Developed by: Joel Schumacher Associate Specialist jschumacher@montana.edu Dept. of Agricultural Economics & Economics MSU Extension

Stocks

Ways to make money from a stock:

1. The Share Price IncreasesCapital Appreciation

2. The Stock issues a DividendIncome

Page 27: Investing in Your Future Developed by: Joel Schumacher Associate Specialist jschumacher@montana.edu Dept. of Agricultural Economics & Economics MSU Extension

Stocks

Share Price Equals:

+ Value of assets

- Value of liabilities

+ Present value of future earnings

Do we know what these values are?

Page 28: Investing in Your Future Developed by: Joel Schumacher Associate Specialist jschumacher@montana.edu Dept. of Agricultural Economics & Economics MSU Extension

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

Page 29: Investing in Your Future Developed by: Joel Schumacher Associate Specialist jschumacher@montana.edu Dept. of Agricultural Economics & Economics MSU Extension

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?

Page 30: Investing in Your Future Developed by: Joel Schumacher Associate Specialist jschumacher@montana.edu Dept. of Agricultural Economics & Economics MSU Extension

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.

Page 31: Investing in Your Future Developed by: Joel Schumacher Associate Specialist jschumacher@montana.edu Dept. of Agricultural Economics & Economics MSU Extension

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.

Page 32: Investing in Your Future Developed by: Joel Schumacher Associate Specialist jschumacher@montana.edu Dept. of Agricultural Economics & Economics MSU Extension

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?

Page 33: Investing in Your Future Developed by: Joel Schumacher Associate Specialist jschumacher@montana.edu Dept. of Agricultural Economics & Economics MSU Extension

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

Page 34: Investing in Your Future Developed by: Joel Schumacher Associate Specialist jschumacher@montana.edu Dept. of Agricultural Economics & Economics MSU Extension

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?

Page 35: Investing in Your Future Developed by: Joel Schumacher Associate Specialist jschumacher@montana.edu Dept. of Agricultural Economics & Economics MSU Extension

Questions