Recap Saving and Investing

Review Questions

Which of these saving/investing options has the highest risk?

a. stocks

b. savings accounts

c. U.S. government bonds

d. money market accounts

If you bought an investment for $1,000 and it grew to $1,050 1 year later, what is your ROI?

a. 50%

b. 0.5%

c. 5%

d. 5.5%

Slide 2

Just a Couple MoreWhen investing, the higher the risk you are willing to take

a. the less return you can expect

b. the greater your possible return may be

c. the lower your possible return may be

d. the less return you can expect and the lower your possible return may be

A long-term, planned approach to making investments is called

a. systematic investing

b. contingency fund planning

c. political risk

d. hedging

Slide 3

Answers Are

Which of these saving/investing options has the highest risk?

a.Stocks

If you bought an investment for $1,000 and it grew to $1,050 1 year later, what is your ROI?

c. 5%

When investing, the higher the risk you are willing to take

b. the greater your possible return may be

A long-term, planned approach to making investments is called

a. systematic investing

Slide 4

Slide 5

Saving and Investing

• Saving is accumulating money for future needs – Savings accounts and CDs– Money market accounts

• Investing is attempting to make your money grow– Stocks and bonds– Real estate

10-1 Reasons for Saving and Investing

Slide 6

Short-Term Needs

• Contingency planning– Liquidity– Emergency fund

10-1 Reasons for Saving and Investing

Savings can be used to help pay for emergency expenses.

• Vacations• Short-term goals

Slide 7

Long-Term Needs

• Education

• Buying a house

• Providing for a family

10-1 Reasons for Saving and Investing

Many people make investments to provide for future needs of their families.

• Financial security

• Retirement planning

Slide 8

Sample Financial Plan

10-1 Reasons for Saving and Investing

Slide 9

Growth of Principal

• Principal grows through– Additional deposits to the account– Interest earned

• Simple interest• Compound interest

– Capital Appreciation • Return on Investment (ROI)

10-2 Saving and Investing Principles

Slide 10

Growth of Principal

10-2 Saving and Investing Principles

COMPOUND INTEREST

Annual Interest Rate 6%

Period       Adjusted

(Quarterly) Principal Rate Interest Principal

1 $5,000.00 0.015 $75.00 $5,075.00

2 $5,075.00 0.015 $76.13 $5,151.13

3 $5,151.13 0.015 $77.27 $5,228.39

4 $5,228.39 0.015 $78.43 $5,306.82

5 $5,306.82 0.015 $79.60 $5,386.42

6 $5,386.42 0.015 $80.80 $5,467.22

7 $5,467.22 0.015 $82.01 $5,549.22

8 $5,549.22 0.015 $83.24 $5,632.46

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Return on Investment

• Is the amount that money saved or invested grows

• ROI formulaSelling Price – Purchase Price = Gain

Gain / Purchase Price = ROI

10-2 Saving and Investing Principles

RETURN ON INVESTMENT

Purchase Price Selling Price Gain ROI

$500.00 $525.00 $25.00 5.00%

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Systematic Saving and Investing

• Is a strategy for regularly setting aside cash that can be used to achieve goals

• Has a long-term focus• Dollar-cost averaging is one

strategy for systematicinvesting

10-3 Saving and Investing Strategies

Achieving financial goals requires discipline, just as preparing for a marathon does.

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Tax Advantages

• Tax-deferred investments have no taxes on gains until the money is taken from the account

• Tax-free investments have no taxes on gains

10-2 Saving and Investing Principles

Slide 14

Risk and Return

• Investment risk

• Inflation risk

• Industry risk

• Stock risk

• Political risk

10-2 Saving and Investing Principles

Natural disasters, such as a hurricane, can damage investment properties.

Slide 15

Diversification

• Means holding a variety of investments to reduce risk

• An investment portfolio is a collection of assets– Certificates of deposit– Stocks– Bonds– Real estate– Other holdings

10-3 Saving and Investing Strategies

Slide 16

Understanding the Market

• Bull market– Prices are steadily increasing– Profit-taking may cause a temporary drop in

some stock prices

• Bear market– Prices are steadily decreasing

– May be a good time to buy stocks that are sound

investments because prices are lower • Economic conditions

10-3 Saving and Investing Strategies