section 1
DESCRIPTION
Deciding to Save. Economists define savings as the setting aside of income for a period of time so that it can be used later. A person receives interest on a savings plan for as long as the funds are in the account. Section 1. Deciding to Save (cont.). - PowerPoint PPT PresentationTRANSCRIPT
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Section 1
Deciding to Save
• Economists define savings as the setting aside of income for a period of time so that it can be used later.
– A person receives interest on a savings plan for as long as the funds are in the account.
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Section 1
Deciding to Save (cont.)
• Saving benefits the economy as a whole:
– It provides funds for others to invest or spend.
– It allows businesses to expand, which provides increased income for consumers and raises the standard of living.
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Section 1
Deciding to Save (cont.)
• Some savings plans allow immediate access to your funds but pay a low rate of interest.
• Others pay higher interest and allow immediate use of your funds, but require a large minimum balance.
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Section 1
• Options for saving:
Savings Accounts and Time Deposits (cont.)
– A savings account pays interest, has no maturity date, and allows funds to be withdrawn at any time without penalty.
– Money market deposit account (MMDA) pays relatively high rates of interest, requires a minimum balance of $1,000 to $2,500, and allows immediate access to funds.
View: Savings Basics
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Section 1
– Time deposits require savers to leave their funds on deposit for certain periods of time, or maturity.
Savings Accounts and Time Deposits (cont.)
– Time deposits are often called certificates of deposit (CDs), or savings certificates.
View: Savings Choices
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Section 1
• After the stock market crash of 1929, the Federal Deposit Insurance Corporation (FDIC) was created to protect peoples’ funds.
Savings Accounts and Time Deposits (cont.)
– The National Credit Union Association (NCUA) is another federal agency that insures most banks and savings institutions.
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A. A
B. B
Section 1
Which type of account will pay you more in the long run?
A. A regular savingsaccount
B. A CD
A B
0%0%
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Section 2
Stocks and Bonds (cont.)
• Corporations are formed or can expand business by selling shares of stock.
– The person who buys this stock, becomes a stockholder, and is entitled to part of the future profits and assets of the corporation.
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Section 2
Stocks and Bonds (cont.)
• Stockholders benefit from stock in two ways:
– Earn dividends or a return based on theamount of stock invested.
– Can sell stock for more than they paid for it.
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Section 2
Stocks and Bonds (cont.)
• Profits made on the sale of stock is referred to as a capital gain.
• A decrease in value on the sale of the stock is referred to as a capital loss.
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Section 2
Stocks and Bonds (cont.)
• Similar to stock, a bond is a certificate issued by a company or the government in exchange for borrowed funds.
– Bonds promise to pay a stated rate of interest over a stated period of time, in addition to repaying the borrowed amount in full at the maturity date.
– A bond does not make a bondholder part owner of the company.
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Section 2
Stocks and Bonds (cont.)
• Tax-exempt bonds are sold by local and state governments: interest paid on the bond is not taxed by the federal government.
– Interest that you earn on bonds your own city or state issues is also exempt from city and state income taxes.
View: Differences Between Stocks and Bonds
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Section 2
Stocks and Bonds (cont.)
• Savings bonds are issued by the federal government as a way of borrowing money. Are purchased at half the face value and increase every 6 months until full face value is reached
– These are safe.
– Interest earned is not taxed until the bond is turned in for cash.
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Section 2
Stocks and Bonds (cont.)
• The Treasury Department of the US Government sells several types of larger investments. They include:
– Treasury bills (T-bills) certificates $1,000 and maturing in a few days up to 26 weeks
– Treasury notes (T-notes) certificates $1,000 and maturing in 2 to 10 years
– Treasury bonds (T-bonds) certificates $1,000 and maturing in 30 years
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A. A
B. B
Section 2
Is the following description of a stock or a bond?These represent ownership, do not have a fixed dividend rate, and do not have a maturity date.
A. Stock
B. Bond
0%0%
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Section 2
Stock and Bond Markets (cont.)
• Stocks are bought and sold through brokers or through Internet brokerage firms.
• Brokerage houses communicate with the busy floors of the stock exchanges.
– The largest stock exchange, or stock market, is the New York Stock Exchange (NYSE). Others include the Chicago Exchange, London Exchange and Tokyo Exchange.
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Section 2
Stock and Bond Markets (cont.)
• Stocks can also be sold on the over-the-counter market, an electronic marketplace.
• The largest volume of these smaller company stocks are quoted on the National Association of Securities Dealers Automated Quotations (NASDAQ) national market system.
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Section 2
Stock and Bond Markets (cont.)
• Nearly every weekday, news is given about the activity to the stock market indexes.
– Dow Jones Industrial Average or “The Dow” is the most well known index.
• The New York Exchange Bond Market and the American Exchange Bond Market are the two largest bond exchanges.
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Section 2
Stock and Bond Markets (cont.)
• Many people invest in the stock market by placing savings in a mutual fund.
– Mutual fund is investment company that pools the funds of many individuals to buy stocks, bonds, or other investments
– The long-run return from index funds is higher than can be expected from almost any other investment.
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Section 2
Stock and Bond Markets (cont.)
• Money market fund is one type of mutual fund that uses investors’ funds to make short-term loans to businesses and banks.
– The investor can write checks (above some minimum amount) against their account.
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Section 2
Stock and Bond Markets (cont.)
• Banks and savings and loan associations offer money market deposit accounts (MMDA).
• The advantage to MMDAs is that the federal government insures them against loss.
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Section 2
Government Regulations (cont.)
• The Securities and Exchange Commission (SEC) is responsible for administering all federal securities laws.
• It also investigates any dealings among corporations.
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Section 2
Government Regulations (cont.)
• Congress passed the Securities and Exchange Act after the stock market crash of 1929.
• The SEC requires any institution issuing stocks or bonds:
– To file a registration statement with the federal government
– Give a prospectus (brief description) to each potential buyer of stocks or bonds
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Section 2
Government Regulations (cont.)
• States also have securities laws which protect small investors.
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Section 3
Investing for Retirement (cont.)
• It is important for a person to save for and invest in his or her own retirement.
• Retirement savings plans can include:– A pension plan is a company supported
retirement plan like a 401(k) that is not taxed until used.
– A Keogh plan is a retirement plan for self-employed individuals.
– Save a maximum of 15% of their income (tax deductible)
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Section 3
Investing for Retirement (cont.)
– An individual retirement account (IRA) is a private retirement plan for individuals or married couples.
• Contributions tax deductible
• Taxed when taken out.
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Section 3
Investing for Retirement (cont.)
– A Roth IRA is a private plan for individuals.
• Taxes income before it is saved.
• Does not tax interest on that income when funds are used upon retirement.
View: Retirement Plan Options
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Section 3
Investing for Retirement (cont.)
• Buying real estate, such as land and buildings, is another form of long term investing.
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Section 3
How Much to Save and Invest? (cont.)
• The higher the promised return on an investment, the greater the risk.
View: Savings Considerations
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Section 3
How Much to Save and Invest? (cont.)
• When you have very little income, you should probably put your savings lower risk accounts.
• It is important to practice diversification to lower your overall risk.
• Diversification – spreading investments out to lower risk
View: Risk and Return
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VS 1
Saving some of your income allows you to earn interest and put away funds for future purchases.
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VS 2
After you have accumulated savings funds, you may want to invest some of it to try to earn greater returns.
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VS 3
It is important to diversify your saving and investing, especially when looking toward retirement. In general, the greater the risk involved in any venture, the greater the potential return.
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Figure 1
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Figure 4
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Figure 5
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Figure 6
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