UNIT 4: FINANCE

Chapter 14: Savings and Investing

Saving and Investing

Saving – means safely putting money aside for future use.

Investing – is using your savings to earn extra income. Investing has two major advantages over savings:

1. Investments often yield a higher rate of return. 2. Investments can grow at or exceed the rate of

inflation. However, there are two major disadvantages of

investing: 1. The yield is not guaranteed. 2. There is some risk of losing part or all of the money.

Savings and Investing

The Need for a Savings Plan A savings plan is a systematic or

regular method of putting money aside to reach a financial goal.

Why People Save 1. emergency needs 2. short and long term goals Security and future needs

Selecting a Savings Plan

Benefits of Saving Plans 1. Earning and Yield Deposit – placing money into a bank account Interest – money you receive over time for letting others

borrow your money. Rate of return (yield) – interest expressed as a

percentage of the original investment. Simple interest – interest calculated only on the

principal. Principal – the original amount you deposited. Compound interest – interest calculated on the principal

plus any interest already earned. See table 14.1 on page 439

Selecting a Savings Plan

Benefits of Savings Plans

Safety – accounts are insured up to $100,000 for all your accounts at all branches of the same financial institution.

(Don’t put all your eggs into one basket.)

Liquidity – in an emergency, you can withdraw money quickly and without notice.

Common Savings Plans

Savings Accounts A savings account is a safe vehicle for savings of any

amount. Interest may be calculated in different ways:- Daily and paid at the end of each month- On the average account balance during a specific

period- On the minimum monthly balance, and deposited in

your account semi-annually on April 30 and October 31No matter how it’s calculated, the interest paid on savings accounts is the lowest rate of interest paid on all types of investments.

Common Savings Plans

Term Deposit and Guaranteed Investment Certificates

Term deposits and guaranteed investment certificates (GICs) are both savings plans in which you deposit a fixed sum of money for a specific length of time, or term, at a fixed rate of interest.

Registered Retirement Savings Plans The federal government introduced the registered

retirement savings plan (RRSP) in 1957 to encourage people to save for retirement. RRSPs help you save money by allowing you to invest a portion of your yearly income without paying income tax on it.

Please see figure 14.1 on page 443

Common Savings Plans

Registered Education Savings Plans The registered education savings plan

(RESP) is a tax-sheltered plan designed to help finance post-secondary education.

Unlike an RRSP contributor, the person making contributions to an RESP does not get any tax benefit.

Read more about RESPs on page 445 Read about the costs of post-secondary

education on page 446

Common Forms of Investments Good investors diversify their investments. This means that they spread their

investments across several types. This spreads out the risk of investing. If one investment is performing poorly, it will be balanced by one that is doing well.

Canada Savings Bonds A Canada Savings Bond (CSB) represents a loan made by you to the Government

of Canada. The Government will repay you the value of the bond plus interest earned on or before the maturity date. The maturity date, printed on the face of the bond, is the date when the bond becomes due and is paid. Provincial and municipal bonds are also available, but CSBs are more popular.

Corporate Bonds When a company needs money, they often sell securities: corporate bonds and

shares of stock. A bond is a definite promise to repay borrowed money on a certain future date, along with interest. If the bondholders want their money back before the bonds mature, they can sell them to other investors, through investment dealers, at the current value, or market value. This amount may be more or less than the bond’s face value, depending on what other investors will pay.

Common Forms of Investments Investing in Stocks Investing in stocks is different from bonds. When you invest in a stock, you

become a part owner, or shareholder, of that company. Shareholders share both the risk and rewards of the company.

When the demand for and prices of most stocks are high, we say it is a bull market.

If the offers to sell stocks exceed the orders to buy stocks, then the prices will fall; we say this is a bear market.

The stock prices reflects the investors’ overall opinion of the company’s prospects.

The most available stock is common stock. They give its owner a voice in the operation of the business.

Preferred stock has certain advantages over common stock. The main advantage is that preferred shareholders are paid first if the company makes a profit. Companies with long records of regular dividend payments, stable growth patterns, and active trading of their shares are called blue chip companies. They are much less risky than growth companies, which reinvest their profits into their operations rather than paying shareholders dividends.

Commons Forms of Investments The Stock Exchange Investors buy and sell stocks, with the help of stockbrokers or online services,

through the stock exchange. The Toronto Stock Exchange (TSX) handles the most trading volume of any

Canadian stock market. Buying and Selling Stocks Many stocks are bought and sold through stockbrokers and investment

dealers. These licensed financial experts advise buyers on which stocks to buy and sell, and when.

With the rapid growth of the Internet, online investing has become more and more popular. Online investing is less expensive and more convenient than using a financial planner or stockbroker, but the wise investor is aware that there are potential disadvantages as well.

Stock Quotations A stock quotation consists of two prices. The bid price is the highest price

anyone is currently willing to pay for a particular stock. The ask price is the lowest selling price that another investor is willing to accept for that stock.

Common Forms of Investments Mutual Funds A mutual fund is a pool of money from many investors that

is set up and managed by an investment company to buy and sell securities of other corporations.

Real Estate Real Estate is land and anything attached to it. It may

involve the purchase of a house, cottage, condominium, or piece of property.

Collectibles Any item of personal interest to a collector that can

increase in value over time is a collectible. A collectible will increase in value only if it is popular and hard to find, or if it is produced in a limited edition so that the demand for it far exceeds the supply.

Business Investments

Why Businesses Invest

1. to accommodate excess cash until it is needed

2. to generate income 3. to advance a corporate strategy.

Read: Ethical, Moral & Legal Considerations, on page 456

UNIT 4: FINANCE

Chapter 15: Credit

The Wonderful World of Credit Credit is the privilege of using someone

else’s money for a period of time. A creditor is any person or business

that grants a loan or sells on credit. A debtor is any person or business that

buys on credit or receives a loan.

Consumer Credit

Please see figure 15.1 on page 468: Advantages and disadvantages of using consumer credit.

To use or not to use Consumer Credit? Before buying anything on credit, ask yourself these key

questions: 1. Do I really need this item, or is it an impulse purchase? 2. Is this item a good buy, or should I comparison shop? 3. How much could I save if I paid cash? 4. If I pay cash. How long will it take me to save enough money? 5. How much interest will I pay if I use credit? 6. Can I afford the monthly credit payments? 7. How will the use of credit affect my budget? 8. Is this purchase a wise use of credit?

Government Credit

All three levels of government – federal, provincial, and local – borrow money to provide goods and services to citizens.

Ex. To build schools, hospitals, highways, airports, and buses, and to pay the salaries of government employees.

Governments borrow through a variety of sources.

Ex. Canada savings bonds, and Government of Canada Treasury Bills.

Business Credit

Businesses use long-term credit to purchase land, buildings, and equipment, and entrepreneurs use loans to start new business ventures.

Businesses may also borrow money for short-term reasons.

Ex. A business may need to use credit while it waits for goods in stock to be sold or for credit customers to pay for their purchases.

Also, to buy goods for sale or to purchase raw materials and supplies.

Why Businesses Grant Credit Businesses use credit on a regular basis

but may also grant credit to their clients and customers.

Ex. Banks, credit unions, and trust companies.

Please look at Figure 15.2 Advantages and Disadvantages of Business Credit, on page 471.

Types and Sources of Credit

Credit cards Please read Ethical, Moral & Legal

Considerations on page 475 Types: bank-issued credit cards, Travel and

Entertainment Cards, and Retailer Credit Cards.

Installment Sales Credit – is a credit plan that requires a purchaser to make a down payment and fixed regular payments, with finance charges added to the price.

Types and Sources of Credit

Loans A term loan is a form of installment credit in

which the borrower agrees to make fixed monthly payments over a set period of time, or term.

A demand loan is a special kind of short-term loan with flexible terns of repayment.

Collateral is something of value that the leader can take and sell if the loan is not repaid on time.

Student loans Mortgage loans

The Cost of Credit

Credit is very popular with consumers and businesses, but it does involve a cost. Several factors affect the amount of interest that borrowers pay for credit. The principal, or the amount of money borrowed, is the chief factor in determining the interest cost.

Other factors include:- The term for repaying the loan- Current interest rates- Inflation and general economic conditions- Security or collateral - Risk and credit rating

The Cost of Credit

How to calculate simple interest:

I(interest) = P(principal) x R(interest rate) x T(time)

Credit Worthiness

The three Cs of credit: Character Capacity Capital

A credit bureau is a business that gathers credit information on all borrowers in a particular region for the purpose of selling that information to credit grantors, or lenders.

A credit rating is an indication of the level of risk that consumers, businesses, or governments will pose if credit is granted to them.

Get a credit history Check your credit file Stay out of credit crisis

Getting our of Debt

A financial crisis is a wake up call to get a handle on your finances.

Consolidation loan – is money borrowed to consolidate all your debt into one loan payment.

Credit counselling services – are not for profit organizations that provide unbiased assistance to individuals and families experiencing money and credit problems.