Savings and Investments

1
Savings and Investments
UNIT THREE

• Your Money at Work

2
Savings vs. Investing

• Savings usually money you set aside for
  short-term goals.
• Investments setting your money aside for future
  income, benefit, or profit to meet long-term
  goals.
• No guarantee that your money will grow
• Earnings or losses are more than with a savings
  account.

3
Time Value of Money

• Time value of money the relationship between
  time, money, and rate of return (interest) and
  their effect on the earnings growth.
• A dollar you receive in the future may be worth
  more or less than a dollar in your hand today.

4
Earned Interest

• Earned interest the payment you receive for
  allowing a financial institution or corporation
  to use your money.

3 Factor to determine how much money will be
available to meet your specific financial
goals time more time, more money money
more money to save, more money rate higher
rate, more money
5
Compounding

• Compounding or compound interest earning
  interest on interest.
• Important thing to remember the amount you save
  is not as important as establishing the savings
  habit now
• Interest Principal x Interest Rate x Time
• Exercise 3B, pg 30

6
Rule of 72

• How long will it take to double your money?
• 72 6 interest 12 years
• 72 8 years 9 interest

7
Key Investment Principles

• Time
• Risk and Return
• Rate of return how fast your money grows
  (interest rate)

• Diversification reduction of investment risk
  by spreading your invested dollars among several
  different investments.

8
Key Investment Principles

• Inflation and Taxes
• Inflation general rise in price of goods and
  services
• you will pay more in the future for items
• occurs year after year
• GOAL investments should have a higher return
  rate than inflation rate

• Taxes -- another drain on your savings and
  investments
• pay taxes on income investment and interest on
  savings
• GOAL minimize the impact of taxes

9
Income Investment Choices

• Savings accounts
• low risk low rate of return
• U.S. Savings Bonds a formal agreement between a
  lender and a borrower covering a set time period.
• CD (Certificates of Deposit bonds from banks
  and credit unions
• specific 1. amount 2. time 3. interest
• penalty for early withdrawal
• Money Market Accounts work like checking
  accounts and pay higher rate of interest than
  savings accounts
• usually no penalty for withdrawing money
• Corporate Bonds these bonds typically pay the
  highest interest

10
Growth Investment

• Stocks investments that represent ownership in
  a company
• High risk high rate of return
• Riskier than income investment
• Capital gain
• selling price gt purchase price
• Capital loss
• selling price lt purchase price

11
Growth Investment

• Real Estate -- land, houses, malls, apartment
  complexes, undeveloped land, commercial
  buildings, and farmlands.
• Collectibles unique items that are relatively
  rare in number paintings, works of art,
  sculptures, classic cars, sports memorabilia,
  sports trading cards, etc.
• Mutual Funds investments that pool money from
  several investors and uses the money to buy a
  particular type of investments in the fund.
• Diversification
• Professional management of your money
• Multiple objectives produce income or designed
  for growth