Basics of Saving and Investing

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Basics of Saving and Investing

• Debra Pankow
• September 2003

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Major Points

• Difference between saving and investing
• Risk/rate of return trade-off
• Time value of money
• Level of risk tolerance
• Key factors in personal investment plan/asset mix

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Savings vs Investment

• Safe
• Easily Accessible
• Low return
• Short-term goals

• Risk
• Volatile in short time frame
• Potential appreciation
• Mid Long-term goals

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Comparing the Returns
Savings Account Stocks
Initial Investment 100 100
Current Income 2 (interest) 2 (dividend)
Capital Gain 0 3
Total Return 2 5
Rate of Return 2 5
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Rule of 72

• The Number 72
• Interest Rate
• Years to Double

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Average Annual Rates of Return, 925-2000
(Ibbotson Associates,2001)
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Risk

• Inflation
• Business Failure
• Changes in the Economy
• Interest Rate Changes

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Risk/Rate of Return
Relationship
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Diversification

• Savings/Certificates of Deposit
• Bonds
• Variety of Securities
• Small Stocks
• Large Stocks
• Mutual funds

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Personal Assessment

• Time Line
• Risk Tolerance
• Personal Financial Goals

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Working with Financial Professionals

• Know yourself
• Know what professional you may need
• Know your professional
• Ask the right questions
• Keep lines of communication open

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Basics of Saving and Investing