Banking, Saving and Banking, Saving and InvestingInvesting

Using Money to Make Money

BankingBankingBank Accounts:Checking AccountsSavings AccountMoney Market AccountCertificate of Deposit

Checking accounts hold money that you will need to spend soon (on bills, at stores, etc). The others hold money that you expect to keep for a while.

SavingsSavings

Savings accounts pay interest. Most checking accounts do not (or they pay very little).

Savings accounts are used for emergency funds, and to save for specific goals (like a new car, a down payment on a house, etc.)

SavingsSavings

Savings and checking accounts at banks and other financial institutions are usually insured by the federal government (the Federal Deposit Insurance Corporation).

InvestingInvesting

Investments involve buying something with an expectation of a gain, usually over a long period of time.

There are many, many kinds of investments. They include “real” things like land, buildings, and precious metals. They also include financial investments like stocks and bonds.

InvestmentsInvestments

InvestingInvestingStock represents a share of ownership in a company, like Apple or Costco. Some stocks pay dividends, which are cash payments made to stockholders (usually 4 times per year.)Stocks can go up or down in value. Investments in stocks are not guaranteed.

InvestingInvesting

Bonds are used by companies to borrow money. Usually, a bond pays interest on a regular schedule.

Bonds do not represent an ownership stake in the company that issues them.

Bonds are not guaranteed.

InvestingInvestingMany people invest by buying shares of a mutual fund. A mutual fund uses money from many investors to make large investments in stocks and bonds.

Each share of the mutual fund represents a tiny share in each of the stocks and bonds that the mutual fund holds.

Mutual fund investments are not guaranteed.

InvestingInvesting

Risk is the chance that an investment's actual return will be different than expected. Risk includes the possibility of losing some or all of the original investment.

Mutual funds are less risky than individual stocks, because they offer diversification.

Single Stock Mutual Fund

Many companies Diversification can lower risk Investors pool their money Can include bonds

Publicly traded companies Earn dividends when companies make profit Traded in shares

One company No diversification means higher risk Each investor is on his/her own  

Stocks vs. Mutual Funds

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The stocks of the biggest companies in America have gone up about 8% per year on average. Some years they have gone up more, and some years they have gone down. But the overall average is about 8%.

An investment that returns 8% per year will double in value every 9 years.

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Compare:

Jack and Jill are both 22 years old, and they start work at the same company on the same day. Jill invests $100 per

month in a mutual fund, but Jack decides to wait.

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After 10 years, Jill has put $12,000 of her money into her account. She decides to stop investing money each month, but keeps the money invested so it will continue to grow.

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Jack decides to start investing the same day Jill decides to stop. He invests $100 per month, every month, until he and Jill both retire at age 65.

Investing- Jack and Jill by Investing- Jack and Jill by yearyear

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Who has more money on the day that Jack and Jill both retire?

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InvestingInvesting

Jill invested $12,000 from her salary, and Jack invested $39,600 from his.

Jill ended up with more money, because her investment had more years to grow.

The Lesson: There Is No Substitute for Time.

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How much to invest each month to become a millionaire in:

40 years - $286.4530 years - $670.9820 years - $1697.7310 years - $5466.09