Download - Chapter 7
Chapter 7
Saving and Investing
Focus Questions
Why should you save? What is the difference between saving and
investing?
pay yourself first (a little can add up)
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Save this each week … at % interest … in 10 years you’ll have $7.00 5% $4,720 14.00 5% $9,440 21.00 5% $14,160 28.00 5% $18,880 35.00 5% $23,600
You can buy … two fast food meals or one movie ticket (and a candy bar) or save $7.00 this week.
You can buy … two small cheese pizzas or one large pepperoni pizza, delivered or one new CD or save $14.00 this week.
What can you give up to save for your financial goals?
What is Saving? Saving—the setting aside of income for a
period of time so that it can be used later. Results of saving?
When an individual saves, the economy as a whole benefits because savings provides money for others to invest or spend.
FDR created the FDIC (Federal Deposit Insurance Corporation) to protect all savings after the Depression.
People deposit savings to get interest.
Financial Institutions loan $ to businesses
Trucks Equipment
Plant Computers
Businesses use $ to expand and improve
Businesses pay interest to financial institutions
Interest is returned to saver/depositor
Where Do You Save?
Some people save at home Financial Institutions Savings Plans
Something with interest. Interest is the payment people receive when they lend
money or allow someone else to use their money.
Savings Account Passbook Savings Account
Account for which a depositor receives a booklet in which deposits, withdrawals, and interest are recorded.
Statement Savings Account Account similar to a passbook except that the depositor
receives a monthly statement showing all transactions. Money-Market Deposit Account
Account that pays a higher interest rate and allows you to write checks. The trade-off is that you must keep a higher minimum balance.
Time Deposits
Time Deposits Savings plans that require savers to leave their
money on deposit for a certain amount of time. The period is known as maturity. CD’s—Certificate on Deposit
simple interest calculation Dollar Amount x Interest rate x Length of Time (in years) = Amount Earnedexample
If you had $100 in a savings account that paid 6% simple interest, during the first year you would earn $6 in interest.$100 x 0.06 x 1 = $6
At the end of two years you would have earned $12. The account would continue to grow at a rate of $6 per year, despite the accumulated interest.
compound interest calculation Interest is paid on original amount of deposit, plus any interest earned.(Original $ Amount + Earned Interest) x Interest Rate x Length of Time = Amount Earnedexample If you had $100 in a savings account that paid 6% interest compounded annually, the first year you would earn $6.36 in interest.
$100 x 0.06 x 1 = $6$100 + $6 = $106
With compound interest, the second year you would earn $6.36 in interest. The calculation the second year would look like this:
$106 x 0.06 x 1 = $6.36$106 + 6.36 = $112.36
How simple and compound interest are calculated
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Relating Saving to the Economy
How can saving benefit the economy?
Investing
Taking risks with your savings Types of investing
Stocks Bonds Mutual Funds Real Estate
Stocks Corporations are formed by selling shares of stock
(also called securities). A stock gives you ownership of a corporation. Thus you
are called a stockholder. Stockholders make money by dividends and
speculation. A dividend is money paid to each stockholder during a time
of profit. Speculation is the money earned by selling your stock
back during a profit time. Money gained or lost during a stock holding time is
known as capital gains and capital loss.
Capital Gain/Loss Capital Gain Example
On December 1, you buy 100 shares of Best Buy @ $45 per share.
You hold on to the shares until July 15 at which time they are selling for $52 per share.
What is your capital gain? $52 x 100 = $5200 $45 x 100 = $4500 Capital gain = $700
Capital Loss Example On December 1, you buy
100 shares of Best Buy @ $45 per share.
You hold on to the shares until July 15 at which time they are selling for $42 per share.
What is your capital loss? $45 x 100 = $4500 $42 x 100 = $4200 Capital loss = $300
Bonds
A bond is a certificate issued by a company or the government in exchange for borrowed money. In return it promises to pay a stated rate of
interest over a stated period of time, and then to repay the borrowed amount (principal) in full at the end of that time.
Types of Bonds Tax-exempt bonds
Sold by local and sate governments without federal, state, or local tax. Interest is not taxable
Savings bonds Sold by the federal government. You receive interest updates every 6 months Interest is Taxable
T-Bills Minimum $10,000—matures in 3 months to 1 year Interest is only taxable by federal govn’t
T-Note Minimum $1000-$5000—matures in 2-10 years. Interest is only taxable by federal govn’t
T-Bond Minimum $1000-$5000—matures in 10 or more years. Interest is only taxable by federal govn’t
Difference Between Stocks and BondsStocks Bonds
All corporations issue or offer to sell stock. That is what makes them a corporation
Corporations are not required to issue bonds
Stocks represent ownership Bonds represent debt
Stocks do not have a fixed dividend rate (except preferred stocks)
Bonds pay a fixed amount of interest
Dividends on stock are paid only if the corporation makes a profit
Interest on bonds must always be paid whether there is a profit or not
Stocks do not have a maturity date Bonds have a maturity date
Stockholders can elect a board of directors who control the corporation
Bondholders usually have no voice in or control over how the corporation is run
Stockholders have a claim against the property and income of a corporation
Bondholders have a claim against the property and income of a corporation that must be met before claims
of any stockholders
How do you buy stocks and bonds? Stocks are bought and sold
through brokers on a stock exchange either at a brokerage firm or on the internet. A broker is a go between for
buyers and sellers NYSE—New York Stock
Exchange Stocks can also be acquired
on your own. These are called over-the-counter stocks. NASDAQ has the largest
volume of over-the-counter stocks
Bonds Bonds are sold over-the-
counter and on the Internet
Mutual Funds and Money Market Funds Mutual Funds
Investing in the stock market where your money is pooled with many other individuals to buy stocks, bonds, or other investments. Usually a diversified
portfolio of stocks and bonds.
Most are invested into one of two indexes. DJIA S&P
Money Market Fund A type of mutual fund used
to buy the short term debt of businesses and banks
You may write a check against the amount you have in that fund.
Government Regulations
SEC Securities and Exchange Commission
Regulates brokerage firms, stock exchanges, most businesses that issue stock.
Investigates any dealings among corporations that affect the value of stock Mergers
Is property the route to wealth?
Special Savings Plans and GoalsRetirement
Special Savings Plans and Goals Investing for retirement
Pension plans are the most popular of the retirement income plans. 401K is the most popular A portion of your check is withheld and a company matches that
amount to be paid with interest upon retirement or buyout.
60 Minutes: The 401K Fallout
Special Savings Plans and Goals Investing for retirement
Pension plans are the most popular of the retirement income plans. 401K is the most popular A portion of your check is withheld and a company matches that
amount to be paid with interest upon retirement or buyout. Individuals can set up their own plans:
Keogh Plan—15% of your income, deductible for yearly taxes Traditional IRA—Set up for people earning less than $30,000 a year.
You can contribute up to $5000 a year and deduct that amount from your taxes.
Roth IRA—You can contribute up to $5000 a year. This amount is not tax deductible now, but rather later the interest earned is tax deductible.
IRAs – an example of a return on investment
contributions made only between ages of 22–30 (9 years) $2,000 contributed each year Total investment of $18,000 At an interest rate of 9%, by age 65 will have $579,471
contributions made only between ages of 31–65 (35 years) $2,000 made contributed each year Total investment of $70,000 At an interest rate of 9%, by age 65 will have $470,249
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Real Estate as an Investmentways to invest Buy a house, live in it, and sell it later at a profit. Buy income property (such as an apartment house or a commercial building)
and rent it. Buy land and hold it until it rises in value.advantages Excellent protection against inflation.disadvantages Can be difficult to convert into cash. A specialized type of investment requiring study and knowledge of business.capital gains: profits from the sale of a capital asset such as stocks, bonds, or real
estate. These profits are tax-deferred; you do not have to pay the tax on these profits until the asset is sold. Long-term capital gains occur on investments held more than 12 months. Short-term capital gains occur on investments held lessthan 12 months.
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How Much Do You Save?
Evaluate your amount of risk If investing, spread your investments out—
diversification How much do you value now or later?
the rule of 72How many years will it take to double my money?
72 DIVIDED BY= YEARS TO DOUBLE A SUM OF MONEYINTEREST RATE
At what interest rate will my money double in a set number of years?
72 DIVIDED BY = INTEREST RATE REQUIREDYEARS TO DOUBLE INVESTMENT
Relating Investing to the Economy
How does investing play a part in the economy?
Career Opportunity Stock Broker
Job Description Relay investors’ stock orders to the floor of a securities
exchange Offer financial counseling and advice on the purchase or
sale of particular securities. Qualifications
College Degree Pass a state licensing exam and the General Securities
Registered Representative Exam Median Salary:$38,800 Job Outlook: Above Average