investing in your future developed by: joel schumacher associate specialist [email protected]...
TRANSCRIPT
Investing in Your Future
Developed by:
Joel Schumacher
Associate Specialist
Dept. of Agricultural Economics & Economics
MSU Extension
What are your goals?
This year:• Improve your free throw shooting?• Improve your grades?• Buy a car?
In the next few years:• Have a grand champion project at the fair?• Improve your ACT score?• Go to college?
How are you going to achieve your goal?
Jay’s Goal• Jay wants to be a starter on next year’s basketball
team.
How does Jay achieve this goal?• Jay gives up time he could have spent doing other
things.• Jay spends this time in the gym improving his
basketball skills.
How are you going to achieve your goal?
Kayla’s Goal• Kayla wants to buy a car
How does Kayla achieve this goal?• Spends less money on food, music & clothes
• Kayla gives up some of these items to save money• Kayla saves this money to help purchase a car
• Spends more time working at a job• Kayla gives up time she could have spent doing other things• Kayla’s employer pays her for time & effort• Kayla uses this money to help purchase car
What does college cost?
Tuition & Mandatory Fees• Carroll College $25,198• Rocky Mountain $22,892• MSU $6,428• MSU-Billings $5,470• MSU-Northern $4,642• Montana Tech $6,094• UM $5,775• UM-Western $3,945* Tuition & Mandatory Fees for full time students, 2011-2012
College Costs
What % of MT College Graduates have student debt?• 68%
What was the average student debt?• $22,346
Source: Project on Student Debt (2009)
How can I invest in my future?
We all have one resource? Time
• Time can be used to “work” to earn money.
• Time can be used to learn new skills that will improve our future opportunities.
Where is this money coming from?
Job Gifts (birthday, Christmas) Allowance 4-H Animal Project Sale Others places?
Next Question:• Where do I put my money until I need it?
Part II: Investments
Investment Options
Insured Assets• Savings Account, CDs
Bonds• Corporate, Government, Savings Bonds
Stocks• Common & Preferred
Hard Assets• Livestock, Real Estate, Gold
Mutual Funds
Insured Investments
Types of Investments Savings Accounts Certificates of Deposit Some Money Market Accounts Checking Accounts
What is the current national average rate for 6 month CDs?
A. 0.78%
B. 1.19%
C. 1.92%
D. 2.40%
E. 3.12%
Insured Investments Low Risk
• Generally these accounts pay interest as a set interest rate• Insured by FDIC or NCUA
Historically Lower Returns• $100 invested 1/1/1990 would be worth:
12/31/2009• 6-Month CD: $253• S&P 500: $326• Gold: $285
20 Year Average Return: 4.59% annually
Insured Investments Federal Deposit Insurance Corporation (FDIC)
National Credit Union Administration (NCUA)
• $250,000 per person per category
If the bank fails…• FDIC takes over the bank• It sells the pieces to other banks• Then pays depositors up to the insurance limits
Lower Volatility
Savings Bonds
Basic Information:• Savings Bond is a very small loan from you to the
federal government• These bonds earn interest for 30 years or until you
redeem them• Individuals under age 18 can purchase them directly• Can be purchased in amounts of $25 and up• Can be purchased online (www.treasurydirect.gov) or
many financial institutions• Interest may be tax free if used for educational
expenses
Savings Bonds
Two Types of Savings Bonds• Series I:
• Part of the interest rate is fixed for the life of the bond.• Part of the interest rate is based on inflation.
• Series EE:• Rate is adjusted semi-annually• Based on average rate of 10 year Treasury Securities.
Bonds
A bond is a loan from an investor to a company or organization
Who issues bonds?• Big Businesses• School Districts• City, County, State and Federal Governments• Water and Sewer Districts• Airport & Port Authorities
How a Bond Works:
Step :2 Investors buy the rights to these payments.The investors become "bond holders"
Step 1: Company offers a five year bondwith annual 6% interest payments
Face value of the bond is $1,000
January 1, 2012 $60January 1, 2013 $60January 1, 2014 $60January 1, 2015 $60January 1, 2016 $1,060
Payment Schedule
Bond Pricing
The company holds a “bond” auction• Investors bid on bonds. • The company doesn’t know the price until the sale.
Bonds from issuers with strong credit ratings will sell for higher prices.
Calculating Current Yield
Divide the Interest Payment by the Price of the bond
Current
Price Interest Yield
$ 975 $60 6.15%
$1,000 $60 6.00%
$1,050 $60 5.71%
Bond Risks Default Risk:• The bond issuer might not make the bond payments• Some bonds have collateral
Inflation Risk:• Interest payments on bonds generally don’t adjust for
inflation
Stocks A share of stock represents ownership of a
company
Residual Interest Holder• Everybody else gets paid before shareholders• Suppliers, Employees, Bond Holders, Banks,
Utility Companies, etc.
• Everything that is left belongs to shareholders
Risks & Rewards of Stocks
Higher Volatility
Historically Higher Returns• $100 invested 1990 would be worth:
2009• 6-Month CD: $253• S&P 500: $326• Gold: $285
20 Year Average Return: 7.6%
Higher Volatility
Stocks
Ways to make money from a stock:
1. The Share Price IncreasesCapital Appreciation
2. The Stock issues a DividendIncome
Stocks
Share Price Equals:
+ Value of assets
- Value of liabilities
+ Present value of future earnings
Do we know what these values are?
Hard Assets
Examples:• Real Estate• Precious metals: Gold, Silver, etc.• Collectibles: Art, Baseball Cards, Coins• Ag Commodities: Corn, Cattle, Wheat, etc.• Energy Commodities: Oil, Natural Gas, Coal
Hard Assets
Different Risks than for Monetary Assets
• Livestock require upkeep (feed, shots, etc.)
• Livestock can die, be stolen, or fail to produce a calf.
• How quickly can you convert it to cash if you need the money?
Mutual Funds
A mutual fund share represents a small piece of ownership in a large investment pool.
Each mutual fund has different investment goals.• Examples:
• Fund X invests only in stocks of US companies. • Fund Y invests in stocks and bonds of manufacturing
companies based in Europe.
Mutual Funds
Advantages:
• Diversification: • You own dozens of stocks and bonds buy purchasing just
one share of a mutual fund.
• Professional Investment Management: • The fund has a professional investment management team
that manages the fund.
Steps to Get Started
Put your goals in writing• How much will they cost?• When do you want to achieve the goal?
Where will your savings come from?• Job, animal sale, gifts
Where will you put your money until you need it?• How much risk are you willing to take?
Other Issues for Young Investors
Minimum Investment Rules• Lower rates for accounts will small balances• Mutual Fund companies often require $500 to
$10,000 to open an account.
Restrictions on ownership for minors• Might need a joint account to own stocks & bonds
Investing at a Young Age
Key Points
• Save for a reason. What is your reason?
• What is your goal? How much and when?
• Where will you put your money until you need it?
Questions