Investment

• To put money to use for something offering potential profitable returns (as in interest, income, or appreciation).

• Appreciation = the value of something goes up over time

• Depreciation = the value of something goes down over time

Risk and Return

• Risk = exposure to chance injury or loss

• Return = exposure to possible gain or reward

•General Rule = The riskier an investment the greater the potential return

Which of These Are Investments?

Paying rent for an apartment Buying a house Buying a car Paying utility bills (gas, water and electric) Buying groceries Taking out a student loan Taking out a payday loan

Real Estate

• Property, especially in land

•When people buy houses, they are also buying the land the house sits on

Types of Borrowing: Mortgage

• An agreement under which a person borrows money to buy property (usually a house)

• Usually a 15 or 30 year mortgage

• Fixed interest rate = the interest rate is locked in to a particular rate (4.37%)• Variable interest rate = the interest rate changes over the course of the loan

Types of Borrowing: Mortgage

• You usually pay off more of the interest first

• As the loan matures, you pay more of the principal

Types of Borrowing: Mortgage

• The buyer doesn’t really own the house until the mortgage is paid off

• The lender may take possession of the property if the borrower fails to repay the money• default = failure to repay the loan• foreclosure = the process of repossessing a house that has not been paid off

Real Estate: Risk and Return

• Usually a good investment

• Property usually appreciates (because the price of houses and land goes up over time)

• But, not always…

Types of Borrowing: Student Loans

• Borrowing money to pay for college• Federal government loans are usually better than commercial lenders• Low, fixed interest rates (3.86%)

Types of Borrowing: Student Loans

• Sometimes limits on how much you can borrow per year• Based on need, so feds may deny application if your income is too high

• As cost of tuition goes up, loans can become burden

Student Loan: Risk and Return

• Can be a good investment if it will lead to a better job and career

• Can be a problem if you borrow too much. It means you start your career in debt.

Types of Borrowing: Car Loan

• Paying for new (or used) car• 36 - 60 month loan = 6.19% - 7.18%

• The rate you get is based on your credit history – better credit means lower interest rate• Loan from a bank usually better than the dealership (but not always)

Car Loan: Risk and Return

• Car is usually a necessity in American economy

•Good investment because a car can be resold

• Some cars retain their value; all cars depreciate over time

Types of Borrowing: Collateral loan

• You agree to use one of your assets as a guarantee that you will pay back the loan.

• If you default, the lender can take your asset to pay your debt

What’s the root?

Types of Borrowing: Payday Loan

• Cash advance for a paycheck (check cashing loans)• Amounts range from $100 - $1,000

Types of Borrowing: Payday Loan

•Must be 18 years of age; proof of income of at least $1,000 for three months• Small, short-term loan usually available to people who have bad credit and can’t get a traditional loan• Extremely high interest rates (400%!)

Montel Williams and Money Mutual

1,300%!

Payday: Risk and Return

• Horrible return

• Should never be used except in dire emergency