Preparing for a Savings or Investment Program

Chapter 8

Saving and Investing

Section 8.1 Objectives How to establish goals for a savings or

investment program How to discuss ways to obtain funds for

investing How to identify the factors that affect your

investment choices

Establishing Your Financial Goals

Goals should be specific and measurableYour goals should correspond with your valuesAsk yourself these questions as you make goals

How do I want to spend my money?How much money do I need to satisfy my goals?How will I get the money?How long will it take to save the money?How much risk am I willing to take when I invest?What conditions in the economy or in my life could

change my investment goals?Are my goals reasonable, considering my

circumstances or future circumstances?Am I willing to make sacrifices to save?What will happen if I do not meet my goals?

Perform a Financial Check-Up

Balance your budget Spend less than you make Limit credit card usage

Have insurance Cover losses from car, home, health

Start an emergency fund Save enough for 3-9 months of expenses

Have other sources of cash Have line of credit available or cash advance capability

for serious emergencies

Money to Get Started

Pay yourself first Treat investment like a normal expense

Employer sponsored retirement plans 401k or 403b

Elective savings programs IRA or Roth IRA

Special savings effort Periodic cuts on spending

Gifts, inheritances, and windfalls

Value of Long-term Savings Plans

How much money do you think you

would have at the age of 60 if you

invested $2,000 every year starting at the

age of 20 at 10% interest? $885,180

Rate of Return

1 5 10 20 30 40

4% 2,0002,000 10,83210,832 24,01224,012 59,55659,556 112,170112,170 190,052190,052

5% 2,0002,000 11,05211,052 25,15625,156 66,13266,132 132,878132,878 241,600241,600

6% 2,0002,000 11,27411,274 26,36226,362 73,57273,572 158,116158,116 309,520309,520

7% 2,0002,000 11,50211,502 27,63227,632 81,99081,990 188,922188,922 399,280399,280

8% 2,0002,000 11,73411,734 28,97428,974 91,52491,524 226,560226,560 518,120518,120

9% 2,0002,000 11,97011,970 30,38630,386 102,320102,320 272,620272,620 675,780675,780

10% 2,0002,000 12,21012,210 31,87431,874 114,550114,550 328,980328,980 885,180885,180

11% 2,0002,000 12,45612,456 33,44433,444 128,406128,406 398,040398,040 1,163,6601,163,660

12% 2,0002,000 12,70612,706 35,09835,098 144,104144,104 482,660482,660 1,534,1801,534,180

Safety and Risk

Safety – chance of losing money is smallRisk – cannot be certain of investmentSpeculative investment – high risk which

might earn large profit in short timeYoung investors tend to take bigger risks,

less to loseOlder investors are conservative so they

can protect savings

Safety and Risk

Safe Can Vary High Risk

Govt bonds and securities Treasury bills Treasury notes Treasury bonds Municipal bonds US Savings Bonds

Savings accounts CDs

Stocks Corporate bonds Mutual funds Real estate

Commodities Options Precious metals and

gems Collectibles such as

coins, stamps, and comic books

These are considered

speculative investments, may earn large profits in short time, but high risk involved

Chance of losing money small

Cannot be certain about the profit of investment

Five Components of Risk

Inflation Return may not keep up with rapid inflation

Interest Rate Fixed rates may hurts you is outside rate rise

Business Failure Lose money on stocks/bonds when business is bad

Financial Market Could be affected by social and political conditions

Global Investment May be risky, keep in mind economics and political stability

Investment Income

Dependable sources CDs, US savings bonds, US treasury

bills – will know exactly how much and

when you will get it

Stock and bonds Research the company and past

payouts

Real estate rentals Speculative investments

Only for those experienced in these markets

Investment Growth

Best ones are common stocks and growth stocks Growth companies usually reinvest profits so immediate dividends not likely, but will grow in value

Investment Liquidity

The ability to buy and sell quickly with

substantially reducing its value

Market conditions may prevent regaining

original investment

Savings and Investment Options

Section 8.2

Section 8.2 Objectives

How to identify the main types of savings and investment alternatives

How to explain the steps involved in developing a personal investment plan

Types of Investments

Stocks Corporate Bonds Government Bonds Mutual Funds Real Estate

Stocks

Stockholders buy equity in a company and in turn become a part owner Two types:

Common Stock Preferred Stock

Consider before investing Must find someone to sell to if you want out Current value is partially determined by how much you could sell it for No guarantee of dividend payments

Common Stock

Provides ownership in company Entitles owner to voting privileges Sometimes provides dividends Can provide growth profits if $ value

rises Owner could gain more shares by “stock

splits”

Preferred Stock

Gives advantage of receiving dividends

before common stockholders Consider these before investment in any

stock Company does not have to repay what you paid for

stock Current value of stock is partially determined

by how much someone is willing to pay Company does not have to pay dividends

Corporate and Government Bonds

A bond is a written pledge of company or govt. to repay a specific amount of money, along with interest Matures anywhere from 1 to 30 year with interest paid every 6 months if they can afford it Two key factors affect value of bond

Whether it will be repaid at maturity Whether the corporation/govt. will be able to pay interest until maturity

Mutual Funds

Investors pool money to buy stocks, bonds, and other securities Professional managers who work for investment companies select purchases Great for inexperience investors to have knowledge available for purchases Loss of one fund could be offset by gain in another

Real Estate

Goal is to own property that increases in value to sell at a profit or receive rental income When investing compare with similar properties for pricing, know what financing is available, and cost of

property taxes When purchasing ask:

Why are they selling? Is it in good condition? What is condition of other properties in area? Is there a chance it will decrease in value?

When selling ask: Can you find an interested buyer? Can they get the financing to purchase it?

Evaluating Investment Alternatives

Level 1

Financial Security

Level 4

Speculation

Level 3

Growth

Level 2

Safety and Income

Options, commodities, precious metals and gems, speculative stocks, junk bonds,

collectibles

Income and growth stocks, mutual funds, real estate, convertible bonds

US Treasury securities, conservative corporate bonds, state and municipal govt.

bonds, income and utility stocks

Cash, CDs, savings accounts, money market accounts, US govt.bonds

Low Risk

High Risk

Diversify to spread risk

Developing a Personal Investment Plan

Establish investment goals Decide how much money you will need and by

when Determine the amount of money you have invest List al the investments you want to evaluate Reduce your list of possible investments to a

reasonable number Choose at least two investments so you have

some diversity Recheck regularly to make changes

Reducing Risk and Sources of Information

Section 8.3

Section 8.3 Objectives

How to describe your role in a personal investment program

How to identify sources of financial information

Financial Planners

Two things to consider 1) Your income level 2) Your willingness to make your own

financial decisions

If you make less than $45,000 a year,

you may not need one

Types of Financial Planners

Fee-only planners Charge hourly rate ($75 - $200) or flat fee ($500 - several

thousand), may also charge annual fee of .04 to 1% of value on

investments they handle Fee-offset planners

Charge hourly or annual, but reduce it with earnings they make buying/selling investments

Fee-and-commission planners Charge a fixed fee for financial plan, earn commissions

from products they sell Commission-only planners

Earn all money thru commission they make on sales of investments

Selecting a Financial Planner

Look for a planner who will do the following:

Assess your current financial situation Offer a clearly written plan with investment recommendations Discuss the plan with you and answer questions Help you keep track of your progress Guide you to other financial experts and services as needed

Every state varies on certification and licensing required

Managing Your Investments

Evaluate investments Monitor investments

Keep track using Internet and newspaper

Keep accurate records Keep purchase records, commissions and

fees you have paid

Consider tax consequences Tax exempt, tax deferred, taxable

Sources of Investment Information

Internet Newspapers and TV News Programs

Wall Street Journal and CNN Fn Business Publications

BusinessWeek, Forbes, Fortune, Consumer Reports Government Publications

Federal Reserve Bulletin Corporate Reports

Prospectus that discloses information about company selling securities

Statistical Averages Standard & Poor’s 500 Stock Index or Dow Jones Industrial

Investor Services Newsletters and publication from financial people