Download Module 04 - Investing

Meet Whitney and Justin
Whitney– senior
• Works part-time
• Spends most of her money on clothes
and going out with friends
• Doesn’t stick to her savings plan
Justin– 8th grader
• Earns money from occasional odd jobs in
neighborhood
• Father was recently laid off from job
• Is saving money for college
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©2012 National Endowment for Financial Education | Lesson 4-1: Put Savings to Work
Save vs. Invest
Alike
Plan to use money later
Keep ownership
Save
2
?
Invest
Store money somewhere
to avoid spending now
Use money with
expectation that it will make a profit
(Ex: stock, rental property, business)
Original amount always available
(unless stolen, lost, or destroyed)
Not all investments are insured
Insured if kept in a bank account
No guarantee that original amount will
be available if value of investment
drops (except bank accounts)
©2012 National Endowment for Financial Education | Lesson 4-1: Put Savings to Work
Millionaire Myth #1 – True or False?
Millionaires usually work in sports, entertainment or
lead gigantic Fortune 500 companies.
 Athletes and entertainers are notorious for
squandering their money until they’re broke.
Actually, half of all millionaires are selfemployed or own a business.
Source: Thomas J. Stanley, Ph.D. and William D. Danko, Ph.D.
The Millionaire Next Door: The Surprising Secrets of America's Wealthy, 1996
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©2012 National Endowment for Financial Education | Lesson 4-1: Put Savings to Work
Millionaire Myth #2 – True or False?
Millionaires made their fortunes the easy way—
inheriting it.
 Only 20 percent of millionaires inherited part of
their money. And half of those inherited less than
10 percent of their assets.1
 In fact, 76 percent of millionaires said “smart
investing” is one of the top three factors
contributing to their financial success. The other
two critical elements are hard work and education.2
1Thomas
J. Stanley, Ph.D. and William D. Danko, Ph.D.
The Millionaire Next Door: The Surprising Secrets of America's Wealthy, 1996
2Spectrem
Group, 2012 Affluent Market Insight
www.millionairecorner.com/article/smart-investing
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©2012 National Endowment for Financial Education | Lesson 4-1: Put Savings to Work
Millionaire Myth #3 – True or False?
Millionaires spend a lot of time managing their
finances and trading stocks.
 Most spend less than six minutes per day on
finances.1 They’re too busy making more money to
invest! And they invest for the long-term. About 75
percent buy and hold stocks more than five years.
Nearly 40 percent hold them 10 years or more.2
1Ric
Edelman, Ordinary People, Extraordinary Wealth: The 8 Secrets of
How 5,000 Ordinary Americans Became Successful Investors--and How You Can Too, 2000
2Chuck
Carlson, 8 Steps to 7 Figures: The Investment Strategies of
Everyday Millionaires and How You Can Become Wealthy Too, 2001
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©2012 National Endowment for Financial Education | Lesson 4-1: Put Savings to Work
Millionaire Myth #4 – True or False?
Millionaires spend tons of money on cars, boats, and
other luxury items.
 Wealth is not what you make—it’s what you
keep. True millionaires focus on acquiring
assets that will make them money, such as real
estate, investments, and their businesses.
That’s why so many drive Fords and Toyotas.
Source: Thomas J. Stanley, Ph.D. and William D. Danko, Ph.D.
The Millionaire Next Door: The Surprising Secrets of America's Wealthy, 1996
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©2012 National Endowment for Financial Education | Lesson 4-1: Put Savings to Work
Millionaire Myth #5 – True or False?
Millionaires never have to worry about having
enough money.
 Nearly 42 percent of millionaires still don’t feel
wealthy. They say they’d need investing assets
of $7.5 million to feel truly wealthy and stop
worrying. The more you have, the more you
seem to need to feel financially secure.
Source: Fidelity, Millionaire Outlook, March 2011
www.fidelity.com/inside-fidelity/individual-investing/millionaire-outlook-2011
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©2012 National Endowment for Financial Education | Lesson 4-1: Put Savings to Work
3 Ways to Build Wealth
1. Make enough money to cover
essential expenses and have
something left to save and invest.
2. Have a plan to save and use
part of your income to invest.
3. Invest to put money to
work for you.
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©2012 National Endowment for Financial Education | Lesson 4-1: Put Savings to Work
Sources of Income for Teens
Allowance
Windfalls
Job
Sources
of
Income
Earned
Interest
Sell
Something
Gift
Money
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©2012 National Endowment for Financial Education | Lesson 4-1: Put Savings to Work
Windfalls
What are your windfalls?
Unexpected chunks of money, like work bonuses, inheritances,
tax refunds, or other.
Use unexpected increases
in cash to save and invest.
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©2012 National Endowment for Financial Education | Lesson 4-1: Put Savings to Work
Inflation
Same Item, Different Price
$30
$27
$25
$20
$20
$15
$10
$5
$-
2000
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©2012 National Endowment for Financial Education | Lesson 4-2: How Investing Works
2012
Pay Raise for Whitney
Whitney currently earns $7.25 an hour working part time. During
her performance review meeting her supervisor informed her
that she has earned a $.50 increase in hourly pay.
•Is Whitney’s wage increase enough to keep up with inflation?
•What is the minimum increase per hour she needs to at least
match the average annual rate of inflation at three percent?
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©2012 National Endowment for Financial Education | Lesson 4-2: How Investing Works
Pay Raise for Derrick
Justin’s older brother, Derrick, now earns an
annual salary of $28,080. He wants to ask about
a raise at his next performance review.
•What is the minimum amount of
salary increase Derrick should
request to keep up with the
average annual rate of inflation?
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©2012 National Endowment for Financial Education | Lesson 4-2: How Investing Works
Invest Now or Later?
Which is better?
A. Start investing a little now.
B. Wait a while to invest more later.
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©2012 National Endowment for Financial Education | Lesson 4-2: How Investing Works
Reasons to Invest
An income investment
provides expected earnings,
usually in predictable amounts.
• Earned interest – payment
received in return for use of your
money
• Dividends – share of profits
some companies pay to their
stockholders
• Rent payments – received from
people or companies in return
for using your property
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Growth investments are
purchased because of the
potential that the value will
increase over time; an
unpredictable amount of
money is received when the
investment is sold.
•
•
•
•
Real estate
Business
Crops
Precious metals
©2012 National Endowment for Financial Education | Lesson 4-2: How Investing Works
Stock Talk
Businesses sell shares of stock to raise money to run the business.
Someone who buys stock owns a portion of a business,
depending upon how many shares are bought.
A shareholder doesn’t take on responsibilities of running the company,
but a company employee might happen to be a shareholder.
A shareholder is allowed one vote per share
when electing board members at shareholder meetings.
Company management might decide to share part of the profits
by paying dividends to shareholders (cash or shares of stock).
The price of stock shares varies based on what people are willing to pay.
Each stock has a unique ticker symbol
(abbreviated name for lists).
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©2012 National Endowment for Financial Education | Lesson 4-2: How Investing Works
How to Buy Stock
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Select Broker
Place bid
(or ask) order
with broker to
buy (or sell)
quantity at a
certain price.
Place order
for broker to
complete
trade through
an exchange
Keep record
of buy (or sell)
for tax
reporting
Deposit Cash
to open a
brokerage
account
Decide what
you want to
buy (or sell)
Pay
transaction
fee to broker
at time of buy
(or sell)
Pay attention
to stock news
and price
©2012 National Endowment for Financial Education | Lesson 4-2: How Investing Works
The Language of Investing
Asset  something of value that can be turned into cash
Examples: stock, home, lake-front property, business
Liability  something owed to another person
Examples: loan, rent
Rate of Return  degree to which an asset gains (or loses)
value over a given period of time
Examples: APY interest on savings, stock value increase/decrease
Risk  uncertainty of achieving a desired result
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©2012 National Endowment for Financial Education | Lesson 4-3: Choosing Investments
Nike Shoes or Nike Stock?
Air Jordan
XVIII Shoes
Nike Stock
Price
Hypothetical
Nike Stock Portfolio
(15 shares)
January
2003
$175 new
$11.53/share
$172.95
January
2013
$60-$250
Market Price
estimates
$51.84/share
$777.60+
(does not include
quarterly dividends)
Year
+ If the dividends paid each quarter had been reinvested,
the total number of shares owned would be greater that 15 shares after 10 years.
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©2012 National Endowment for Financial Education | Lesson 4-3: Choosing Investments
Risk Meter
Start-Up
Stock
Certificate
of Deposit
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©2012 National Endowment for Financial Education | Lesson 4-3: Choosing Investments
Take the Risk
Your risk tolerance depends on …
– When you need the money (short-term or long-term)
– Your financial goals
– Your ability to live with any investing decisions with
unpleasant consequences
Tame the risk
– Be sure you can cover your necessary financial needs
– Know what you are getting into before you invest
– Invest in different types of investments
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©2012 National Endowment for Financial Education | Lesson 4-3: Choosing Investments
Diversify to Tame Risk
Don’t put all your eggs in one basket.
• Invest in a combination of asset categories:
– More than one asset (Example: not all Facebook stock)
– Variety of assets (Example: not just Certificates of Deposit)
• Mix investments within an asset category:
– Different industries (Example: not all retail)
– Different-sized companies (Example: not all small)
Divide investments among several “baskets”.
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©2012 National Endowment for Financial Education | Lesson 4-3: Choosing Investments
Wealthy Habits
1. Be the one who invests your money.
2. Avoid unnecessary fees.
3. Believe in yourself.
4. Make tamed risks.
5. Be smart.
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©2012 National Endowment for Financial Education | Lesson 4-4: Investment Strategy