Download SAVINTGS AND INVESTING

SAVINGS AND INVESTING
When budgeting money, it is important to set aside money for savings and or investing. When
setting money aside for saving and investing, some questions to consider are:
Are you saving money for something you want or need? Describe how you are managing to save
money.
Why would you recommend opening a savings account to someone who doesn’t have one yet?
Even though the purpose of the account is to save money, why might it be necessary to
withdraw money from a saving account?
If you open a savings account, and start making deposits and withdrawals, who is responsible for
keeping track of the account?
Reasons to save and invest money include:
1- In case of an emergency
2- To have the option of taking advantage of unforeseen opportunities
3- To reach financial goals
As you start to earn money you need to PAY YOURSELF FIRST!
Many people ask why, one should set aside money, the answer is to make a habit of saving money
so that you can reach your financial goals. What does it take to PAY YOURSELF FIRST? It
takes:
1- Commitment
2- Discipline
3- Delayed gratification
Some ways to do start PAYING YOURSELF FIRST are:
1- From each paycheck or allowance, deposit a set amount or percentage into your
savings account before spending money or anything else.
2- At the end of the day, put all your change in a savings container. Once a
month deposit the money in a savings account.
3- Whenever you get unexpected money, put a portion of it into savings.
Remember
1- Amount saved isn’t as important as getting into the habit.
There a number of ways of saving money so that you can reach your financial goal, they include:
Savings accounts, passbook accounts, statement accounts, money-market deposit accounts, and
time deposits (certificates of deposit). Let’s consider each one individually.
Savings Accounts
Advantages
1- Simplest way to earn interest on small amount of money for future expenses,
while keeping money readily accessible and earning interest on your money.
Choosing A Savings Account
Factors to consider
Interest Rate
Fees - charges - and penalties
Minimum Balance requirement
Balance calculation method
Individual factors to consider
Your own income
Your budget
Reasons for saving
Truth in Savings Act
Opening A Savings Account
You must be at least 18, or a parent or adult guardian must accompany
the student, who can be a co-signer, meaning, the adult guarding
is willing to share responsibility for the account
Know your Social Security Number
Two forms of ID
Have money to Deposit
Making a Deposit
Fill out a deposit slip – which is a form used to record the details of
the transaction.
Include the following information on the deposit slip:
1- Date
2- Account Number
3- Your Name
4- Your Address
5- Your Signature
6- Amount Deposited in Cash
7- Amount Deposited in Checks
8- Subtotal of Amount Deposited
9- Cash Received if Any
10- Total Amount Deposited
Making a Withdrawal
Fill out a withdrawal slip – with is a form used to record the details of
the transaction.
Include the following information on your withdrawal slip:
1- Date
2- Your Name
3- Account Number
4- Amount, using words
5- Amount, using numbers
6- Your Signature
Using ATMs to Make Savings Deposits and Withdrawals
ATM cards are issued by your financial institution and allow you to
deposit and withdraw money in/from your savings account by
using a deposit envelop, located next to the ATM machine or
withdrawal transaction
ATM machines are open 24 hours a day
ATM deposits and be in any amount
ATM withdrawals must be in increments of $20
Allows you to choose a personal Identification number (PIN) to access
your account information
Savings Account Register
After all transactions you will need to enter the savings information in
a savings account register. The savings register keeps track of the
date of all transactions, deposits or withdrawals, and the running
balance (current balance/amount of money) in your account.
About the Rule of 72
1- A simple way to estimate how money can grow
2- Divide 72 by the interest rate to find how many years you need
for your money to double.
72 divided by
--------------------------- =
Interest rate you an get
Years to double investment
3- Divide 72 by a number of years to determine the interest rate
needed to double your money in that period of time.
72 divided by
---------------------------Years to double investment =
Interest ate required
Simple and Compound Interest
Simple Interest – the same amount of interest is earned on the
original amount deposited
Compound Interest – compound interest grows faster because the
interest is earned on the original amount deposited, then added
to the original year, as well as each year after increasing the
amount that he interest is being paid on each year
Savings vs Investing
1- Difference
a- Degree of risk.
b- Rate and stability of return
c- Availability of funds for use
d- Amount of protection against inflation
Passbook
1- Depositor receives a booklet in which deposits, withdrawals, and interest are
recorded.
2- Average interest rate is lower at banks and savings and loans than at credit
unions.
3- Funds are easily accessible.
Statement accounts
1- Basically the same as a passbook account, except depositor receives monthly
statements instead of a passbook.
2- Accounts are usually accessible through 24-hour automated teller machines
(ATMs).
3- Interest rates are the same as passbook account.
4- Funds are easily accessible.
Interest – Earning Checking Account
1- Combines benefits of checking and savings.
2- Depositor earns interest on any unused money in his/her account.
Money-Market Deposit Account
What they are and how they work – acts like a checking account that pays interest
1- Checking/savings account.
2- Interest rate paid built on a complex structure that varies with size of
balance and current level of market interest rtes.
3- Can access your money from an ATM, a teller, or by writing up to three
checks a month
Benefits
1- Higher interest rates than regular savings accounts.
2- Immediate access to your money.
Trade - offs
1- Limited number of withdrawals each month.
2- Limited number of checks can be written each month.
3- Average yield (rte of return) higher than regular savings accounts.
Time Deposits Certificates of Deposit
What they are and how they work – require you to keep your money in account for
fixed period of time, five or more year. The longer the term, the larger the
deposit, the higher the interest
1- Bank pays a fixed amount of interest for a fixed amount of money during
a fixed amount of time.
Benefits
1234-
Higher interest rate than regular savings account.
No Risk.
Simple.
No fees.
Trade - offs
1- Withdrawal penalty if cashed before expiration date.
2- Restricted access to your money.
Types of certificates of deposit
12345How To Calculate Interest
Simple
Dollar Amount X Interest Ate X Length of Time (in years) = Amount Earned
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 6% (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 is paid on original amount of deposit, plus any interest earned.
(Original $ Amount + Earned Interest) X Interest Rate X Length of Time = Amount
Earned
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 6% (0.06) x 1 = $6
$100 + $6 = $106
With compound interest, the second year you would earn $6.36 in interest.
$106 x 6% (0.06) x 1 = $6.36
$106 + 6.36 = $112.36
Some Common Investment Vehicles
Bonds
What they are
A bond is an “IOU”, certifying that you loaned money to a government or
corporation and outlining the terms of repayment.
How they work
The buyer may purchase a bond at a discount. The bond has a fixed
interest rate for a fixed period of time. When the time is up, the bond is
said to have “matured” and the buyer may redeem the bond for the full
face value.
Bonds are often purchased as gifts for birthdays, holidays or religious
Events for people who have time on their hands for the bond to mature..
The money from US Savings Bonds, where you lend money to the US
Government, are used to build bridges, school, high ways and fund the
services which keep our government running.
Types
Corporate
1- Sold by private companies to raise money.
2- If a company goes bankrupt, bondholders have first claim to the
assets, before stockholders.
Municipal
1- Issued by any non-federal government.
2- Interest paid comes from taxes or from revenues from special
projects. Earned interest is exempt from federal income tax.
federal
3- The safest investment you can make. Even if U.S. government
goes bankrupt, it is obligated to repay bonds.
Mutual funds
What they are Professionally managed portfolios made up of stocks, bonds, and other
Investments, such as real estate or commodities.
How they work
1Individuals buy shares, and fund uses money to purchase stocks,
bonds, and other investments through a financial advisor or broker.
The financial advisor or broker will manage your investment, in
additional to being responsible for buying and selling stocks. Your
financial advisor or broker will charge you a small percentage of your
investment.
2-
Profits and or losses are shared as the entire pool of money rises or
falls in value and returned to shareholders monthly, quarterly, or
semi-annually in the form of dividends.
Advantages
1Allows small investors to take advantage of professional account
management and diversification normally only available to large
investors.
Types
12345678-
Balanced Fund
Global Bond Fund
Global Stock Fund
Growth Fund
Income Fund
Industry Fund
Municipal Bond Fund
Regional Stock Fund
Stocks
What they are
Represents ownership of a corporation. Stockholders own a share of the
company and are entitled to a share of the profits as well as a vote in how
the company is run.
How earnings are made
1Company profits may be divided among shareholders in the form of
dividends. Dividends are usually paid quarterly.
2-
Larger profits can be made through an increase in the value of the
stock on the open market.
Advantages
1If the market value goes up, the gain can be considerable.
2Money is easily accessible.
Disadvantages
1If market value goes down, the loss can be considerable.
2Selecting and managing stock often requires study and the help of a
good brokerage firm.
You can buy stocks at the stock market – which is where buyers and sellers of stock meet to
conduct transactions. There are two types of stock markets in the United Sates, the overthe-counter market (OTC), which is also known as the National Association of Security
Dealers Automated Quotes (NASDAQ) and the auction market, which is also known as the New
York Stock Exchange (NYSE) and the American Stock Exchange (AMEX).
All stocks have a stock symbol, symbols consisting of 1-3 letters when traded on the NYSE or
AMEX and symbols of 4-6 letters traded on the OTC.
To measure how the stock market is going one can refer to the Dow Jones Industrial Average
(DJIA), DOW for short. The DOW is used as an indicator or benchmark to let investors know
which way the stock marketing is going, either up or down, whether the investors are making or
losing money.
The DJIA is comprised of 30 companies that represent different industrial sectors. As each
company’s stock are traded throughout the day, every 15 seconds, the stock price changes and
the Dow goes up or down.
You can purchase investment programs from which you can purchase shares of stock directly
from publish companies called – Direct Investing programs (DRIPS). Such programs are good
for students or small investors, because they can own shares of their favorite companies
without having to go through a professional broker.
A common way to buy stocks and mutual funds is called Dollar Cost Averaging (DCA). People
use DCA to minimize their loss by buying stocks or mutual funds using a payment plan where
they purchase the same investment using the same amount of money spread out over time, such
as: every week, or every month, thus averaging your “per share cost” .
Real estate
Ways to invest
1Buy a house, live in it, and sell it later at a profit.
1Buy income property (such as an apartment house or a commercial
building) and rent it.
3Buy land and hold it until it rises in value.
Advantages
1Excellent protection against inflation.
Disadvantages
1Can be difficult to convert into cash.
2
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 less than 12 months.
Retirement plans
What they are and how they work
1- Plans that help individuals set aside money to be used after they
retire. Such plans can contributed to by employee’s and employer’s
2- Federal income tax not immediately due on money put into a retirement
account, or on the interest it makes.
3- Grow tax free and, income tax paid when money is withdrawn.
4 Penalty charges apply if money is withdrawn before retirement age,
except under certain circumstances.
5- Income after retirement is usually lower, so tax rate is lower.
Types of IRA’s
Individual retirement account -IRA1- Allows a person to contribute up to $ 2,000 of earnings per
year. Contributions can be made in installments or in a lump
sum.
ROTH IRA -also called the IRA PLUS1- While the $ 2,000 annual contribution to this plan is not tax
deductible, the earnings on the account are tax-free after
five years. The funds from the Roth IRA may be withdrawn
after age 59, if the account owner is disabled, for educational
expenses, or for the purchase of a first home.
401 K
1- Allows a person to contribute to a savings plan from his or her
pre-tax earnings, reducing the amount of tax that must be
paid. Employer matches contributions up to a certain level.
Keogh plan
1- Allows a self-employed person to set aside up to 15% of income
(but not more than $ 35, 000 per year).
457
Pension
Capital Gains and Losses
Capital gains and losses are considered - the profits or losses made on an investment.
About investment frauds and investment swindlers
What they are
1Illegal pyramids, insider trading, and unlicensed investment brokers
2High-risk “penny” stocks and fraudulent securities
3Fraudulent franchises and business opportunities
4Internet services, 900 - numbers, and high -tech investments promising
high profits and minimal risk
5Opportunities to invest in movie deals and other entertainment ventures
with promises of guaranteed profits and failure to disclose risk.
What you can do to protect yourself
1Become informed about investments and industries before investing
2Talk with others who have made similar investments
3Obtain information from state and federal regulatory agencies
4Never buy over the phone without first investigating the situation
5Avoid investment opportunities promising large returns in a short amount of
time that seem “too good to be true” - they probably are!
Thanks to:
Neffe – p. 43, Unit Four, Savings and Investments: Your Money at Work
www.practicalmoneyskills.com – Lesson 12, Saving and Investing
www.handsonbanking.org –
www.financialeducation.us – p. 99, Week 9, Introduction To The Stock Market, Dow Jones
Industrial Average, DRIP Investing Plans, Dollar cost Averaging, p. 108, Week 10, Mutual Funds
and US Savings Bonds, p. 115, Week 11, Certificates of Deposit and Retirement Plans
www.bankhs.com – Money, Banking, Savings and Money, Investing, The Risks
and Money, Investing, Stocks, and Money, Investing, Bonds, and Money,
Investment, Retirement