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Chapter 7
Saving and Investing
Focus Questions
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Why should you save?
What is the difference between saving and
investing?
pay yourself first (a little can add up)
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Save this each week … at % interest … in 10 years you’ll have
$7.00
5%
$4,720
14.00
5%
$9,440
21.00
5%
$14,160
28.00
5%
$18,880
35.00
5%
$23,600
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You can buy … two fast food meals or one movie ticket
(and a candy bar) or save $7.00 this week.
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You can buy … two small cheese pizzas or one large pepperoni pizza,
delivered or one new CD or save $14.00 this week.
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What can you give up to save for your financial goals?
teens – lesson 12 - slide 12-A
What is Saving?
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Saving—the setting aside of income for a
period of time so that it can be used later.
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Results of saving?
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When an individual saves, the economy as a whole
benefits because savings provides money for others to
invest or spend.
FDR created the FDIC (Federal Deposit
Insurance Corporation) to protect all savings
after the Depression.
Interest is
returned to
saver/depositor
People deposit
savings to get
interest.
Businesses pay
interest to financial
institutions
Businesses
use $ to
expand
and
improve
Financial
Institutions
loan $ to
businesses
Trucks
Equipment
Plant
Computers
Where Do You Save?
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Some people save at home
Financial Institutions
Savings Plans
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Something with interest.
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Interest is the payment people receive when they lend
money or allow someone else to use their money.
Savings Account
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Passbook Savings Account
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Statement Savings Account
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Account for which a depositor receives a booklet in which
deposits, withdrawals, and interest are recorded.
Account similar to a passbook except that the depositor
receives a monthly statement showing all transactions.
Money-Market Deposit Account
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Account that pays a higher interest rate and allows you to
write checks. The trade-off is that you must keep a higher
minimum balance.
Time Deposits
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Time Deposits
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Savings plans that require savers to leave their
money on deposit for a certain amount of time.
The period is known as maturity.
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CD’s—Certificate on Deposit
How simple and compound interest are calculated
simple interest calculation
 Dollar Amount x Interest rate x Length of Time (in years) = Amount Earned
example
 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 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 calculation
 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
example
 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 0.06 x 1 = $6
$100 + $6 = $106
 With compound interest, the second year you would earn $6.36 in interest.
 The calculation the second year would look like this:
$106 x 0.06 x 1 = $6.36
teens – lesson 12 - slide 12-E
$106 + 6.36 = $112.36
Relating Saving to the Economy
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How can saving benefit the economy?
Investing
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Taking risks with your savings
Types of investing
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Stocks
Bonds
Mutual Funds
Real Estate
Stocks
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Corporations are formed by selling shares of stock
(also called securities).
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Stockholders make money by dividends and
speculation.
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A stock gives you ownership of a corporation. Thus you
are called a stockholder.
A dividend is money paid to each stockholder during a
time of profit.
Speculation is the money earned by selling your stock
back during a profit time.
Money gained or lost during a stock holding time is
known as capital gains and capital loss.
Capital Gain/Loss
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Capital Gain Example
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On December 1, you buy
100 shares of Best Buy @
$45 per share.
You hold on to the shares
until July 15 at which time
they are selling for $52 per
share.
What is your capital gain?
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$52 x 100 = $5200
$45 x 100 = $4500
Capital gain = $700
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Capital Loss Example
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On December 1, you buy
100 shares of Best Buy @
$45 per share.
You hold on to the shares
until July 15 at which time
they are selling for $42 per
share.
What is your capital loss?
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$45 x 100 = $4500
$42 x 100 = $4200
Capital loss = $300
Bonds
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A bond is a certificate issued by a company
or the government in exchange for borrowed
money.
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In return it promises to pay a stated rate of
interest over a stated period of time, and then to
repay the borrowed amount (principal) in full at
the end of that time.
Types of Bonds
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Tax-exempt bonds
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Savings bonds
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Minimum $10,000—matures in 3 months to 1 year
Interest is only taxable by federal govn’t
T-Note
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Sold by the federal government.
You receive interest updates every 6 months
Interest is Taxable
T-Bills
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Sold by local and sate governments without federal, state, or local tax.
Interest is not taxable
Minimum $1000-$5000—matures in 2-10 years.
Interest is only taxable by federal govn’t
T-Bond
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Minimum $1000-$5000—matures in 10 or more years.
Interest is only taxable by federal govn’t
Difference Between Stocks and Bonds
Stocks
Bonds
All corporations issue or offer to sell stock. That is what
makes them a corporation
Corporations are not required to issue bonds
Stocks represent ownership
Bonds represent debt
Stocks do not have a fixed dividend rate (except
preferred stocks)
Bonds pay a fixed amount of interest
Dividends on stock are paid only if the corporation
makes a profit
Interest on bonds must always be paid whether there is
a profit or not
Stocks do not have a maturity date
Bonds have a maturity date
Stockholders can elect a board of directors who control
the corporation
Bondholders usually have no voice in or control over
how the corporation is run
Stockholders have a claim against the property and
income of a corporation
Bondholders have a claim against the property and
income of a corporation that must be met before claims
of any stockholders
How do you buy stocks and bonds?
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Stocks are bought and sold
through brokers on a stock
exchange either at a brokerage
firm or on the internet.
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A broker is a go between for
buyers and sellers
NYSE—New York Stock
Exchange
Stocks can also be acquired
on your own. These are called
over-the-counter stocks.
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NASDAQ has the largest
volume of over-the-counter
stocks
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Bonds
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Bonds are sold over-thecounter and on the Internet
Mutual Funds and Money Market Funds
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Mutual Funds
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Investing in the stock
market where your money
is pooled with many other
individuals to buy stocks,
bonds, or other
investments.
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Usually a diversified
portfolio of stocks and
bonds.
Most are invested into one
of two indexes.
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DJIA
S&P
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Money Market Fund
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A type of mutual fund used
to buy the short term debt
of businesses and banks
You may write a check
against the amount you
have in that fund.
Government Regulations
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SEC
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Securities and Exchange Commission
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Regulates brokerage firms, stock exchanges, most
businesses that issue stock.
Investigates any dealings among corporations that
affect the value of stock
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Mergers
Is property the route to wealth?
Special Savings Plans and
Goals
Retirement
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Special Savings Plans and
Goals
Investing for retirement
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Pension plans are the most popular of the retirement income
plans.
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401K is the most popular
A portion of your check is withheld and a company matches that
amount to be paid with interest upon retirement or buyout.
60 Minutes: The 401K Fallout
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Special Savings Plans and
Goals
Investing for retirement
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Pension plans are the most popular of the retirement income
plans.
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401K is the most popular
A portion of your check is withheld and a company matches that
amount to be paid with interest upon retirement or buyout.
Individuals can set up their own plans:
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Keogh Plan—15% of your income, deductible for yearly taxes
Traditional IRA—Set up for people earning less than $30,000 a year.
You can contribute up to $5000 a year and deduct that amount from
your taxes.
Roth IRA—You can contribute up to $5000 a year. This amount is
not tax deductible now, but rather later the interest earned is tax
deductible.
IRAs – an example of a return
on investment
contributions made only between ages of 22–30 (9 years)
 $2,000 contributed each year
 Total investment of $18,000
 At an interest rate of 9%, by age 65 will have $579,471
contributions made only between ages of 31–65 (35 years)
 $2,000 made contributed each year
 Total investment of $70,000
 At an interest rate of 9%, by age 65 will have $470,249
teens – lesson 12 - slide 12-N
Real Estate as an Investment
ways to invest
 Buy a house, live in it, and sell it later at a profit.
 Buy income property (such as an apartment house or a commercial building)
and rent it.
 Buy land and hold it until it rises in value.
advantages
 Excellent protection against inflation.
disadvantages
 Can be difficult to convert into cash.
 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.
teens – lesson 12 - slide 12-L
How Much Do You Save?
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Evaluate your amount of risk
If investing, spread your investments out—
diversification
How much do you value now or later?
the rule of 72
How many years will it take to double my money?
72 DIVIDED BY
=
YEARS TO DOUBLE A SUM OF MONEY
INTEREST RATE
At what interest rate will my money double in a set number of years?
72 DIVIDED BY
=
YEARS TO DOUBLE
INVESTMENT
INTEREST RATE REQUIRED
Relating Investing to the
Economy
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How does investing play a part in the
economy?
Career Opportunity
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Stock Broker
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Job Description
 Relay investors’ stock orders to the floor of a securities
exchange
 Offer financial counseling and advice on the purchase or
sale of particular securities.
Qualifications
 College Degree
 Pass a state licensing exam and the General Securities
Registered Representative Exam
Median Salary:$38,800
Job Outlook: Above Average