Presentation on theme: "Ch. 19-1 Saving and Investment Planning. Saving- Storage of money for future use. Financial experts recommend that people save 10-15% of their income."— Presentation transcript:
Ch Saving and Investment Planning
Saving- Storage of money for future use. Financial experts recommend that people save 10-15% of their income. Investing- Using your savings in order to earn more money. The number 1 rule in investing is DIVERSIFICATION! Diversification spreads around the risk.
Liquidity- availability The more liquid, the less return. The less liquid, the greater return The higher the risk, the greater the possible return should be The lower the risk, the lower the possible return should be
Different types of investing:
Savings account Money Market account CD Stock Bond Mutual Fund Collectibles Real Estate
Savings account- Pay VERY little interest, but is an extremely safe and liquid investment. A savings account today will yield between.5% and 1.5%
Money Market Account- Pays a variable interest rate based on various government and corporate securities. Usually requires a higher deposit than a CD pays a little less interest, but is more liquid.
Certificate of Deposit (CD)- Allows you to earn more than in a savings account. Usually requires a minimum deposit and must be invested for a certain period of time (penalized if taken out early). Very safe, not as liquid investment.
Stock investments- Becoming part owner of a company. Purchasing single stocks is extremely risky can potentially yield a very high return.
Bond investments- Lending money to a company or the government. Like a CD, there is a minimum amount required and it must be invested for a certain period of time.
Mutual Fund- Money is pooled together from multiple investors and is invested among many different companies.
Mutual funds are the best long-term investment. The stock market has averaged a 12% return since its inception. A mutual fund spreads around the risk of your investment. There are many different types of mutual funds: Large, medium, small cap, domestic, international
Large Cap- Large companies (less risk, less potential return) Medium Cap- Medium sized companies (more risk, more potential return) Small Cap- Small companies (Most risk, most potential return) Domestic- American International- Non-American
Investing for the Future
College saving Save in an Education Savings Account (ESA) You can save $2,000 (after tax) per year, per child. Start when the child is born 18 years later, invest $36,000 At a 12% growth, that amounts to $126,000 Tax free
College Savings Do NOT save for college using savings bonds. This will earn 5-6% Do NOT save for college using pre-paid college tuition. This will earn 7% (inflation)
Investing for the future IRA/Roth IRA- Accounts that are designed for saving for retirement. Roth IRA vs. IRA- Both are basically the same thing, however, an IRA is pre-taxed money and a Roth IRA is after-tax money. Each individual can invest $5,000 in an IRA annually. If you invest in a Roth IRA, you take the money out tax free upon retirement.
Traditional IRA Tax deductible contributions (depending on income level) Withdraws begin at age 59 1/2 and are mandatory by 70 1/2. Taxes are paid on earnings when withdrawn from the IRA Funds can be used to purchase a variety of investments (stocks, bonds, certificates of deposits, etc.) Available to everyone; no income restrictions All funds withdrawn (including principal contributions) before 59 1/2 Early withdrawals are subject to a 10% penalty (subject to exception).
Roth IRA Contributions are not tax deductible No Mandatory Distribution Age All earnings and principal are 100% tax free if rules and regulations are followed Funds can be used to purchase a variety of investments (stocks, bonds, certificates of deposits, etc.) Available only to single-filers making up to $95,000 or married couples making a combined maximum of $150,000 annually. Principal contributions can be withdrawn any time without penalty (subject to some minimal conditions).
6 Things that Hinder Retirement: Keeping up with the Joneses LIVE WITHIN YOUR MEANS Bad Habits Cigarettes are around $5.00 per pack. 1 pack a day=$1,800 per year=$91,000 in your working lifetime. Alcohol costs around $4.00/beer 2 beers/day-$2,920/year=$146,000 in your working lifetime
Under-funding your retirement 10-15% of your income should go towards retirement. $5,000 per person per year into a Roth IRA Too much debt Debt can KILL your retirement. Live within your means. Don’t borrow money for stuff. 6 Things that Hinder Retirement:
Spending too much on entertainment Entertainment is often sporadic and not planned. Spending too much money eating out, going to concerts, going to sporting events, etc. can REALLY add up fast. Have an entertainment budget, and STICK TO IT! Purchasing depreciating items Cars, boats, computers, etc. all LOSE value as time goes on. DON’T buy new if you can avoid it. Buying a new car/boat is the WORST thing that you can do with your money! 6 Things that Hinder Retirement:
Car payment vs. investing A new car is the absolute WORST thing that you can spend your money on! Once a car leaves the car lot, it loses 20% of its value. 95% of self-made millionaires do NOT buy new cars. It is the worst investment that you can make. The average car payment among Americans is $464
If you took that $464 and invested it every month instead of making a car payment, how much money would you have in 40 years (Age 25-65)?