1. Chapter 6 Saving and Investing

2. Section 6-1: Why Save?  Deciding to save  People save for purchases that require more funds than available, for emergencies, and for retirement.  Economies benefit from individuals who save because people have more money to invest or spend, leading to expanding business.  When choosing a place to save, think about trade- offs.

3.  Savings Accounts  Passbook, regular, or statement savings accounts accrue a low interest but allow immediate access to funds.  Money market accounts accrue high interest with immediate access through checks, but have a high minimum balance requirement.

4.  Time Deposits  Time deposits refer to a wide range of savings plans or certificates of deposit (CDs) with a high interest rate that increases over time, but a person cannot remove funds before a certain time period or maturity without paying a penalty.  Before the 1930s, people could lose all the money in their accounts if the bank failed.  Now the federal government insures bank accounts (in FDIC member banks) up to $100,000, giving people security when making deposits.

5. Section 6-2: Investing: Taking Risks with your Savings  Stocks and Bonds  Stocks entitle the buyer to future profits and assets of the corporation.  Stockholders make money through dividends, return on bought stock, or by speculating- buying stock hoping it will increase in price so they can sell it at profit.  A capital gain is money earned by selling stock for more than you paid for it.  A capital loss is money lost by selling stock for less than you paid for it.

6.  Stocks and Bonds cont…  A bond is a certificate promising to repay a loan at a stated interest rate.  A bondholder is NOT part-owner of the organization.  Tax-Exempt bonds earn tax-free interest.  With savings bonds you pay half of the bond’s face value and the interest increases yearly until the face value is reached.  T-Bills, T-Notes, and T-Bonds are government bonds exempt from state and local tax and mainly for larger investments.

7.  Stock and Bond Markets  Stocks are bought/sold through brokers.  Stocks are traded at stock exchanges.  Stocks that are not traded in specific place are called over-the-counter stocks.  Bonds are sold on exchanges and over-the-counter markets.  Mutual funds are investment companies that combine many investors’ funds to buy a large variety and quantity of stocks.

8.  Stock and Bond Markets cont…  Some mutual funds mirror index funds.  Managed mutual funds have managers who adjust and mix the stocks bought, attempting to generate the highest yields.  Money market mutual funds allow inventors to write checks against the money in the fund.

9.  Government Regulations  The Securities and Exchange Commission regulates brokerage firms, stock exchanges, and most businesses that issue stock.  Congress passed the Securities Act to avoid another stock market crash.  The Act requires a prospectus to be given to each potential buyer of stocks or bonds.

10. Section 6-3: Special Savings Plans and Goals  Investing for Retirement  Most companies have pension plans, such as 401k, that provide retirement income.  Some people will combine a retirement plan with their Social Security checks because Social Security alone is not enough.  Personal or private pension plans have the benefit of tax savings.

11.  Investing for Retirement cont…  The Keogh plan is an individual retirement plan for self-employed people where they can save up to 15% of income.  Traditional IRAs allow you to contribute up to $5000 per year, which is not taxed when put in, and any earnings and interest are not taxed until money is withdrawn.  Roth IRAs allow you to save up to $5000 per year, which is taxed when put in, interest and earnings are never taxed, and money is not taxed when withdrawn.

12.  Investing for Retirement cont…  Real estate is a popular form of investing for the future.  Housing generally increases in value over time.  Buying undeveloped land is a more risky investment.  It is hard to turn real estate into cash on short notice.

13.  How much to save and invest?  There are many factors involved in deciding how much to save versus how much to invest  Invest in several different types of accounts to lower your overall risk (diversify)  If you cannot afford any losses, use banks or savings bonds.  Your values may affect your investment choices.