Practical Economics: Saving and Investing

Pay Yourself First Make investing a habit ▫$5,000 at 2% interest  20 year, $7,456 Long & Short Term Goals ▫At age 45, 3x salary

Goal Setting What do you want in life? ▫Career ▫Net worth ▫Accessories ▫Retirement

Risky Business Chance taken that all or part of the money put into an investment can be lost Bigger the risk, the bigger the POTENTIAL payoff

October 22 nd Please grab the two handouts available on the podium

Time is Money Time Value of Money ▫The more time spent on saving and investing, the more money one will accumulate Simple Interest ▫Earnings based on principle  4%  Year 1: $1040  Year 2: $1080  Year 3: $1120 Compounded Interest ▫Earnings based on original principal and accumulated interest  4%  Year1: $1040  Year 2: $  Year 3: $

Rule of 72 In order to calculate amount of time for investment to double, divide interest rate into 72 ▫Interest rate of 6  12 years for money to double

Savings Short-term needs or emergencies Very low risk, especially in FDIC insured institutions Accumulated interest

Savings Account No minimum deposit Very low interest ▫APY (Average Percentage Yield) 0.01% Immediate withdrawal of funds

Money Market Deposit Account (MMDA) $1000-$2500 minimum deposit High interest ▫Wells Fargo Bank, 0.03% APY Limited-check ability

Certificate of Deposit (CD) Time restriction ▫Maturity  One month to five years $1000 minimum High interest rate ▫Fixed across term ▫Well Fargo 1 year, 0.05% Penalty for early withdrawal Taxable gains

Stocks and Bonds Stock ▫Security ▫Funds accumulated by a corporation  To use in expanding business ▫5-7 years, 7% Stockholder ▫Investor ▫Entitled to certain part of future profits and assets  Part owner

Stocks and Bonds Dividends ▫Return received on the amount that he or she invested in the company  Dependent on profits Speculation ▫Sell for more than purchased

Stocks and Bonds Dividends ▫Procter & Gamble

Stocks and Bonds Capital Gain ▫Increase in value of an asset from the time it was bought to the time it was sold Capital Loss ▫Decrease in the value of an asset from the time it was bought to the time it was sold

Stocks and Bonds Bond ▫Certificate issued by company or government in exchange for borrowed money Bond’s maturity ▫Full amount plus interest paid at pre- described term  Fixed interest  3-5% ▫Paid monthly

Stocks and Bonds Tax-exempt bonds ▫Issued by local and state governments ▫Interest is not taxed Savings bonds ▫Federal distributed  $50-$10,000 ▫Interest is tax at end of term ▫Purchased at half-face value  $50, purchased for $25 now

Stocks and Bonds Treasury bill ▫Certificate exchanged for a minimum $1000 ▫Matures in a few days to 26 weeks Treasury notes ▫Matures in two to ten years Treasury bonds ▫Matures in 30 years  Exempt from state and local taxes, not federal

Stock and Bond Markets Stockbrokers ▫Person who acts as a go-between for buyers and sellers of stocks and bonds NYSE ▫New York Stock Exchange  Chicago Exchange  Tokyo  London

Stock and Bond Markets Over-the-counter Market ▫Electronic purchase and sale of stocks and bonds  Small companies, outside organized exchanges NASDAQ ▫National Association of Securities Dealers Automated Quotations  100 shares 

Stock Markets Stock Market Indexes ▫Measures of what is happening to a given set of stock prices  Dow Jones Industrial Average  The Dow ▫30 major companies ▫Increase/decrease in prices  Standard & Poor’s 500  S&P 500 ▫500 major companies

Mutual Funds ▫Investment company that pools the funds of many individuals to buy stocks, bonds, and other investments  Diversification ▫Could have as many as 100 (1000) Stock fund ▫Could have as many as 100 different bonds ▫Advantage  $250 minimum (American Funds)  IBM (all your eggs in one basket)  Limits risks

Mutual Funds ▫Investor chooses type of stocks  Large companies, growth industries  Apple, Google, Facebook  Outside the United States  China  Combination of stocks & bonds ▫Choose your flavor, but not the ingredients

Money Market Mutual fund used to make short-term loan to business and banks Large pool of short-term securities ▫Pool of CDs, 30 day paper Limited-checks ▫>$500  Interest (0.05%) earned on amount left in account Is not federally insured AAA Rate Debt Security ▫Very low risk

Investing for Retirement Pension Plan ▫Company provided retirement plan  401(K)  Portion of paycheck is withheld with company matched amount ▫Tax incurred once funds are withdrawn

Investing for Retirement SEP Plans ▫Self-employed individuals can save a maximum of 15% of their income up to a specified amount each year ▫Can deduct amount from yearly taxable income

Investing for Retirement IRA ▫Individual Retirement Account  Private retirement account that allows individuals (married couples) to save a certain amount of untaxed earnings per year with the interest being tax-deferred  Deposits are tax deducted (credit)  $5,500, if qualified  Federal & State tax experienced when funds are withdrawn ▫59 ½ Roth IRA ▫Income is taxed before saved ▫Tax-free interest

Investing for Retirement IRA ▫Individual Retirement Account  Bucket  Chose to invest ▫Edward Jones Roth IRA ▫Income is taxed before saved  No credits ▫Tax-free interest  59 ½ ▫Flexibility

Futures Bonds, Stocks, Mutual Funds, Real Estate Government Securities, Insured Savings Accounts, MMF, CD, Cash