Saving & Investing Economics

Guiding Questions What is the best way to save your money? What is risk, and how does it affect your saving and investment? How does scarcity affect personal finance?

“Asked once what the greatest invention of all time was, Albert Einstein is said to have replied, compound interest.” – New York Times “Compound interest is the most powerful force in the universe.” – Albert Einstein

Risk & ROI How do you make money on an investment or saving method? Giving your money to somebody else means you may not get it back! To give an incentive to give your money to someone else, they give you interest on your investment Risk = the uncertainty that you will lose your investment Return on Investment = how much will you potentially get back for investing money The higher the risk, the higher the ROI!

Risk Tolerance Quiz Answer the questions from the quiz in your notes… If you answered… Mostly A: You have a very high tolerance for risk. You are comfortable with risky situations. You’re okay with losing everything, as long as there’s a chance for a huge payoff. You like when the odds aren’t in your favor. You love activities like sky diving and drag racing. Mostly B: You have a high tolerance for risk. You wouldn’t call yourself reckless, but you’re okay if something doesn’t work out. You like to bet. You probably play contact sports without a cup. Mostly C: You have a moderate preference for risk. You’re willing to take a risk, but only after researching it and fully understanding the consequences. You always prefer the safer bet. Your biggest risk is probably getting a tattoo. Mostly D: You hate risk, and do everything you can to avoid it. You probably don’t even play the board game. You’re breaking out in hives right now just thinking about risk. You prefer not to bet.

Risk & Savings/Investments Your risk tolerance determines how you will save and invest your money Your risk tolerance changes over time… What should it be when you’re old? (50+?) What should it be when you’re young? (17?) It’s good to diversify your methods. Your strategy should use many tools of saving/investing of different risk levels.

Savings Accounts Compound interest Benefits Downsides Gain interest on your principal savings plus all the money you’ve earned as interest Rule of 72 72 / Rate of interest = how long it takes to double your principal deposit Benefits High liquidity – can access your money at any time and easily get ahold of it Earn interest Insured by FDIC Downsides Very low interest rate

Money Market Accounts Type of savings account Benefits Drawbacks Higher interest rate High liquidity Low risk Drawbacks Must have a minimum balance ($1,000-$2,500) or else pay fees Limited monthly withdrawals (usually 3)

Certificate of Deposit Account that pays specific, fixed amounts of interest over a set period of time Benefits Low risk You know exactly what you’re getting into Drawbacks Must have a minimum balance ($1,000-$2,500) or else pay fees Cannot withdraw money until end of term unless you want to pay fees and/or lose interest

Bonds Bonds = loans a government/corporation must later repay to an investor (like an I.O.U.) How to make money Fixed rates of interest at regular intervals At maturity (end of period) – pay back initial amount Types of bonds Savings – Municipal Treasury – Corporate

Bonds Benefits Drawbacks Stable type of investment (interest rate won’t change once you agree to it) Better interest than savings accounts Medium liquidity – can sell a bond to somebody else before maturity if you need money Drawbacks Medium-low risk Selling early is no guarantee of profit Company (or government!) may not pay you back

Treasury Bonds are how the government borrows money to pay for the government programs. What’s happening with that right now? So… what’s happening to the T-bond market?

Stocks Stock = part ownership of a company Make money in two ways Dividends = quarterly (every 3 months) payout of your share of the company’s profits Selling your stock If the price goes up from what you paid you make money (capital gain) If the price goes down from what you paid you lose money (capital loss) Benefits Higher potential ROI Medium liquidity Drawbacks High risk

Mutual Funds Mix of many different investment methods managed a financial analyst Benefits Diversified portfolio that is managed for you Many options to fit your risk tolerance Drawbacks No control of investments Have to pay fees for fund management

Stock Market How stocks are traded Few companies sell stock directly. Most people go through professional stockbrokers. Buying on margin: Borrowing part of the cost of a stock to purchase it Short selling: Betting that a stock will lose value in the short-term. Step 1 – brokerage sells stock it owns and gives you the money Step 2 – you buy back the same # of stocks & give back to broker If the stock is cheaper than it was – you win!

Stock Market Measuring the market Index funds = collection of stocks that attempts to describe the market as a whole Dow Jones Industrial Average (DOW) NASDAQ Standard & Poor 500 (S&P 500) Bull market = market goes up for awhile Bear market = market goes down for awhile

Stock Market Measuring the market Strategy Index funds = collection of stocks that attempts to describe the market as a whole Dow Jones Industrial Average (DOW) NASDAQ Standard & Poor 500 (S&P 500) Bull market = market goes up for awhile Bear market = market goes down for awhile Strategy Daytrading