Insurance and Investment

Savings Tools Advanced Level

Types of Savings Tools Savings tools - secure and liquid accounts offered by depository institutions assisting in the management of a savings fund Checking Account Savings Account Money Market Deposit Account Certificate of Deposit

Ideal for Storing Emergency Savings Insured depository institutions offer accounts which are: Secure Accounts must stay within coverage limits Liquid Generally quick and easy to withdraw money How will a consumer know if their depository institution offers secure accounts?

Liquidity (accessibility) Checking Account Definition Account that provides an easy method for withdrawing and depositing money Interest Most do not If offered, rates are low Liquidity (accessibility) Most liquid What are common ways to access funds in a checking account?

Checking Account Features Reduce the need to carry large amounts of cash Different types of accounts are available (some have fees) Also known as a share draft account at a credit union Not recommended as the only account used to save money

Liquidity (accessibility) Savings Account Definition Account designed to hold money not spent on current consumption Interest Earns interest Rates are often low Liquidity (accessibility) More liquid than other savings tools (except checking accounts) What are common ways to access funds in a savings account?

Savings Account Features Effective for storing emergency funds May require a minimum balance or have a limited number of withdrawals each month Also known as a share account at a credit union

Liquidity (accessibility) Money Market Account Definition Account that usually has minimum balance requirements and tiered interest rates Interest Often tiered interest rates – the amount of interest earned depends on the account balance Liquidity (accessibility) Less liquid than checking and savings accounts because of minimum balance requirements and transaction limits Which would typically earn a higher interest rate? An account with a $10,000 balance or a $2,500 balance?

Money Market Account Features Usually have to deposit a minimum amount to open the account (typically $1,000) Similar to a savings account but earns higher interest and has higher minimum balance/deposit requirements

Certificate of Deposit (CD) Definition Account that is used for a fixed period of time and allows restricted access to the funds Interest Varies (depending on time and amount of money deposited) Liquidity (accessibility) Least liquid savings tool Why would a depository institution typically offer higher interest rates for CD’s with a longer time period or more money invested?

Certificate of Deposit Features Deposits must be held for a certain length of time (usually 7 days to 10 years) Deposits can range from $100 to $250,000 If funds are held for the designated time period, then there is limited risk and no fees

Liquidity Higher interest rates are a trade-off for lower liquidity Money Market Deposit Account Checking Accounts Savings Accounts Money Market Deposit Accounts Certificates of Deposit Most Liquid/Lowest Interest Least Liquid/ Highest Interest Checking Account Savings Account Certificate of Deposit

Time Value of Money Math “Take Charge of Your Finances” Advanced Level

Simple Interest vs. Compound Interest Interest earned on the principal investment Earning interest on interest Principal is the original amount of money invested or saved

$1,000 invested at 7% for 5 years Amount Investment is Worth Compound Interest Number of times interest is compounded has effect on return Interest compounding frequently will yield higher returns $1,000 invested at 7% for 5 years Compounding Method Amount Investment is Worth Daily $1,419.02 Monthly $1,417.63 Quartely $1,414.78 Semi-Annually $1,410.60 Annually $1,402.55

The Rule of 72 The time it will take an investment (or debt) to double in value at a given interest rate using compounding

72 / interest rate = Number of years to double savings (or debt) 72 / number of years = Interest rate needed to double

How long it will take for money to double using compounding interest The Rule of 72 How long it will take for money to double using compounding interest The interest rate an investment must earn to double in a time period How many times money will double in a specified time period

Things to know about the Rule of 72 It’s only an approximation Assumes the interest rate stays constant Does not allow for additional payments to original amount Does not account for taxes

The Fundamentals of Investing Advanced Level

Investments Financial Plan Savings Investments Investments -assets purchased with the goal of providing additional income from the asset itself but with the risk of loss

All Investments Have Some Risk Return Profit or income generated by saving and investing Trade off Higher returns Higher risk (chance of loss) Investment Risk Possibility that an investment will fail to pay the expected return Investments have the potential for higher returns

Investments are Important to Building Net Worth Savings Tools = Monetary Assets (liquid – quickly and easily converted to cash) Investment Tools = Investment Assets (may not be easily converted to cash or penalties charged to access the funds early) Investments are less liquid than savings tools

Investments Help Accomplish Long-Term Goals Money invested is usually used to pay for long-term goals Buying a House Higher Education Retirement It is recommended that at least 10% of net income is dedicated to savings and investments each time income is received

Amount of Money Invested Rate of Return Total return on investment expressed as a percentage of the amount of money saved Total Return Amount of Money Invested Rate of Return

Inflation Inflation Rise in the general level of prices Inflation Risk The danger that money won’t be worth as much in the future as it is today Strive to have the rate of return on investment be higher than the rate of inflation How does inflation relate to investing?

Bond Fixed interest rate Definition Description Investment Risk Return Form of lending to a company or the government Description Organization pays interest to the lender (purchaser) until the maturity date is reached Investment Risk Least amount (typically) Depends on the type of bond Return Fixed interest rate Maturity date – specified time in the future when the principal amount of the bond is repaid to the bondholder

A share of ownership in a company Stock Stock Stockholder or shareholder A share of ownership in a company Owner of the stock Usually a stockholder owns a very small part of a company

Stock Returns - Dividends Share of profits distributed in cash to stockholders Stockholder may or may not receive dividends

Stock Returns – Capital Gains Market Price Current price a buyer is willing to pay Stocks sells for a price higher than what was paid Capital gain – unearned income received from the sale of an asset above its purchase price Stock sells for a price lower than what was paid Stockholder will lose money

Real Estate Ownership of residential or commercial property or land Potential for Returns Capital gains (selling the property for more than what was paid) Rent (charging others for use of the property) Real estate can be time consuming but the potential for returns is high

Speculative Investments High risk investments Have the potential for significant fluctuations in return over a short period of time Futures Options Collectibles Type of return depends on the investment

Mutual Funds When a company combines the funds of many different investors and then invests that money in a diversified portfolio of stocks and bonds What is Included Bonds Stocks Real Estate Speculative Investments Type of Returns Interest Dividends Rents Capital Gains

Reduces investment risk Mutual Funds Advantage Disadvantage Reduces investment risk Fees may be high Saves investors time

Index Fund Index Fund Index Example Type of mutual fund designed to reduce fees by investing in the stocks and bonds that make up the index Index Group of similar stocks and bonds Example Standard and Poor’s 500

Investment Philosophy Everyone has a tolerance level for the amount of risk they are willing to take on Generally divided into three categories: conservative, moderate, aggressive Time may influence investment philosophy If someone was an aggressive investor, what types of investment tools would they primarily have in their portfolio?

Portfolio Diversification Portfolio diversification – reduces risk by spreading money among a wide array of investments Goal: create a collection of investments that will provide an acceptable return with an acceptable exposure to risk Reduces investment risk Investing in a mutual fund is an automatic form of portfolio diversification

Stock Exchange Investments are purchased from a stock exchange (except for real estate and some speculative investments) Stock exchange provides an organized, central service to buy and sell all stocks, bonds and other investments that are traded Worldwide, there are many different stock exchanges A limited number of people are allowed to buy and sell directly from each stock exchange

Brokerage Firms Full-service Discount Brokerage firms facilitate the buying and selling of investments on the stock exchange Full-service Offer investment transactions and a financial advisor Financial advisor – trained professional that helps make investing decisions Discount Only completes orders to buy and sell investments Advice is not offered

Investing for Retirement Choose an investment Usually mutual funds Contribute money Typically tax-advantaged When possible, use an employer-sponsored plan Employer may match funds (up to a certain limit)

There are many other types of plans available Retirement Accounts Employer Sponsored Similar plans 401(k) 403 (b) (tax-exempt organizations) Personal Retirement Traditional IRA (taxes when money withdrawn) Roth IRA (taxes paid when money deposited) The trade-off to tax advantages is most accounts have penalties if money is withdrawn early There are many other types of plans available

Investing in Bonds Characteristics of Bonds Buying and Selling Bonds MYPF Chapter 13 13-Sept-2001 Investing in Bonds Characteristics of Bonds Buying and Selling Bonds ROTEC / Patrick Henry High School

MYPF Chapter 13 13-Sept-2001 Stocks vs. Bonds Bonds are loans that must be repaid at maturity by a corporation Stocks are ownership in a corporation, so they do not need to be repaid Interest on bonds is mandatory Dividends on stocks are not ROTEC / Patrick Henry High School

MYPF Chapter 13 13-Sept-2001 Corporate Bonds Face value – amount the bondholder will be repaid at maturity. Also called par value. Maturity date – when bonds become due for payment. Can vary widely ROTEC / Patrick Henry High School

Fixed income investments MYPF Chapter 13 13-Sept-2001 Fixed income investments Bonds pay a specified amount of interest on a regular basis – usually every 6 months. For example, a $1000 bond paying 5% would pay 2.5% twice a year ($25) ROTEC / Patrick Henry High School

Market Value of Bonds May rise above or fall below face value. MYPF Chapter 13 13-Sept-2001 Market Value of Bonds May rise above or fall below face value. When bonds sell for more than face value, they are selling at a premium If interest rates are falling, investors would be willing to pay more for a bond that pays a higher interest Bonds can be sold at a discount, or an amount less than face value When interest rates are rising, investors are not willing to pay full price for a bond paying lower interest ROTEC / Patrick Henry High School

Yield on a 6% Corporate Bond MYPF Chapter 13 13-Sept-2001 Yield on a 6% Corporate Bond If you by the bond at face value $600 6.0% If you by the bond at 104 $600 5.8% If you buy the bond at 96 $600 6.3% Purchase of $10,000 Bond Interest Yield Annual interest dollar amount Current yield = Market price ROTEC / Patrick Henry High School

MYPF Chapter 13 13-Sept-2001 Government Bonds Municipal bond – issued by state and local governments Revenue bond (raise money for public works project) General obligation bond (backed by the power of the issuing state/local government) Pay lower interest than corporate bonds, but are generally exempt from taxes Savings bonds & Treasury bonds Agency bond – issued by Federal Agencies When you purchase an agency bond, you are lending them money ROTEC / Patrick Henry High School

Evaluating Bonds Independent rating services Investment-grade bond MYPF Chapter 13 13-Sept-2001 Evaluating Bonds Independent rating services Moody’s, Standard & Poor’s Highest rating is AAA Investment-grade bond High quality bonds considered safe Junk bond Low rating, or no rating at all – high risk ROTEC / Patrick Henry High School

Investing in Mutual Funds MYPF 5/22/2019 Investing in Mutual Funds Chapter 14

Evaluating Mutual Funds MYPF 5/22/2019 Evaluating Mutual Funds A mutual fund is a professionally managed group of investments bought using a pool of money from many investors. Individuals buy shares in the mutual fund. The fund managers use this pooled money to buy stocks, bonds, and other securities. The kinds of securities they buy depend on the fund’s stated investment objectives. Chapter 14

Advantages of Mutual Funds Professionally managed Liquid Diversified Require only a small minimum investment

Value of Portfolio – Liabilities Net Asset Value The net asset value tells you the market price for a share of a mutual fund. The NAV is the total value of a fund’s investment portfolio minus its liabilities, divided by the number of outstanding shares. NAV = Value of Portfolio – Liabilities Number of Shares

The Prospectus The prospectus is a legal document that offers securities or mutual fund shares for sale. It must contain the following: The terms A summary of the fund’s portfolio of investments The fund’s objectives Financial statements showing past performance

Costs and Fees If you buy a mutual fund through a broker, you will likely have to pay a sales fee, called a load. Front-end load You pay the fee when you buy the fund Back-end load You pay the fee when you sell the fund No-load fund No sales fees

Types of Insurance Advanced Level

Why is It important to have insurance? Emergency savings - at least six months of expenses set aside to cover costs of unexpected expenses Risk - chance of loss from an event that cannot be entirely controlled is managed by Insurance – a financial product purchased by many people facing a similar risk to protect against the risk of larger losses What are examples of unexpected events that may result in a financial loss?

Insurance Policy Policy - A contract between the insurance company and the insured that states the exact terms of the policy Coverage - The risks covered and amount of money paid for losses under an insurance policy Policyholder - Person who owns the insurance policy Premium - Money paid to purchase the policy Experts say that buying insurance is buying financial security. Do you think this is true? Why or why not?

The benefits of Insurance Types of Insurance Property & Liability Payments received from an insurance policy can far exceed the premiums paid Provides financial security and peace of mind Life Health Long-term Care Why is the best outcome to have insurance but never collect on it? Disability

The Insurance Process Claim – a formal request to an insurance company asking for a payment when the policyholder has an accident, illness or injury Event occurs resulting in loss Deductible – the out-of-pocket money paid by the policyholder before an insurance company will cover the remaining costs attributed to the loss Remaining amount owed is paid by co-insurance (if applicable) Policyholder makes claim to insurance organization Co-insurance – requires the insured individual to pay a fixed percentage of the loss after the deductible has been paid Insurance organization determines if event is covered by policy If so, policyholder pays a deductible

Why do insurance policies include deductibles and co-insurance? When the act of insuring an event increases the likelihood it will occur Deductibles and co-insurance place some of the loss on the policyholder Reduce the problem of moral hazard Not locking a car or parking it in a theft-prone area in hopes it will be stolen and automobile insurance will pay for a new vehicle For example… Dollars paid from an insurance policy are not intended to make a person better off than before the loss happened

Sources of Insurance Employer Individual Government In most cases, individuals acquire insurance from a combination of sources Long-term care, property and liability insurance Employer Special programs for those who qualify and during catastrophes Health, disability, and occasionally life insurance Individual Government If an employer does not provide insurance, it may be acquired individually

Employer Provided Insurance Employee benefits - products or services that add extra value for employees beyond earned wages Insurance premiums paid by… In-kind income – the donation of a product or service in place of cash Employer Employee Payroll deduction Policies may be available to the employee’s family members (usually for additional fees) No income taxes are paid on the in-kind income

Government Programs Provide basic insurance as a part of the social safety net to protect citizens from economic hardship Social Security, Medicare, Medicaid Many programs require a work history and employer provided participation to be eligible Unemployment insurance, worker’s compensation Can address specific catastrophes Hurricane Sandy

Mental health treatment Health Insurance Provided by And/or Employer Health insurance - provides money to pay for health care Government Individual Risks Covered Mental health treatment Hospital bills Preventative care Doctors’ visits Vision care Prescription drugs Medical procedures Dental care

What if a Person Cannot Work or live Independently? Disability insurance Long-term care insurance Payment for extended nursing care when a person cannot live independently (but doesn’t need to be hospitalized) Payment to replace earnings during times when workers cannot work due to illness or injury Why are both disability and long-term care insurance important? Provided by employers, individuals, and/or government Provided by individuals

Property & Liability Insurance Two parts Property insurance - payment to insured person if his/her property is damaged or destroyed by an accident Pays for loss to insured person Liability insurance - payment to others if a member of the insured household accidently causes harm to other people or property Pays for injury or loss to others Provided by individuals

Types of Property & liability Insurance Automobile insurance - payment for liability and property insurance on a vehicle If a person drives an automobile, automobile liability insurance is required by law Homeowners insurance - payment to cover liability losses and damage/loss of home structure and its contents Renters insurance - payment for damage/loss of property in a rental unit in addition to liability losses

When would it be necessary to purchase life insurance? Provided by employers and/or individuals Life insurance- payment to beneficiaries who were named by the insured person May cover paid and unpaid work formerly done by the individual Beneficiary- someone who receives money if an insured person dies Household production- unpaid work, such as child care or meal preparation Dependent - someone who relies on someone else for income and care When would it be necessary to purchase life insurance?