Chapter 19, Lesson 3 Saving and Investing

Reasons to Save Money One way to help you reach your long-term spending goals is to save. To save means to set aside income for a while so that you have it to use later. Savings is part of your income that you do not spend. Even purchases that you can buy on credit such as a car or a house often require a down payment that you must save for. People also save to pay for college or for emergencies.

Savings Accounts You can open a savings account at a bank or a credit union where your savings earns interest. This is added automatically to the principal, the amount that you deposited initially. In the meantime, they use your money to make loans to other customers, so it gets put back into the local economy. Savings accounts are safe, but they pay less in interest than might be earned from other investments. You also might not be able to get as much money out of the account at a time as you would like.

Checking Accounts If you want frequent access to your account for paying bills or making purchases, you can open a checking account. Unlike a savings account, checking accounts tend to offer little or no interest earnings on the account balance, though. When you write a check, the bank pays out of the funds in your checking account. You must be careful to always have enough money in your account, though, or the check will “bounce.” This can cost you high fees from both the bank and business to which your wrote the check.

Debit Cards Many banks offer debit cards which look like a credit card but work like a check. When you make a purchase with your debit card, the money comes directly from your checking account. It is still important to record the amount that you spend, though, so that you can keep tabs on how much money you have in your account. If you attempt to spend more, most banks will charge an overdraft fee for each transaction you make without enough money in your account.

Money Market Accounts There are ways to save your money aside from savings accounts. A money market account is like a savings account except that you usually have to deposit larger sums of money to open one. Money market accounts pay higher rates of interest than savings accounts, and many financial institutions let depositors write checks to draw on the funds in their money market account if they need to.

Certificates of Deposit Depositors may also use certificates of deposit (CDs) to save. CDs are a kind of time deposit where you agree to deposit a sum of money with a financial institution for a certain amount of time, usually several months or years. In return, the institution guarantees you a set rate of interest which it added to your principal when the CD reaches maturity, the preset time at which your CD is payable. A CD almost always offers a higher rate of interest than a regular savings account or a money market account, but if you try to take out money before it reaches maturity, there are high penalties, or fees involved.

Stocks and Bonds Have you and your friends ever pooled or combined your money to buy something you could all use…like a pizza? This is the idea behind many investing practices. Although savings accounts, money market deposit accounts, and CDs are useful and safe, their return, or the interest payments earned by the investor, is usually low. Investments, like stocks and bonds, tend to have a higher return over time, but they carry more risk.

Stocks Stock represents ownership of a company. When you buy stock, you become a shareholder, part owner in a company. If the company does well, the value of your share usually goes up, and vice versa if it does not do well. The key is to try to sell it for more than you paid for it. Some companies pay shareholders dividends, a portion of a company’s earnings paid to shareholders based on the number of shares they hold. Stocks generally earn a higher return than other investments because they carry more risk. However, if a company does poorly, you could stand to lose your investment.

Bonds Companies and governments sell bonds as a way to borrow money from investors. Bonds are certificates of agreement between borrowers and lenders. When you buy a bond, you lend your money to a company or the government for a specific period of time, but unlike stocks, this does not make you part owner. Most bonds are in large amounts, such as $100,000 and up, because companies use the money for major expenses such as equipment or research. They pay a fixed rate of interest, but they carry risk if a company does poorly. Government bonds are sold for much lesser amounts, and are considered among the safest investments.

Mutual Funds Many investors find it easier and safer to invest in stocks and bonds using mutual funds. Mutual funds are companies that sell stock in themselves and pool the money to purchase a wide selection of individual stocks and bonds in other companies. Financial experts choose which stocks and bonds to purchase, and your return is based on their choices. Mutual funds are usually less risky because the investment is spread out among many stocks and bonds. Investors can keep daily track of their investments by reading the Dow Jones Industrial Average or the Standard and Poor’s (S&P) 500 which keep track of stock prices.