Investment vs. Savings

What are some ways we’ve discussed already to make money with your money? What are the pros and cons of these methods?

Savings Tools - What are the pro/cons of these for making money? Checking Account Savings Account Money Market Deposit Account Certificate of Deposit Savings Bond

Savings Tools -Low risk, low rate of return/interest rates Checking Account ~0.00% Savings Account ~ Money Market Deposit Account ~ % Certificate of Deposit ~ % Savings Bonds ~ 1.18% through October 31, 2013

Why is it important to not only save money in safe, low interest accounts, but also invest in more risky ones?

Inflation – the value of money being less

Inflation – rise in prices over time - your money won’t be worth as much in the future

content/uploads/2012/08/Infographic- Historical-Gas-Prices.jpg content/uploads/2012/08/Infographic- Historical-Gas-Prices.jpg Inflation rate varies – but it has been about 4% annual average since 1950 – Last few years - ~2% a year How can you beat the inflation rate with your savings?

Stocks and Investments – Higher Risk, Higher Return POTENTIAL RETURN RISK Risk- uncertainty regarding the outcome of a situation or event Investment Risk- possibility that an investment will fail to pay the expected return or fail to pay a return at all All investment tools carry some level of risk What is the risk level of savings tools?

Types of Investment Tools StocksBonds Mutual Funds Index Funds Real Estate Speculative Investments

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

DividendsMarket Price Return on Stocks If stock is sold for a market price higher than what was paid Share of profits distributed in cash to stockholders Stockholder may or may not receive dividends- depends on company profit Current price that a buyer is willing to pay for stock If stock is sold for a market price lower than what was paid Stockholder will receive a return Stockholder will lose money Definition What is received?

Stocks – High Risk, High Potential Return GREAT after 1930s Pretty bad in 1928

Bonds Form of lending to a company or the government (city, state, or federal) Annual interest is paid to investor Once the maturity date is reached, the principal is repaid to the bondholder Bonds are less risky than stocks but usually do not have the potential to earn as high of a return Definition Return

Advantage Disadvantage Mutual Funds Mutual fund- when a company combines the funds of many different investors and then invests that money in a diversified portfolio of stocks and bonds Make sure to research the fees charged by a mutual fund Reduces investment risk Fees may be high Saves investors time

Index Fund Index Index Fund A mutual fund that invests in the stocks and bonds that make up an index A group of similar stocks and bonds- Standard and Poor 500

Index Fund What is the difference between a mutual fund and an index fund? Advantage Disadvantage High diversification Usually charge lower fees than mutual funds Still charge fees

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Real Estate Any residential or commercial property or land as well as the rights accompanying that land A family home is usually not considered an investment asset Can be risky and more time consuming but has potential for large returns Examples of real estate investments include rental units and commercial property

Speculative Investments High risk investments Have the potential for significant fluctuations in return over a short period of time Futures Options Commercial Paper Collectibles

Financial Risk Pyramid Speculative Investment Tools Increasing potential for higher returns Increasing risk Savings Tools Checking Account Savings Account Money Market Deposit Account Certificate of Deposit Savings Bonds Investment Tools Bonds Stocks Mutual Funds Real Estate OptionsCollectibles Futures Commercial Paper Index Funds The risk level for specific investment tools may vary

Online Risk Tolerance Quiz: Click HEREHERE Want to improve your personal finances? Start by taking this quiz to get an idea of your risk tolerance--one of the fundamental issues to consider when planning your investment strategy, either alone or in consultation with a professional. Choose the response that best describes you--there are no "right" or "wrong" answers. Just have fun!

Work on 29a – Types of Investments Pros and Cons