INTRO TO INVESTING Personal Finance

What is Investing? Purchase of assets with the goal of increasing future income Focuses on increasing wealth – more money Use for long term financial goals Rate of Return Total Return/Amount of Money Invested = ROR What is Mandy’s ROR? Money Invested = $2,200 Total Return= $110

Risk Higher Potential Return = Higher Risk Risk: Uncertainty of the outcome of a situation or even Investment Risk: Possibility that an investment will fail to pay to the expected return or pay any return at all ALL investment tools carry SOME level of risk

Types of Investment Tools Stocks Bonds Mutual Funds Real Estate Speculative Investments

A share of ownership in a company Stocks 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

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

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

Reduces investment risk Mutual Funds Advantage Disadvantage 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 Reduces investment risk Make sure to research the fees charged by a mutual fund Saves investors time Fees may be high

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

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

Investment Philosophy Everyone has a tolerance level for the amount of risk they are willing to take on The greater the risk a person is willing to make on an investment, the greater the potential return will be Investment Philosophy- an individual’s general approach to investment risk Generally divided into three categories: conservative, moderate, aggressive

Tax-Sheltered Investments Government tries to encourage certain types of investments by making them tax-sheltered Tax-sheltered investments- eliminate, reduce, defer, or adjust the current year tax liability Retirement Child/dependent care Education expenses Health care expenses

Employer-Sponsored Investment Accounts Type of tax-sheltered investment Money is automatically taken out of employee’s paycheck Employers often contribute a portion of money to the investment with no additional cost from the employee Employee contributes 7% of paycheck to investment account Example: Employer contributes the same amount of money to the employee’s investment account Employee benefits from having double the amount of money invested!

Number of years needed to double the principal investment Rule of 72 Allows a person to easily calculate when the future value of an investment will double the principal amount 72 Interest Rate Number of years needed to double the principal investment

What Can the “Rule of 72” Determine? How many years it will take an investment to double at a given interest rate How long it will take debt to double if no payments are made The interest rate an investment must earn to double within a specific time period How many times money (or debt) will double in a specific time period

“Rule of 72” FYI Only an approximation Interest rate must remain constant Interest rate is not converted to a decimal Equation does not allow for additional payments to be made to the original amount Interest earned is reinvested Tax deductions are not included

Doug’s Certificate of Deposit Doug invested $2,500 into a Certificate of Deposit earning a 6.5% interest rate. How long will it take Doug’s investment to double? Invested $2,500 Interest Rate is 6.5% 72 6.5 11 years to double

Jessica’s Credit Card Debt Jessica has a $2,200 balance on her credit card with an 18% interest rate. If Jessica chooses to not make any payments and does not receive late charges, how long will it take for her balance to double? $2,200 balance on credit card 18% interest rate 72 18 4 years to double

18% interest rate 4 years 72 Jacob’s Car $5,000 to invest Jacob currently has $5,000 to invest in a car after graduation in 4 years. What interest rate is required for him to double his investment? $5,000 to invest Wants investment to double in 4 years 72 4 years 18% interest rate