1. Managing Your Money 12.1 12.1Saving 12.2 12.2Investing 12.3 12.3Insurance CHAPTER 12

2. © 2013 Cengage Learning. All Rights Reserved. Learning Objectives LO1Describe benefits people receive from saving part of their income. LO2Identify and describe the types of deposit accounts offered by banks. 12.1SAVING 2 CHAPTER 12

3. © 2013 Cengage Learning. All Rights Reserved. Key Terms  saving  return  compound interest  annual percentage yield (APY)  certificate of deposit (CD)  money market account 3 CHAPTER 12

4. © 2013 Cengage Learning. All Rights Reserved. Saving for Your Future  Define saving  Economists define saving as the act of choosing not to spend current income.  Saving involves a tradeoff.  By choosing to save, you trade the satisfaction from buying something now for the satisfaction you may receive from buying something in the future. CHAPTER 12 4

5. © 2013 Cengage Learning. All Rights Reserved. Saving for Your Future  Benefits of saving  Accumulate money to buy expensive products  Security against unexpected events CHAPTER 12 5 (continued)

6. © 2013 Cengage Learning. All Rights Reserved. Create a Savings Plan  Have a clear idea why you are saving and how much you want to save.  Create a strategy for saving.  Save automatically if you can.  Reward yourself when you reach savings goals. CHAPTER 12 6

7. © 2013 Cengage Learning. All Rights Reserved. Store Your Savings  Store your savings where it will earn a return.  Return is income earned from funds that are not spent.  Earning a return is another major benefit of having a savings plan.  In general, the greater the expected return, the greater the risk. CHAPTER 12 7

8. © 2013 Cengage Learning. All Rights Reserved. Types of Bank Accounts  Savings accounts  Time deposits  Checking accounts  Money market accounts CHAPTER 12 8

9. © 2013 Cengage Learning. All Rights Reserved. Amounts Deposited in Bank Accounts, 1990–2010 CHAPTER 12 9 Figure 12.1

10. © 2013 Cengage Learning. All Rights Reserved. Savings Accounts  A savings account allows you to deposit or withdraw your savings at any time and earn a relatively low but fixed rate of interest.  Compound interest is computed on the amount saved plus the interest previously earned.  Annual percentage yield (APY) refers to the formula banks must use to calculate interest they pay on deposits. CHAPTER 12 10

11. © 2013 Cengage Learning. All Rights Reserved. Time Deposits  When you open a time deposit, you commit to leave an amount of money in your account for a specified period of time.  Time deposits typically are for six months or for one, two, or five years. CHAPTER 12 11

12. © 2013 Cengage Learning. All Rights Reserved. Certificate of Deposit  The most common type of time deposit is known as a certificate of deposit or CD.  A certificate of deposit (CD) is a savings instrument with fixed a interest rate and a fixed maturity date.  The holder of a CD may not withdraw funds early without paying a penalty. A penalty usually equal to six months or more of interest is charged for early withdrawals. CHAPTER 12 12

13. © 2013 Cengage Learning. All Rights Reserved. Checking Accounts  Checks and debit cards  Advantages of checks or debit cards  Open and maintain a checking account  Checking account fees CHAPTER 12 13

14. © 2013 Cengage Learning. All Rights Reserved. Money Market Accounts  Money market accounts—bank accounts that allow people to deposit or withdraw funds at any time and for which interest rates vary from day to day CHAPTER 12 14

15. © 2013 Cengage Learning. All Rights Reserved. Learning Objectives LO1Compare and contrast investing in corporate stock versus investing in corporate bonds. LO2Examine resources to help you manage your investments. 12.2INVESTING 15 CHAPTER 12

16. © 2013 Cengage Learning. All Rights Reserved. Key Terms  investing  corporate stock  diversification  mutual fund  corporate bond  financial planner 16 CHAPTER 12

17. © 2013 Cengage Learning. All Rights Reserved. Invest to Earn a Return  Investing is using your savings in a way that earns income to create a return.  Investing refers to using your savings to earn a greater return than is paid by banks.  Investing involves more risk than leaving your funds in a bank. CHAPTER 12 17

18. © 2013 Cengage Learning. All Rights Reserved. Invest in Corporate Stock  Corporate stock—shares of ownership in a corporation  Two types of corporate stock  Shares of common stock give their owners one vote per share when important decisions are made for the firm.  Shares of preferred stock do not give their owners a vote in how the corporation is operated. CHAPTER 12 18

19. © 2013 Cengage Learning. All Rights Reserved. Percent of Families Owning Corporate Stock by Income Group CHAPTER 12 19 Figure 12.2 Source: Statistical Abstract of the United States, 2011, p. 750.

20. © 2013 Cengage Learning. All Rights Reserved. Why Does the Value of Stock Change?  Demand and supply CHAPTER 12 20

21. © 2013 Cengage Learning. All Rights Reserved. Risk vs. Return in Buying Stock  Blue chip stock  Growth stock CHAPTER 12 21

22. © 2013 Cengage Learning. All Rights Reserved. Buying and Selling Shares of Stock  The New York Stock Exchange  The NASDAQ CHAPTER 12 22

23. © 2013 Cengage Learning. All Rights Reserved. Create Your Stock Portfolio  When you buy stocks, you are creating a stock portfolio.  Your portfolio should be diversified and should reflect your goals and personal financial situation.  Diversification means investing in a wide variety of firms. CHAPTER 12 23

24. © 2013 Cengage Learning. All Rights Reserved. Market Value of Publicly Traded U.S. Corporations at Year End, in Billions CHAPTER 12 24 Source: Board of Governors of the Federal Reserve System, Flow of Funds Guide, Table L.213 Corporate Equities at http://www.federalreserve.gov/apps/fof/DisplayTable.aspx?t=l.213. Figure 12.2

25. © 2013 Cengage Learning. All Rights Reserved. Mutual Funds  Mutual fund—financial organization that accepts funds from many people and invests them in a variety of stocks  Costs of owning a mutual fund  Load funds are marketed by salespeople who receive a commission of about 6 percent of the amount invested either when you buy the fund or when you sell it.  No-load funds do not charge a sales commission.  Different ways mutual funds invest CHAPTER 12 25

26. © 2013 Cengage Learning. All Rights Reserved. Invest in Corporate Bonds  Corporate bond—loan that entitles investor to be repaid at the specified date and receive interest until that date  The price of “used” bonds can change  Different bonds, different risks  Mutual funds that buy corporate bonds CHAPTER 12 26

27. © 2013 Cengage Learning. All Rights Reserved. Money Management Assistance  Where to find investment information  Publications  Internet  Where to find investment help  Stockbroker  Financial planner—expert who gives investment advice for a fee CHAPTER 12 27

28. © 2013 Cengage Learning. All Rights Reserved. Present Value of Future Amounts  In general, an amount of money received today is worth more than the same amount received in the future.  The relation between future and present values can be expressed as follows: CHAPTER 12 28 Future value = (1 + interest rate) × Present value

29. © 2013 Cengage Learning. All Rights Reserved. Learning Objectives LO1Understand the kinds of insurance you can buy to protect yourself against risk. LO2Determine the types and amounts of insurance you will need. 12.3INSURANCE 29 CHAPTER 12

30. © 2013 Cengage Learning. All Rights Reserved. Key Terms  insurance  policy  property insurance  deductible  liability insurance  personal insurance 30 CHAPTER 12

31. © 2013 Cengage Learning. All Rights Reserved. Protect Yourself with Insurance  Insurance—protection you purchase against losses beyond your ability to withstand  Policy—legal contract between an insured person and an insurance company CHAPTER 12 31

32. © 2013 Cengage Learning. All Rights Reserved. Premiums and Past Events  Insurance companies need two types of information to set premiums.  The probability of a loss being suffered by an insured policyholder.  The probable cost of a loss that might take place. CHAPTER 12 32

33. © 2013 Cengage Learning. All Rights Reserved. Premiums and Past Events  In addition to premiums, insurance companies receive income when they invest funds they have accumulated in previous years.  This revenue makes up for years when insured losses and operating expenses exceed the amount received in premiums. CHAPTER 12 33 (continued)

34. © 2013 Cengage Learning. All Rights Reserved. Insurance Industry Income and Expenditures, 2004–2009 CHAPTER 12 34 Source: The III Insurance Fact Book Annual and the Financial Services Fact Book Annual at http://www.iii.org/fi nancial2/. Figures are for property and casualty insurance. Figure 12.4 Values in Billions of Dollars

35. © 2013 Cengage Learning. All Rights Reserved. Types of Insurance  Three types of insurance  Property  Liability  Personal  No insurance plan is complete without some of each. CHAPTER 12 35

36. © 2013 Cengage Learning. All Rights Reserved. Property Insurance  Property insurance protects policyholders against losses to their property.  Almost every property insurance policy has a deductible and limits the loss that is covered.  A deductible is an amount an insured person must pay before the insurance company pays anything.  The dollar limit for property insurance is stated in the policy or determined by the value of the insured property. CHAPTER 12 36

37. © 2013 Cengage Learning. All Rights Reserved. Liability Insurance  Liability insurance covers losses from injuries you cause to another person or damage you cause to someone else’s property.  Liability insurance included in your homeowner’s policy protects you from losses suffered by others when they are on your property.  The limit on the amount paid by a liability policy is determined by the amount of coverage purchased or the cost of the loss that is suffered, whichever is less. CHAPTER 12 37

38. © 2013 Cengage Learning. All Rights Reserved. Personal Insurance  Personal insurance—protects against financial loss from injury, illness, or unexpected death of the insured person  Medical insurance helps pay the cost of your medical care if you are injured or become ill.  Life insurance protects an insured person’s family from financial loss if an insured person dies. CHAPTER 12 38

39. © 2013 Cengage Learning. All Rights Reserved. Your Insurance Needs  Evaluate your insurance needs  Rank your insurance needs  The decision to purchase insurance CHAPTER 12 39