1. SAVING/INVESTING Unit 3 – Fin. Planning Manual

2. SAVING VS. INVESTING SAVING SAVING Money stored or set aside for short-term goals. Safe, secure, low risk, and usually quite “liquid”. Money stored or set aside for short-term goals. Safe, secure, low risk, and usually quite “liquid”. INVESTING Money set aside for future income, benefit, or profit to meet long-term goals. Usually some risk involved, not always as “liquid”.

3. Key Concepts Principal Principal Original amount invested (or borrowed) Original amount invested (or borrowed) Earned Interest Earned Interest Return on your savings or investment. The payment you receive for allowing a financial institution or corporation to use your money. (or, on the flip side, what you pay for use of another’s money) Return on your savings or investment. The payment you receive for allowing a financial institution or corporation to use your money. (or, on the flip side, what you pay for use of another’s money) Simple Interest Simple Interest Percentage applied only to the original principal amount. Percentage applied only to the original principal amount. Compound Interest Compound Interest Percentage applied to principal and any accrued interest to date. Usually referred to as interest on interest. Percentage applied to principal and any accrued interest to date. Usually referred to as interest on interest.

4. Key Concepts Cont… Time Value of Money Time Value of Money Refers to the relationship among time, money, and the rate of interest. Refers to the relationship among time, money, and the rate of interest. Inflation Inflation A general rise in the cost of goods and services over time. A general rise in the cost of goods and services over time. Diversification: Spreading your investment dollars among different investment positions to reduce your overall risk! Diversification: Spreading your investment dollars among different investment positions to reduce your overall risk!

5. Time Value of Money Ingredients needed to make your $$ grow. Ingredients needed to make your $$ grow. Money Money Time Time Means for a rate of return (sometimes interest) Means for a rate of return (sometimes interest) Patience, Perseverance, Consistency (PYF) Patience, Perseverance, Consistency (PYF) Obviously, the more of each you have, the faster your money will grow. But, you do not need a lot of any one of them to get started as long as all elements are present. Understand and respect the power of “time”!!!! Obviously, the more of each you have, the faster your money will grow. But, you do not need a lot of any one of them to get started as long as all elements are present. Understand and respect the power of “time”!!!!

6. Formulas Simple Interest Simple Interest Interest = Principal x Interest Rate x Time Interest = Principal x Interest Rate x Time I = P x R x T I = P x R x T I = $100 x.03 x 1 (year) I = $100 x.03 x 1 (year) Compound Interest Compound Interest Amount in the Account = Principal (1 + Interest) n Amount in the Account = Principal (1 + Interest) n n = number of years n = number of years A = P (1 + i) n A = P (1 + i) n Try it: 3B (p. 30) and 3-1 (p. 31) Try it: 3B (p. 30) and 3-1 (p. 31)

7. Rule of 72 3-H 72 Interest Rate = Years Needed to Double Investment 72 Interest Rate Required = Years Needed to Double Investment An easy mathematical formula used to estimate how fast your money could double.

8. Interest Rate 3% 24 Yrs $800 4% 6% 8% 12% 6 Yrs 9 Yrs 12 Yrs 18 Yrs $400 $400 $400 $200 $200 $200 $200 $200 The Impact of Higher Returns on Savings and Investments Rule of 72: The approximate frequency with which $100 doubles at specific interest rates 3-K

9. Risk to Reward Relationship Usually the higher the risk, the greater the potential for a high return on your investment. Usually the higher the risk, the greater the potential for a high return on your investment. Usually the lower the risk, the lower the return on your investment. Usually the lower the risk, the lower the return on your investment. **A direct relationship between risk and reward! **See Page 33 in your manual for the pyramid.

10. Financial Planning Pyramid Penny Stock Commo- dities Collectibles Speculative Stock / Bonds / Mutual Funds Real Estate Blue-Chip Common Stock Growth Mutual Funds High-Grade Convertible Bonds High-Grade Preferred Stock Balanced Mutual Funds High-Grade Corporate Bonds or Mutual Funds High-Grade Municipal Bonds or Mutual Funds Money Market Accounts or Mutual Funds Certificates of Deposit U.S. Savings Bonds Insured Savings / Checking Accounts Treasury Issues Highest Risk Highest Earnings Lower Risk Lower Earnings 3-J

11. Income vs. Growth Investments Income You get paid (interest) for owning the account or investment. Safe…Low to No Risk Steady returns over time Examples Include… Savings Accounts US Saving Bonds Certificates of Deposit (CD’s) Money Market Accounts Corp. or Gov’t. Bonds Growth You buy and hold the investment with the hope that it will increase in price, over time. More profitable over the long term Include higher risk Potential for higher returns Examples Include… Stocks Real Estate Collectibles Mutual Funds

12. Bonds vs. Stocks vs. Mutual Funds Bond:I.O.U or a “Loaner” Bond:I.O.U or a “Loaner” In essence, you are borrowing money to a bank, government entity, or a company with the understanding they will pay you off at a later date (principal + interest). In essence, you are borrowing money to a bank, government entity, or a company with the understanding they will pay you off at a later date (principal + interest). Stock:“Owner” Stock:“Owner” Represents ownership in a company. If the company does well, you do well, if the company struggles, you struggle! Represents ownership in a company. If the company does well, you do well, if the company struggles, you struggle! Mutual Fund: Mutual Fund: A “diverse” collection of investment positions Can include, stocks and bonds or anything else you choose… Can include, stocks and bonds or anything else you choose…

13. Advantages of Each Bonds Bonds Less Risk Less Risk Must be taken care of before Stockholders Must be taken care of before Stockholders Moderate Return Moderate Return Stocks Stocks “Potential” for high return “Potential” for high return Less risk over the “long term” Less risk over the “long term” Fairly liquid Fairly liquid

14. Advantages cont… Mutual Funds Mutual Funds Diverse (some safety through spreading out risk) Diverse (some safety through spreading out risk) You are not putting all of your eggs in one basket!! You are not putting all of your eggs in one basket!! Not a lot of money needed to start Not a lot of money needed to start Professionally managed Professionally managed Moderate returns Moderate returns You have a lot of choice (buffet or ala carte’) You have a lot of choice (buffet or ala carte’)

15. Retirement Accounts IRA IRA Individual Retirement Accounts Individual Retirement Accounts 401(k) Set up within a private sector business 401(k) Set up within a private sector business 403(b) Set up within a public sector business 403(b) Set up within a public sector business Keough Usually set-up by self-employed Keough Usually set-up by self-employed

16. IRA’s Cont… Traditional IRA Traditional IRA Pre-tax dollars Pre-tax dollars Grows tax deferred Grows tax deferred Roth IRA Roth IRA After tax dollars After tax dollars Grows tax free Grows tax free