1. SAVING AND INVESTING

2. VOCAB a.Investing – purchasing securities (stocks, bonds, mutual funds) with the goal of increasing wealth b.Liquidity – the quality of an asset that permits it to be converted quickly into cash without loss of value c.Opportunity Cost – the value of the second- best alternative that a person gives up when making one choice

3. Risk – the measure of the likelihood of loss or profit of an investment’s rate of return Saving – the process of setting income aside for future spending Savings – money set aside for a future use that is held in easily accessed accounts, such as a savings account and certificates of deposit Savings account – a financial institution deposit account that pays interest and allows withdrawals

4.  The basic reason that people save money is because they want something in the future. Savings is defined as keeping money for future use, or to redirect money from current spending to a savings account or another form of investment. It is important to start saving now.

5. What I want to buyPriceWhat I will give up

6.  It is easier when you have a goal. If you know how much you need and how long it takes to get there, you are more likely to save. If you save, you will not have to borrow money. It is better to pay yourself than pay someone else.

7.  Saving money is simply about making choices about how to use your money. It means you have decided set money aside today for something you want tomorrow. While it sounds easy, it can be difficult because it is certainly more fun to spend today than wait. It is also hard to save when you have made too many purchases on a credit card. Balances on credit cards should be paid off as soon as possible. If you do not have debt, you can start saving now to reduce your need to borrow money later.

8. STRATEGIES  How do you start saving? Once you decide to start saving, there are several things you can do. Pay yourself first – put a minimum of 10% into savings before doing anything else.

9. SAVING 2 WAYS  You can save money by putting it in a safe place, like a bank, where it will earn a small amount of interest. It is a good idea to have enough money in a savings account to pay your bills for a couple of months.

10.  Other ways to save – government savings bonds, money market accounts, or certificates of deposit (CDs). Sometimes, these items pay more interest but they are not as liquid. Liquidity is defined as how easy it is to turn an item into cash without losing any money. Government bonds and CDs have a guaranteed return but you have to hold them for specific periods of time; they are not as liquid as savings accounts.

11. WHY DO WE INVEST?  Investing can also be a way for you to pay yourself first. Investing is the process of putting money some place with the intention of make a financial gain. Investing your savings can be a good financial decision; most financial advisors would recommend you first save money for an emergency fund, than you start saving for investing.

12. WORTH THE RISK?  While investments tend to have a slightly higher financial gain, there is no guarantee. Investing involves more risk than savings.

13.  Risk is the chance of losing some or all of the money you invested. When an investment makes money, you have earned a return on your investment. Risk also involves failing to make the best choice about saving and investing your money. Example – if all of your money is in a savings account with a lower interest rate, you risk earning a higher rate of return through investing

14. a.Investing is a good way to make money if you have seven or more years before you need the money to reach your goal. If your goal is sooner, it is probably better to put the money in a savings account or short-term certificate of deposit (CD).

15. THE RULE OF 72 - VOCAB Compound Interest – interest earned not only on the principal but also on the interest already earned Principal – the original amount of money deposited or invested

16. Rule of 72 – the length of time, in years, it takes an amount of money saved to double when it receives compound interest. This length of time can be found by dividing the interest rate (expressed as a whole number) into 72 Simple Interest – interest calculated periodically on the loan principal or investment principal only, not on previously earned interest (Principle x Interest x # of years)

17.  Why do we earn interest when we put our money in the bank? When you put money into a savings account, you are loaning the use of the money to the bank while it is deposited in your account. In return, the bank guarantees your money is available when you need, making the loan safe. The interest is compensation for providing them the use of your money.

18. Interest is computed two ways – simple and compound. Simple interest is calculated on the money you invest or loan to someone. If you have simple interest of five percent on 100 dollars for three years, you would earn $5 the first year, $5 the second year, $5 the third year. 100 *.05 = $5.

19. Compound interest is calculated on the money that you invest or loan someone plus any interest they have already paid you. Example, 100 dollars with at five percent for three years, you would have 105 at the end of the first year. Then, you would earn $105 *.05 = 5.25 the next year. The third year, you would earn 110.25*.05 = 5.51 the third year. Over the three years, you would earn $15.76. Year one: 100*.05=5 Year two: 105*.05 = 5.25 Year three: 110.25*.05 = 5.51

20.  The longer money is invested, the more impact you receive from compounding. Do you want to be a millionaire when you retire? One secret to accomplishing that can be found in compound interest. Save 2,080 a year or 40 a week when you are twenty years old. If market returns are average, when you are 65 years old, you will have $1,062,137.5. If you begin ten years later, you will have $455,540.33. So, time is your friend when saving.

21.  The rule of 72 is an easy way to discover how long it will take your money to double using compound interest. When the rate of return that you have earned multiplied by the number of years invested equals 72, then your money has doubled. If you invest your money for 9 years and you earn 8% interest 8*9=72

22. SAVINGS AND INVESTING TOOLS - VOCAB Certificates of Deposit – a certificate issued by a bank to a person depositing money in an account for a specified period of time (6 months, 2 years); a penalty is charged for early withdrawal Corporate bonds – a certificate representing the purchaser’s agreement to lend money to a business on the promise that the debt will be paid, with interest, at a specific time

23. Money market mutual funds – a fund restricted by law to investing in the short-term money market Mutual funds – an investment tool that pools the money of many shareholders and invests it in a diversified portfolio of securities, such as stocks, bonds, and money market assets Rate of return - how fast money in savings account or investment grows Risk – a measure of the likelihood of loss or profit; the uncertainty of an investment’s rate of return

24. Savings account – a financial institution deposit account that pays interest and allows withdrawals Savings bonds – a document representing a loan of more than one year to the US government, to be repaid, with interest on a specified date Stocks – an investment that represents shares of ownership of the assets and earnings of a corporation

25. SAVING STRATEGIES  Savings accounts are interest-bearing accounts at banks and credit unions. They usually have low interest rates and are used to deposit small amounts of money to meet short-term goals. Savings accounts are a great tool for establishing an emergency fund. Be sure to use a bank has FDIC insurance or the credit union has NCUA insurance – this protects your money if they should close

26. CERTIFICATES OF DEPOSIT  Certificates of Deposit (CD) are offered by most banks and credit unions, and they are also covered by federal insurance. When you buy a CD, you usually have to wait a certain amount of time until the CD “matures” to get your money. CDs may mature in 30 days or many years. The longer the term of the CD, the higher the interest rate. While CDs are less liquid than savings accounts, they do tend to earn higher interest

27. GOVERNMENT SAVINGS BONDS  Government savings bonds are backed by the US government so there is little to no risk. Default risk is the potential that the bond issuer will not pay the interest or return your money when it matures. Savings bonds are designed to be held for a minimum number of years before you cash them in for your money and interest. Because of the length of maturity, government bonds have a higher rate of return than saving accounts or CDs.

28. MONEY MARKET MUTUAL FUNDS  Money market mutual funds are designed to provide higher rates of return than savings accounts because the money is actually invested in very short-term investments with low risk. Money market accounts are available at some banks and credit unions, but may also be offered by other financial service providers.

29. CHECKING ACCOUNTS  basic purpose of a checking account is NOT saving money. Instead, it provides a convenient way to handle personal and business transactions. However, many checking accounts earn a very small percentage of interest if you maintain a certain minimum balance. Always ask about the rate of interest before opening an account

30. INVESTMENT STRATEGIES  When you invest, you are hoping for a higher rate of return than when you save. Investment options tend to have higher rates of risk than savings options, but they also tend to have higher rates of return. While savings products may guarantee a specific rate of return, there is no guarantee when investing.

31. MUTUAL FUNDS  Mutual funds provide an opportunity for investors to pool their money together to buy shares of a fund that invests in many different financial products such as stocks, bonds, and securities. They are a great way for people with limited money and limited knowledge about investing to get started. Mutual fund accounts have a professional money manager who monitors the account closely to ensure it is earning the maximum amount possible.

32.  At the same time, mutual funds may go through periods of time where they do not earn a high rate of return or lose money. Their rate of return is based on a variety of economic factors, which fluctuate. Most financial experts highly recommend mutual funds for anyone interested in investing because the potential benefits of gain are greater than the potential costs of losing.

33. STOCKS  Buying stocks allow you to be part owner of a company. For example, if you buy a share of stock in Merger. Inc., you are a shareholder in that company. Purchasing a single company can be exciting if you are interested in what the company does, but it does provide more risk than if you purchased a mutual fund.

34.  Putting all of your money into one company is similar to the old saying of, “putting all your eggs in a basket”. If you drop the basket, there go your eggs! If the company fails, there goes your investment. Diversify your portfolio – buy stocks in more than one company

35. CORPORATE BONDS  when you own corporate bonds, you basically make a loan to the company. You allow them to use your money and they pay you interest. The interest you receive is the value of your investment. Buying bonds for a single company is like owning stocks in a single company; if something happens to that corporation, you can lose most or all of your investment.

36.  Buying into bond mutual funds is an alternative for individual investors because it spreads your risk. While bond mutual funds can lose money as interest rates increase, they tend to offer greater protection from losses. In general, investing in bonds is a lower risk option with lower returns than stocks.

37. RATES OF RETURN  because risk levels are different for the various saving and investing options, the rates of return also vary. The rate of return is the amount of money you can earn when saving or investing. The higher the average rate, the more risk you are taking as an investor

38. Common stocks – 10-13% Stocks of smaller companies – 14-16% Long term corporate bonds – 6.5-8% Long term US government bonds – 5- 7.5% Short term US Treasury bills – 3.5-5%

39. TIME IS MONEY - VOCAB Asset class – a group of investments with similar characteristics Diversification – investing in a variety of stocks, bonds, money market accounts, in order to spread risk

40. Equities – a group of investments involving ownership of assets Fixed income class – a group of investments involving loans made to someone else Inflation – a rise in the general or average price level of all the goods and services produced in an economy Risk tolerance – a measure of the likelihood of loss or profit the uncertainty of an investment’s rate of return

41. TIME IS MONEY  Some basic rules of saving and investing apply to everyone but there are numerous individual choices you have to make when deciding how to manage your money. These choices are based on many factors, but some of the most important are time horizon, risk tolerance, and shortfalls in funding future needs.

42.  How long do you have to meet your goals? The longer you have to invest, the more aggressively you can invest your money. Investing in higher risk financial products is having a more aggressive investment strategy. An asset class is defined as a specific kind of investment. Different asset classes have different risk levels and it is important to match your time horizon to the asset class

43.  Fixed Income – Bank Accounts – Immediate access to cash; CDs – time varies based on contract; Government bonds – money loaned to the US government; Municipal bonds – money loaned to a municipality (often a city); Corporate bonds – money loaned to a business corporation

44.  Equity items – large cap stocks – ownership in large companies; small cap stocks – ownership in small companies; international stocks – ownership in foreign companies; commodities – ownership of hard assets such as gold or oil; microcap stocks – ownership in very small companies with a high rate of failure

45.  The fixed income class includes bank accounts, CDs, and government bonds which are also savings instruments. Municipal and corporate bonds are not usually savings instruments because they have more risk and are less liquid. Equities include stocks and commodities, and are generally associated with “ownership”.

46.  When buying stocks, you actually own a share of a company. When buying a commodity, you also take temporary ownership of the product. If a stock or a commodity increases in value, then you share those profits. However, if they decline in value, then you share the loss. Stocks are purchased in a stock market or in a mutual fund. Commodities are sold in a commodities market or in a mutual fund. Both are higher risk investments than products in the fixed income class.

47. RISK FACTORS  Your personality may influence how you invest your money. Risk tolerance relates to how much negative change (potential loss) you can handle with your investment. If you are a risk taker, you may really enjoy investing in the stock market.

48.  A wise investor will consider some of both because it provides a balance for your investment portfolio. This is called diversification. Portfolio is the common term given to all of your personal assets, including savings, investments, and cash.

49. INFLATION FACTORS  If you place your money in a checking account that does not earn interest and leave it there, you are losing money. This is because of inflation. Inflation refers to increases in the average price of goods and services from one year to the next.

50.  The US has an average inflation rate of 3% per year. With a 3% inflation rate, $100 this year is worth $97 next year. If you earn 8% a year, you are really only earning 5% a year.