1. Saving & Investing
Economics

2. Guiding Questions What is the best way to save your money?
What is risk, and how does it affect your saving and investment?
How does scarcity affect personal finance?

3. “Asked once what the greatest invention of all time was, Albert Einstein is said to have replied, compound interest.” – New York Times “Compound interest is the most powerful force in the universe.” – Albert Einstein

4. Risk & ROI How do you make money on an investment or saving method?
Giving your money to somebody else means you may not get it back!
To give an incentive to give your money to someone else, they give you interest on your investment
Risk = the uncertainty that you will lose your investment
Return on Investment = how much will you potentially get back for investing money
The higher the risk, the higher the ROI!

5. Risk Tolerance Quiz Answer the questions from the quiz in your notes…
If you answered…
Mostly A: You have a very high tolerance for risk. You are comfortable with risky situations. You’re okay with losing everything, as long as there’s a chance for a huge payoff. You like when the odds aren’t in your favor. You love activities like sky diving and drag racing.
Mostly B: You have a high tolerance for risk. You wouldn’t call yourself reckless, but you’re okay if something doesn’t work out. You like to bet. You probably play contact sports without a cup.
Mostly C: You have a moderate preference for risk. You’re willing to take a risk, but only after researching it and fully understanding the consequences. You always prefer the safer bet. Your biggest risk is probably getting a tattoo.
Mostly D: You hate risk, and do everything you can to avoid it. You probably don’t even play the board game. You’re breaking out in hives right now just thinking about risk. You prefer not to bet.

6. Risk & Savings/Investments
Your risk tolerance determines how you will save and invest your money
Your risk tolerance changes over time…
What should it be when you’re old? (50+?)
What should it be when you’re young? (17?)
It’s good to diversify your methods. Your strategy should use many tools of saving/investing of different risk levels.

8. Savings Accounts Compound interest Benefits Downsides
Gain interest on your principal savings plus all the money you’ve earned as interest
Rule of 72
72 / Rate of interest = how long it takes to double your principal deposit
Benefits
High liquidity – can access your money at any time and easily get ahold of it
Earn interest
Insured by FDIC
Downsides
Very low interest rate

9. Money Market Accounts Type of savings account Benefits Drawbacks
Higher interest rate
High liquidity
Low risk
Drawbacks
Must have a minimum balance ($1,000-$2,500) or else pay fees
Limited monthly withdrawals (usually 3)

10. Certificate of Deposit
Account that pays specific, fixed amounts of interest over a set period of time
Benefits
Low risk
You know exactly what you’re getting into
Drawbacks
Must have a minimum balance ($1,000-$2,500) or else pay fees
Cannot withdraw money until end of term unless you want to pay fees and/or lose interest

11. Bonds
Bonds = loans a government/corporation must later repay to an investor (like an I.O.U.)
How to make money
Fixed rates of interest at regular intervals
At maturity (end of period) – pay back initial amount
Types of bonds
Savings – Municipal
Treasury – Corporate

12. Bonds Benefits Drawbacks
Stable type of investment (interest rate won’t change once you agree to it)
Better interest than savings accounts
Medium liquidity – can sell a bond to somebody else before maturity if you need money
Drawbacks
Medium-low risk
Selling early is no guarantee of profit
Company (or government!) may not pay you back

13. Treasury Bonds are how the government borrows money to pay for the government programs. What’s happening with that right now?
So… what’s happening to the T-bond market?

14. Stocks Stock = part ownership of a company Make money in two ways
Dividends = quarterly (every 3 months) payout of your share of the company’s profits
Selling your stock
If the price goes up from what you paid you make money (capital gain)
If the price goes down from what you paid you lose money (capital loss)
Benefits
Higher potential ROI
Medium liquidity
Drawbacks
High risk

15. Mutual Funds
Mix of many different investment methods managed a financial analyst
Benefits
Diversified portfolio that is managed for you
Many options to fit your risk tolerance
Drawbacks
No control of investments
Have to pay fees for fund management

16. Stock Market How stocks are traded
Few companies sell stock directly. Most people go through professional stockbrokers.
Buying on margin: Borrowing part of the cost of a stock to purchase it
Short selling: Betting that a stock will lose value in the short-term.
Step 1 – brokerage sells stock it owns and gives you the money
Step 2 – you buy back the same # of stocks & give back to broker If the stock is cheaper than it was – you win!

17. Stock Market Measuring the market
Index funds = collection of stocks that attempts to describe the market as a whole
Dow Jones Industrial Average (DOW)
NASDAQ
Standard & Poor 500 (S&P 500)
Bull market = market goes up for awhile
Bear market = market goes down for awhile

18. Stock Market Measuring the market Strategy
Index funds = collection of stocks that attempts to describe the market as a whole
Dow Jones Industrial Average (DOW)
NASDAQ
Standard & Poor 500 (S&P 500)
Bull market = market goes up for awhile
Bear market = market goes down for awhile
Strategy
Daytrading