1. Preparing for a Savings or Investment Program
Chapter 8

2. Saving and Investing Section 8.1
Establish goals for savings or investing
Discuss ways to obtain funds for investing
Identify factors that affect your investment choices

3. Establishing Your Financial Goals
Goals should be SMART goals (specific, measurable, attainable, realistic, time frame)
Your goals should correspond with your values
Ask yourself these questions as you make goals
How do I want to spend my money?
How much money do I need to satisfy my goals?
How will I get the money?
How long will it take to save the money?
How much risk am I willing to take when I invest?
What conditions in the economy or in my life could change my investment goals?
Are my goals reasonable, considering my circumstances or future circumstances?
Am I willing to make sacrifices to save?
What will happen if I do not meet my goals?

4. Perform a Financial Check-Up
Balance your budget
Spend less than you make
Limit credit card usage
Have insurance
Cover losses from car, home, health
Start an emergency fund
Save enough for 3-9 months of expenses
Have other sources of cash
Have line of credit available or cash advance capability
for serious emergencies

5. Sources of Investment Money
Pay yourself first
Treat investment like a normal expense
Employer sponsored retirement plans
401k or 403b
Elective savings programs
IRA or Roth IRA
Special savings effort
Periodic cuts on spending
Gifts, inheritances, and windfalls
Unexpected money, bonuses, tax refunds

6. Value of Long-term Savings Plans
How much money do you think you
would have at the age of 60 if you
invested $2,000 every year starting at the
age of 20 at 10% interest?
$885,180

7. Rate of Return 1 5 10 20 30 40 4%
2,000
10,832
24,012
59,556
112,170
190,052 5%
11,052
25,156
66,132
132,878
241,600 6%
11,274
26,362
73,572
158,116
309,520 7%
11,502
27,632
81,990
188,922
399,280 8%
11,734
28,974
91,524
226,560
518,120 9%
11,970
30,386
102,320
272,620
675,780
10%
12,210
31,874
114,550
328,980
885,180
11%
12,456
33,444
128,406
398,040
1,163,660
12%
12,706
35,098
144,104
482,660
1,534,180

8. Story of Ben and Arthur

9. Safety and Risk Safety – chance of losing money is small
Risk – cannot be certain of the profit of your investment
Speculative investment is considered a high risk investment which might earn large profit in short time, but could lose most or all of your money
Young investors tend to take bigger risks, less to lose, older investors are conservative so they can protect savings

10. Safety and Risk Cannot be certain about the profit of investment
Chance of losing money small
Safe
Can Vary
High Risk
Commodities
Options
Precious metals and gems
Collectibles such as coins, stamps, and comic books
These are considered
speculative investments, may earn large profits in short time, but high risk involved
Govt bonds and securities
Treasury bills
Treasury notes
Treasury bonds
Municipal bonds
US Savings Bonds
Savings accounts
CDs
Stocks
Corporate bonds
Mutual funds
Real estate

11. Five Components of Risk
Inflation
Investment return may not keep up with rapid inflation
Interest Rate
Fixed rates may hurt you if interest rates go up
Business Failure
Lose money on stocks/bonds when business
fails
Financial Market
Stock value affected by social and political conditions
Global Investment
Keep in mind exchange rate, as well as
economic and political stability

12. Investment Income Safe and Predictable Income Varying Income
Savings accounts, CDs, US savings
bonds, US treasury bills – will know
exactly how much and when you
will get it
Varying Income
Stock, bonds, annuities, mutual funds,
rental properties
High Risk Income
Precious metals, gems, collectibles, and commodities

13. Investment Growth Best ones are common stocks and growth stocks
Retained earnings – profit
reinvested for
expansion, research, and
development
Won’t receive immediate dividends, but stock increases in value

14. Investment Liquidity
The ability to buy and sell quickly without substantially reducing its value
Market conditions may prevent regaining original investment

15. Savings and Investment Options
Section 8.2

16. Types of Investments Stocks Corporate Bonds Government Bonds
Mutual Funds
Real Estate

17. Stocks Stockholders buy equity in a company
and in turn become a part owner
Two types:
Common Stock
Preferred Stock

18. Common Stock Provides ownership in company
Stockholder has voting privileges
May provide dividends, money paid out
from profits
Owner could gain more shares by “stock
splits”

19. Preferred Stock Stockholders receive dividends before common

20. Consider Before Buying Stock
Company does not have to pay dividends
Company does not have to buy back
stock
Value of stock is partially determined by
market value

21. Corporate and Government Bonds
A bond is a written pledge of company or govt.
to repay a specific amount of money, along with
interest
Matures anywhere from 1 to 30 years with
interest paid every 6 months if they can afford it
Two key factors affect value of bond
Whether it will be repaid at maturity
Whether interest will be paid until maturity

22. Mutual Funds Investors pool money to buy stocks,
bonds, and other securities
Professional managers who work for
investment companies select purchases
Great for inexperienced investors
Loss of one fund could be offset by gain
in another

23. Real Estate Goal is to own property that increases in value to
Sell at a profit OR
Receive rental income
When investing
Compare with similar properties for pricing
Know what financing is available
Know the cost of the property taxes

24. Investment Pyramid Diversify to spread risk High Risk Level 4
Options, commodities, precious metals and gems, speculative stocks, junk bonds, collectibles
Level 4
Speculation
Income and growth stocks, mutual funds, real estate, convertible bonds
Level 3
Growth
US Treasury securities, conservative corporate bonds, state and municipal govt. bonds, income and utility stocks
Level 2
Safety and Income
Cash, CDs, savings accounts, money market accounts, US govt.bonds
Level 1
Financial Security
Low Risk

25. Developing a Personal Investment Plan
Establish investment goals
Decide how much money you will need and by
when
Determine the amount of money you have invest
List all the investments you want to evaluate
Reduce your list of possible investments to a
reasonable number
Choose at least two investments so you have
some diversity
Recheck regularly to make changes

26. Reducing Risk and Sources of Information
Section 8.3

27. Financial Planners Two things to consider
1) Your income level
2) Your willingness to make your own
financial decisions
If you make less than $45,000 a year,
you may not need one

28. Types of Financial Planners
Fee-only planners
Charge hourly rate ($75 - $200) or flat fee ($500 - several
thousand), may also charge annual fee of .04 to 1% of value on
investments they handle
Fee-offset planners
Charge hourly or annual, but reduce it with earnings
they make buying/selling investments
Fee-and-commission planners
Charge a fixed fee for financial plan, earn commissions
from products they sell
Commission-only planners
Earn all money thru commission they make on sales of
investments

29. Selecting a Financial Planner
Look for a planner who will do the
following:
Assess your current financial situation
Offer a clearly written plan with investment
recommendations
Discuss the plan with you and answer questions
Help you keep track of your progress
Guide you to other financial experts and
services as needed
Every state varies on certification and licensing
required

30. Selecting a Financial Planner
Questions to ask:
What are your areas of expertise?
Are you affiliated with a major finance company or do you
work independently?
Are you licensed or certified?
What is your education or training?
How is your fee determined?
Am I allowed a free initial consultation?
May I see a sample of a written financial plan?
May I contact some of your clients as references?

31. Managing Your Investments
Evaluate investments
Monitor investments
Keep track using Internet and newspaper
Keep accurate records
Keep purchase records, commissions and
fees you have paid
Consider tax consequences
Tax exempt – not taxed,
Tax deferred – taxed at later date

32. Sources of Investment Information
Internet
Newspapers and TV News Programs
Wall Street Journal and CNN Fn
Business Publications
BusinessWeek, Forbes, Fortune, Consumer Reports
Government Publications
Federal Reserve Bulletin
Corporate Reports
Prospectus that discloses information about company selling
securities
Statistical Averages
Standard & Poor’s 500 Stock Index or Dow Jones
Industrial
Investor Services
Newsletters and publication from financial people