Savings and Investments

Savings and Investments
Presented by Facility You need a room that has enough space for people to move around the room. This presentation should take approximately 1 hour and 45 minutes. Audience Master Financial Education Volunteers and public presentations. Instructional Objectives Participants will: Understand the basics of savings and investments Understand the importance of setting goals when it comes to savings and investments Understand what IDAs are Understand Investing Basics Materials and Equipment Multimedia projector Laptop computer with PowerPoint Signs for the compound interest activity Handout: Risk Investment Pyramid Revised by Celia Ray Hayhoe, Ph.D., Family Resource Management Specialist, Virginia Tech Glenn Sturm, AmeriCorps VISTA Volunteer Developed by Skip Henderson, CFCS, Former Extension Agent, Virginia Cooperative Extension 573

Overview Difference between Saving and Investing Savings Basics
Individual Development Accounts (IDA) Investing Basics Do you know the difference between saving and investing? Are you afraid to invest because you don’t understand the terminology? Do you know what an IDA account is and if you qualify for one? The answers to these questions and more will be covered in the presentation. NOTE: Investment information regarding Mutual Funds will be covered in depth in unit 21. 574

Savings VS Investing Savings VS. Investing
Safe – little chance for loss of principle Risky – chance of loss as well as gain Low return on investment – low interest rates Higher return on investment - Chance for appreciation and income Use for – emergency funds and goals to be completed in less than 5 years Use for – goals longer than 5 years, retirement Liquid – easy to turn into cash with little or no loss of principle Less liquid – marketable but may lose principle CD’s, savings accounts, money market funds, money market mutual funds Mutual funds, stocks, bonds, ETFs, investment real estate, business Savers expect: no loss of principal; a predictable return; the same return each period. Investors expect: no guaranteed return of principal; possibility of loss; unpredictable returns. Return is the income from savings or investments. The rate of return or yield is expressed as a percentage. Liquid assets are held in the form of cash or can be readily converted to cash with minimal or no loss in value. Used to meet living expenses, make purchases, pay bills and loans, and provide for unexpected expenses and emergencies. Risk is the uncertainty about whether or not a financial loss will occur and how large the loss will be. Placing money in a federally insured savings account is virtually a no-risk situation because the government guarantees both the principal and the yield. Most people must save money to invest money. True investors develop an investment philosophy, a personal investment strategy that anticipates specific returns and risks, and have strategies for accomplishing their investment goals. 575

Why Do People Save Money?
To generate income To become debt free To retire comfortably To cope with emergencies To pay for education or travel To purchase a car, home, furniture, etc. To establish security and peace of mind To build a cushion for planned change in family or career 576

Why Do People Fail to Save Money?
“I will start tomorrow.” “I can’t plan that far ahead.” “I can hardly make ends meet now.” “I was never good at understanding money.” “I’m waiting for the economy to stabilize.” “If I’m lucky, I won’t have to think about my financial future.” People fail to save more because they fail to plan 577

Saving money should be a spending priority and a habit!
Pay Yourself First Saving money should be a spending priority and a habit! Discipline yourself to “pay yourself first”. What does this mean? Treat savings as a bill, and pay this “bill” first. Treat your savings as you would your mortgage or rent payment. Get into the habit of putting money away rather than spending it. You’ll be surprised at how gratifying it is to watch your savings grow. Try to set aside 10% of take-home pay. 10% of gross pay is even better. If you are self employed and not participating in a retirement program, you may want to save more than 10%. If you are just starting your savings habit, you may not be able to save 10% of take-home pay. Start with $1, $5, $10, $20 per pay period. If you have trouble saving, consider payroll savings. Decide how much you would like to save from each paycheck. Then have the money automatically deducted from your paycheck and automatically deposited into your savings account at a bank or credit union, or automatically purchase savings bonds, or participate in your employer’s savings programs (if available). . 578

Savings needed for . . . Emergencies Occasional Expenses Major Goals
Investments 1. An emergency fund is the foundation of your savings program. You need an emergency fund for unexpected expenses that are not planned in the family spending plan. Try to set aside 3-6 months’ living expenses as a reserve to fall back on if you have an unexpected emergency. 2. The second category for which you need to save is occasional or seasonal expenses. (Note: These are discussed in the spending plan unit.) 3. The third category for saving money is for major goals. Major goals vary from family to family. Your goals change as your personal situation changes. Your age, marital status, financial status and the economy are a few factors that may affect your goals. Saving money requires time. (Note: Goal setting is discussed in detail in the values and goals unit.) 4. The fourth category for saving is for investments. You must save to have the money to invest. The major long-term savings goals may overlap with your investment goals. 579

FINDING DOLLARS TO SAVE
Windfall money Use payments from loans you pay off Go on a spending diet for a month Spend less on items like clothing See if your credit card company will lower your interest rate Check the deductibles on your insurance policies and shop around for lower rates Eat out less What can you do if you do not have money to save? Look for ways to decrease expenses or increase income. Savings Tips The impulse is to spend windfall money from lottery, inheritance, gifts, etc. Save it to add substantially to your savings account. When you pay off a loan, continue to make payments to your savings account. Example: When you pay off your car loan, continue to make payments into your savings account. Make an effort one month out of the year to scrimp on all expenses; this would be like a crash-saving diet, purchasing only the bare necessities. You can accumulate a sizable amount of money this way for savings and investments. Be motivated by knowing that it’s for only days! Save your tax refund rather than spending it. Spend Less How can you spend less on clothing? Buy less. Recycle old clothes by mending, hemming, sewing on lost buttons, etc. Shop sales. Check out thrift stores and yard sales for good buys. Avoid buying clothes with “dry-clean only” labels. Purchase classic styles rather than fads. Ask your credit card company for a lower rate. Reduce insurance premiums by shopping around among different companies for the coverage needed at the lowest price. Eating out can be five times more expensive than eating at home. Limit the number of times you eat out. Take lunch to work. Prepare meals at home. 580

More Ways to Save $ Control buying on impulse Pay cash
Buy at the right time Don’t pay extra for a “Name” Recognize the high price of convenience shopping Use lifecycle planning for major purchases Control buying on impulse - Exercise restraint to avoid impulse buying. What is impulse buying? It is buying without fully thinking about needs and alternatives. For example, you may have shopped carefully for a personal computer, comparing prices and features, but when you went in to make your purchase, you impulsively pick up some games and entertainment software you had not planned to buy - spending another $245. This negates your careful shopping. Pay cash - Saves money in two ways. It helps control impulse buying which becomes easier when using credit for unnecessary purchases. Second, use of credit can make financial planning more difficult by taking away financial flexibility and by adding to the cost of items (credit cards charge 12% to 24% or more in interest). Buy at the right time - Pay attention to sales. Many items such as sporting goods and clothing are marked down during certain holidays and at the end of each climate season. New cars are less expensive towards the end of the month because of incentives to meet quotas and other sales promotions. One caution: if you don’t need it, buying it on sale is not a wise use of your money. Don’t pay extra for a “Name” - Buying generic products is a good way to save money. An “Excedrin” headache may cost $0.30 per dosage, while a plain aspirin headache will only cost $0.02 per dosage. Scientific research has shown that the effectiveness of all over the counter pain relievers is about the same. Similar examples occur with hotels, food, and prescription drugs. Generic can save you money. Recognize the high price of convenience shopping - Rather than convenience store shopping, buying a few items a day, plan weekly visits to the neighborhood supermarket. This approach can save as much as 30% or more because of lower prices and less impulse buying. Use lifecycle planning for major purchases - “You can’t have everything” the old saying goes, but many of us certainly try. This desire to have all of life’s comforts early in life is one of the reasons why the average household headed by someone younger than age 25 spends 17% more than its disposable income (how? - by using credit). Comparing your possessions with those of your parents is OK as long as you recognize that it took many years to accumulate those possessions. Setting short and long term goals intelligently and recognizing spending plan limitations will enable you to reach goals for major purchases without jeopardizing your financial security. 581

Saving Tips That Work! Kick a habit Clip coupons Collect loose change
Study employee benefits Reduce or eliminate tax refund Pay off expensive credit card debt Work overtime or get part-time job for extra money to save Transfer funds from checking to savings accounts Examples of kicking a habit: Stop smoking Don’t buy coffee everyday Don’t eat lunch out everyday If you get a tax refund, the government has used your money interest-free. You could have been saving that money yourself and earning interest. Adjust your federal and/or state withholding in order to get a smaller tax refund and more take-home pay. Save the extra money. 582

Savings Vehicles Savings Account
Money Market Funds & Money Market Mutual Funds Certificates of Deposit (CDs) Treasury Bills Money Market Funds and Money Market Mutual Funds are extremely safe. They are accounts at financial institutions or mutual fund companies that specialize in investments that have very short-term maturities, always less than one year. Money market mutual funds pay a slightly higher rate because they do not pay for Federal Deposit Insurance Corporation (FDIC) insurance. These funds provide a convenient place to keep money while awaiting other investment opportunities. Certificates of Deposit are sold at banks and credit unions for a fixed amount of time with no fees charged. Interest rate is locked in for the entire term of deposit. In return for higher interest rates, investors sacrifice free access to the money. Deposits generally range from $100 to a few thousand dollars. Treasury Bills (T Bills) are sold at a minimum of $100 (increasing at $100 increments) and mature in three months, six months or one year. T-Bills are sold at a discount and can be redeemed for face value (principal and interest) at maturity. 583

Individual Development Account
A matched savings account available for low-income household Savings typically matched at a rate of 1:1 or 2:1 Restricted to savings for three uses: Buying a first home Paying for post-secondary education Starting a new business (Note: Teach this section in the training explaining that they should only use it when working with low income households. IDA accounts require funding from the government so check that they are still being offered in your area before using. There are also only a limited number of slots so people need to check to see what is available when they apply.) An Individual Development Account (IDA) is a matched savings account meant to supplement the savings of low-income households For every dollar an IDA participant saves the organization(s) sponsoring the IDA matches that dollar, typically at either a rate of 1 dollar-per-dollar saved or 2 dollars-per-dollar saved IDAs are typically restricted to savings for three uses: Buying a first home Paying for post-secondary education Starting a new business

Individual Development Account cont’d
IDA and personal savings accounts are kept separate Participants must take a required educational course Once there are enough funds, the payments are made directly from the IDA The matched savings account is kept separate from the IDA participant’s savings. Once the participant has enough funds to make the intended purchase (house, education, etc), and has completed the required educational course, payments are made directly from the IDA

Becoming an IDA Participant
Assets for Independence (AFI) In order to be eligible: must have an income that is at or below 200% of the poverty level, or be TANF eligible, or be EITC eligible have no more than $10,000 in net asset wealth - not including one automobile and a home May receive up to $2,000 in matched funds The majority of IDAs are through Assets for Independence (AFI), a competitive grant program funded by the Department of Health and Human Services. Typically, in order to be eligible to be an IDA participant through AFI the individual must have an income that is at or below 200% of the poverty level, or be either Temporary Assistance for Needy Families (TANF) or Earned Income Tax Credit (EITC) eligible, and have no more than $10,000 in net asset wealth, not including one automobile and a home. IDA participants through AFI may receive up to $2,000 in matched funds.

Important IDA Resources
AFI Contact Information Assets for Independence Program Office of Community Services 370 L'Enfant Promenade, S.W., 5th Floor Washington, DC 20447 Telephone: Fax: Links to help you determine if you are EITC or TANF eligible (and therefore IDA eligible through AFI):

Simple versus Compound Interest
Activity Note: To do this activity you need 17 participants. You may not have that many participants in the training session but you may want to discuss it so they can do it in sessions they teach. Materials: Signs that read Principal, Year 1, Year 2, Year 3, Year 4, Year 5 (Need 33 people to do year 5) Objective to demonstrate how compound interest works Ask for two volunteers: Simple Interest Give one volunteer the Principal sign and say “(Name of person) represents the money you are saving or investing” Give the other volunteer the Year 1 sign and say “(Name of person) represents the interest earned in the first year. This vehicle pays great interest at 100%. You won’t find that in the real world but it is messy to use parts of people.” With simple interest you only get interest on the principal. How many people do we need to come up for year 2? (the answer is 1, you don’t earn interest on the interest with simple interest.) Ask for another volunteer and give them sign Year 2. How many people do we need to come up for years 3, 4, and 5? (the answer is 3, one for each year. Ask for 3 volunteers and give them signs for Year 3, Year 4, and Year 5. Have the year 2-5 interest people step back. Compound Interest With compound interest you earn interest on your interest as well as your principal. Year 1 stays the same since we only have the principal to earn interest on. (Ask the year 2 person to step forward.) How much interest will the principal earn in year 2 (answer is 2: one for the principal and one for the year one interest, ask for another person from the audience to join the year 2 person) Repeat until you want run out of people. (year 3 earns 4 interests, so you need 3 more people from the audience, Year 4 needs 8 interest, so you need 7 more people from the audience, year 5 needs 16 people, so you need 15 more people from the audience by which time you’ve probably run out of people.) Ask them which they would rather have if they were saving and investing? (answer compound interest) Simple versus Compound Interest 588

Annual Percentage Yield (APY) at Various Compounding Frequencies
Compound interest is interest earned on interest which is added to the principal. Annual Percentage Yield (APY) is a percentage rate that reflects the total amount of interest paid on an account based on the interest rate and frequency of compounding for an annual period. Pay attention to how often money is compounded. The more often the compounding, the faster your money grows. If you pull your money out early, you won’t get full benefit of compounding. Also, of course, the higher the interest rate, the faster your money grows. 589

Procrastination (Waiting to Start)
$2,000 per Year at 9% $18,000 9 Years +$109,236 Jill $579,488 $70,000 35 Years Jack It pays to start saving money as early as possible. At age 22, Jill started saving $2,000 a year at 9% interest. She saved for 9 years, and then stopped. She used a total of $18,000 of her own money. At age 31, Jack started saving $2,000 a year at 9% interest. He saved for 35 years until he was 65 years old. He used a total of $70,000 of his own money. The total amount Jill took out of her current income was $18,000. The total amount Jack took out of his current income was $70,000. Jill’s money grew to $579,488. Jack’s money grew to $470,249. At retirement, Jill had $109,236 more money than Jack! $470,249 22 30 31 65 Age 590

Rule of 72 72 = Years to double Interest rate investment
Years to required double investment The Rule of 72 is a useful tool for investors. You can calculate how long it will take for your money to double at a given interest rate if you reinvest the earnings. 72 divided by the interest rate equals the number of years needed to double your money. To figure how fast a sum will double at 6% interest, divide 72 by 6. $1,000 will become $2,000 in 12 years at 6% interest. The Rule of 72 can also be applied to inflation. At 6% inflation, a car that costs $20,000 today will cost $40,000 in approximately 12 years. 591

Invest According to Goals
Three goals Preserve principal (safety) Maximize current income Growth of principal Investors often have some investments that reflect each of these goals. At different points in life, and with different needs, each of these goals could be the primary one. When safety is the major goal, you need to recognize that income and growth will probably be low. When income is important, growth is generally not as likely. When growth is most important, there is generally less safety and less current income. It is a long term goal. 592

Goal: Preserve Principal (Safety)
Passbook Savings Certificates of Deposit (CDs) Treasury Securities Bills Notes Bonds Savings bonds EE I When investing for safety rather than savings, look for safe vehicles with longer maturity dates. Certificates of Deposit are sold at banks and credit unions for a fixed amount of time (commonly ranging from 6 months - 8 years) with no fees charged. Interest rate is locked in for the entire term of deposit. In return for higher interest rate, investors sacrifice free access to the money. Deposits generally range from $100 to a few thousand dollars. Treasury Bills (T Bills) are sold at a minimum of $100 (increasing at $100 increments) and mature in three months, six months or one year. T-Bills are sold at a discount and can be redeemed for face value (principal and interest) at maturity. Treasury Notes are government obligations that mature in 1-10 years. Notes are sold at a minimum of $100 (increasing at $100 increments). Treasury Notes are purchased at face value and pay a fixed rate of interest semiannually. Treasury Bonds are the same as treasury notes, except they are issued maturities of more than 10 years. They are purchased at face value and pay a fixed rate of interest semiannually. Treasury bills, notes and bonds may be purchased from a broker or banker for a fee or from the Federal Reserve or Bureau of Public Debt at no charge. Savings Bonds are sold in many denominations and at a discount of face value. There are some advantages in using EE US savings bonds to pay higher education costs. (Note: Information on saving for education expenses in found in unit 18 on Children and Family Finances.) Another advantage of savings bonds is that they can be purchased through many employers through payroll deductions so you can do it without ever seeing the money. Remember you have to keep them at least 5 years to avoid a reduction in the interest rate when you cash them. Series EE: often purchased through employer payroll deduction plans, most widely held security in the U.S., are discount bonds sold at less than face value; therefore, pay no interest Series I: variation of Series EE, tied to changes in the consumer price index to give owner some protection from inflation 593

Goal: Maximize Current Income
Certificates of Deposit Corporate & Municipal Bonds Series HH U.S. Savings Bonds Common and Preferred Stocks Mutual Funds - Stocks and Bonds Corporate Bonds are certificates promising to repay a sum of money by a specified date. In exchange, you receive periodic interest for the use of your money. At maturity, the face amount is returned to you. Corporate Bonds are typically issued in denominations of $1,000. Municipal Bonds are issued by local governments; used to finance public improvement projects, such as roads, bridges, parks, ongoing expenses. Major categories of Stocks: - Blue Chip - Stock of a company that has a long history of earnings growth and dividend payments. - Cyclical - Closely follows the general level of business activity in the economy. - Growth - Stock of a company whose earnings are increasing at a faster rate than the increase in the general level of business activity. - Income - Stock of a well-established company that is relatively mature. Company pays out substantial part of its earnings as dividends, rather than reinvesting much of their earnings. They grow more slowly than growth stocks. U.S. Savings Bonds - They are the safest of all securities; backed with the full faith and credit of the U.S. government. 594

Goal: Growth of Principal
Common stock Zero-coupon bonds Some mutual funds Real estate Common Stock - most basic form of ownership of a corporation. People who own stock expect the corporation to be profitable enough to pay dividends and see an increase in the stock’s value. Zero-Coupon Bonds - sold at an extremely deep discount (a price lower than its face value). Does not pay interest semiannually like ordinary bonds. You earn interest, but it is not paid until you redeem the bond at maturity. These should only be used in tax-deferred accounts like Individual Retirement Accounts (IRA). Otherwise you will pay income tax yearly on money you have not received. Mutual Funds - investment companies raise money by selling shares to the public and invest in a diversified portfolio; they are professionally managed. (Note: Mutual funds are discussed in detail in the following unit). 595

Best Alternative? Size of investment Frequency of contribution
Favorable tax advantage Before or after tax dollars Tax-deferred or tax-exempt Time value of money The best savings or investment depends on your personal investment philosophy. When choosing where to place your money, consider…size of investment, frequency of contribution, time to spend on investments, how you will be taxed. Most savings and investments are made with after-tax dollars. You pay tax on your earnings before the money is available to you to invest. You do not pay taxes on money deposited into some IRAs, retirement plans, tax-sheltered annuities, and deferred compensation plans. (NOTE: These will be discussed in the section on retirement). Taxes on the principal dollars you invest and the earnings from these investments are deferred until you retire, become disabled, or quit your job. Tax-deferred savings increase the amount that you have available to invest. 596

Consider . . . Investment costs Borrowing privileges Management
Time to spend on investments Knowledge of investments Stage of life cycle Risk tolerance The return from your investment can be reduced by various charges associated with purchasing, maintaining, and redeeming or selling investments. Before buying, get disclosures in writing about management fees and commissions. Is there a sales charge, commission, service charge, or annual management fee? How long is the money committed? Before buying, find out how you can sell out and what costs will be involved in doing so. Is there a fee or penalty for taking some or all of the money out? How long should your money be invested to maximize return? A deal too good to be true almost always is. Can you borrow from your investment? The stage of life will influence your investment decisions (NOTE: We will discuss the family life cycle in Unit 24). Young people have a lifetime ahead of them to accumulate money. They can take more risks. They have more time to recover from losses. Those in retirement will probably want to place their money where it is safe. Because we are living longer, older investors may choose to keep higher risk investments longer. Which savings or investment alternative is best for you? It depends on your personal investment philosophy given all the factors previously mentioned. 597

Two Uses of the Term Risk
Investment Risk – chances for loss due to the type of investment Risk Tolerance – the investor’s accepted level of risk Investing involves risk but there are two categories of risk… 598

Types of Basic Investment Risk
Systematic Risk – This is a political event or disaster that would affect many types of assets This can be impossible to protect against since it has the potential to affect more than one asset class in a portfolio The market crash in 2008 is an example of systematic risk 599

Types of Basic Investment Risk continued
Unsystematic Risk – This is the type of risk associated with specific assets such as individual stocks or bonds An example of this type of risk would be if Company XYZ announced that their new product was failing - XYZ stocks would drop dramatically, but other companies’ stocks would not be affected Asset allocation and diversification can help protect against this type of risk 600

Specific Investment Risks
Business Risk This risk pertains to a particular business. This is the risk that a business could fail. If sufficient profits are not made, and the business is not run efficiently, it could fail and the investor might lose his/her money. Stock prices would drop and the company may not be able to cover their bond obligations. 601

Specific Risks Market Risk
This form of risk is the day to day fluctuations associated with the prices of stocks and bonds. This is also the risk that is related to world events that could cause the market to decline. For example, the credit crisis that is currently affecting our economy and causing markets to fall. This refers to the market as a whole, not just one company. 602

Specific Risks continued
Purchasing Power Risk This is also known as inflation Inflation reduces the value of money, or purchasing power If investments do not have returns that are greater than the inflation rate, despite an overall gain when you sell the investment, the money from the sale will not purchase what the original money would have purchased For example, you deposit $1,000 in a savings account that earns 2% interest but inflation is 4%. You would have $1, after 10 years, however, due to inflation, you would need $1, to purchase an item that had cost $1,000 when you deposited the money. 603

Default Risk When an issuer of a bond cannot pay back the interest and principal value of a bond in the time they specified. This is typically associated with bonds issued from corporations and not the government. The government can always print more money if it needs to. 604

Liquidity Risk If an investor needs to sell an investment quickly for cash the liquidity of the investment will determine how easy it is to sell, and if the investor has to lower the price for a fast sale A savings account is liquid because you can withdraw the money quickly with no loss A stock that is traded on a major exchange is liquid in the sense that it can be sold quickly, but it is not as liquid as a savings account because the investor may have to take a loss in order to sell it Real estate is not considered a liquid investment because it may take a long time to find a buyer even at a reduced price 605

Interest Rate Risk When market interest rates rise, the value of bonds fall This happens because investors will not pay face value for bonds that are paying interest that is less than the market rate The opposite happens when interest rates decrease 606

Currency Risk When international investments are made, currency must be converted into the form used by that country, this can lead to a potential loss when exchange rates change Example: Lets say you make an international investment while the €/$ exchange rate is 1.5. You purchase €1,000 (or $1,500) in European stocks. When you decide to sell the stocks again, they have increased value and you currently have €1,100. However, the €/$ exchange rate is now 1.2. When you convert the euros back to dollars you will only receive $1,320 (a loss of $180) despite earning 10% on your investment. Keep in mind, this risk works both ways, a change in the exchange rate can lead to a loss, but it can also lead to a gain. 607

Savings Vehicle Risks Purchasing Power CDs
Liquidity - there is usually a penalty for early withdrawal Interest rate - if rates go up, you may have to pay a penalty to move to the higher rate or leave money at the lower rate until the CD matures That is why these vehicles are used for emergency funds and needs within five years 608

Bond Risks Market risk Business risk Interest rate risk
Purchasing power risk Default risk Some liquidity risk Foreign bonds – currency risk 609

Stock Risks Market risk Business risk
Interest rate risk – preferred stock Some liquidity risk Foreign stocks – currency risk 610

Real Estate Risks Market risk Purchasing power risk Liquidity risk 611

Risk Tolerance An individual’s capacity to accept loss
People in general are risk adverse –they do not like to lose money Investing involves speculative risk – the chance that the investment may have a gain or a loss Different investments carry different chances for gain or loss The higher the risk, the greater chance of higher gain or higher loss - known as the risk reward tradeoff How much risk they are willing to accept dictates, to some extent, the types of investments a person feels comfortable purchasing There are three types of investors: conservative, moderate, and aggressive. Conservative: accept very little risk, generally receive relatively low % rates. Moderate: are fairly comfortable during rising and falling market conditions. Aggressive: strive for very high return & accept high level of risk - seek capital gains. 612

Investment Risk High Risk Medium Risk Low Risk High Return
Options, Futures , Collectibles Bonds Stocks Medium Return Mutual Funds Medium Risk Real Estate Before you choose where you will put your money, evaluate each savings or investment option to see which best meets your needs. (Distribute handout: Investment Risk Pyramid.) Safety of principal means the principal dollars you invest will remain intact. If you invest a dollar, you will get that dollar back. If you put $1,000 in a certificate of deposit (CD), you will get your $1,000 plus earnings when you withdraw your money. If you place $1,000 into stock, and the price has declined when you withdraw your money, you may not get back all of your initial investment. Money saved or invested in instruments at the base of the pyramid allow you to preserve your principal dollars. Your money is safe. The higher you go up the pyramid, the greater your chance of losing principal dollars. Return - How your money grows will influence how quickly you can reach your financial goals. Do you want current income or do want your money to grow over time? Liquidity is the ease with which your investment can be converted to cash without loss. You can get your money quickly in case of an emergency. Marketability is the degree to which there is an active market to trade your investment. If you own real estate and need the money, there may not be a buyer when you need to sell. There is no market for savings accounts, but they are very liquid. Insured Savings Account Certificates Of Deposit Money Market Funds Low Return Savings Bonds Government Securities Low Risk Life Insurance 613

Investing Terminology Review
Diversification Asset Allocation This slide is a review of what they just learned with the candy portfolio Have participants give examples of each term Examples of answers: Diversification - don’t put all your eggs in one basket invest in different types of investments within an asset category Blue chips, growth, small cap, large cap, mid cap, different industries or sectors Asset Allocation – invest in different types of assets Stocks, bonds, real estate, businesses, cash 614

Steps to Wise Investing
Be realistic and ready to make changes Minimize transaction costs Keep records Review investments Never invest in something you don’t understand Avoid investment fraud Define your goals Have money to invest Seek advice Know investment alternatives Determine your risk tolerance; stay within “risk zone” Diversify In summary When you set goals, you need to take a realistic look at future income and the amounts of money needed to reach goals. This requires careful thinking; it’s not an exercise in wishful thinking. Save first for an emergency fund, and then for investments. Know investment alternatives: become familiar with different investment strategies; mutual funds, stocks, bonds, etc. What about your risk tolerance? Can you ride out market ups and downs without panic? Do you have trouble sleeping at night when the principal value of your investment goes down? You can reduce risk by diversifying, which means spreading money among various types of investments. Be aware of transaction costs, and try to minimize these costs. There are load fees when you use the services of a broker. Front-end loads are paid at the time of initial purchase and back-end loads are paid following the fund’s/asset’s sale. The commission is typically 5.5% - 8.5%. Low-load funds may have a 1%-3% sales charge. No-load mutual funds sell their shares without the addition of sales charges. There are some hidden fees, however. The most common hidden charge is a 12b-1 fee, which pays for advertising, marketing, and promotional costs of the fund. There are also maintenance fees associated with no-load funds. Review your investments regularly. Keep good records. Don’t invest if you don’t understand it. Some of the above information refers to mutual funds, which will be discussed in the following unit 615

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Savings and Investments

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