Download - Unit 5: Saving and Investing
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UNIT 5: SAVING AND INVESTING
Personal FinanceHolmen High School
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Objectives Understand various types of investments
Understand advantages/disadvantages of each type of investment
Analyze appropriate investments for different life decisions
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Understanding Risk Risk is the potential of loss.
Explain the relationship between personal risk and financial risk.
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Meet Daphne Daphne’s
grandmother just passed away.
Daphne received $10,000 as an inheritance.
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Daphne Needs to Think About
Goals
Time Frame
Risk Tolerance
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Daphne’s Options
Lending Investments Ownership Investments
Checking Account
Certificate of Deposit
Bonds
Real Estate
Stocks
Mutual Funds/ETF’s
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Daphne Opens a Checking Account Daphne puts $10,000 into a checking account
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Advantages of Checking Account No Risk
FDIC Insurance on $250,000 Liquidity
Easy access to your money Convenience
Online Bill Pay, Direct Deposit, ATM
Building RelationshipEasier to get loans (Homes,
Cars, Business)
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Disadvantages of Checking Accounts Lousy Interest Rate
Under 1% Inflation
Typically 3% Fees
Debit Card, Overdraft Not a Long Term
Investment
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Daphne’s $10,000 After 5 Years Initial Investment $10,000 Interest Rate
.25% Term 5 Years
Return After 5 Years $10,125
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Certificates of Deposit Lend Money to Bank Specific Term
3 Months6 Months1 Year2 Years5 Years
Guaranteed Rate of Return1%-3%
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Current CD Rates
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Certificate of Deposit
Advantages Disadvantages
Set Payoff Date
Guaranteed Interest
Short Term Goals
Inflation
Penalty for Early Withdrawal
Not Long Term Investment
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Daphne’s $10,000 After 5 Years Initial Investment $10,000 Interest Rate
1.68% Term 5 Years
Investment After 5 Years $10,868
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Bonds Issued by
corporations or governments when they need to borrow money
Interest Payments every six months
Set Payoff Date
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Coca-Cola Issues Bonds Coca-Cola needs
to borrow money to build a new plant
Agrees to issue bonds paying 6%
Will pay back money in 5 years
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Coca-Cola Issues Bonds Investors Loan
Money
Paid Interest Twice a Year
Money is Repaid At End of Term
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Daphne’s $10,000 Investment
Lends $10,000 to Coke
Receives $300 Every January
Receives $300 Every July
After 5 Years, Daphne gets her $10,000 Back
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Daphne’s $10,000 After 5 Years Initial Investment $10,000 Interest Rate
6% Term 5 Years
Investment After 5 Years $10,000 Interest Paid Over 5 Years $3,000
(6% a Year)
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Advantages Disadvantages
A Bond would be good for her if…
A Bond would not be good for her if…
Wanted Steady Income Elderly
Doesn’t need the Money
Enjoys Safety AAA Rating (Gov’t)
Company Goes Broke Blockbuster, Best Buy
Inflation 3% per year
Needs the Money Illiquid
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Stocks Ownership in a
Company
Profit When Company Does Well
Lose Money When Company Performs Poorly
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Advantages Disadvantages
Stocks would be good for her if…
Stocks would not be good for her if…
Highest Return
Long Investment Timeframe
Okay with Risks
Company Goes Broke Blockbuster, Best Buy
Volatile Market +20% -50%
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Daphne’s $10,000 After 5 Years Bull Market (Good Market) Initial Investment $10,000 Rate of Return 20% Term 5 Years
Investment After 5 Years $24,883
Nothing Else Comes Close!
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Daphne’s $10,000 After 5 Years Average Market Initial Investment $10,000 Rate of Return 10% Term 5 Years
Investment After 5 Years $16,105
That’s Average!
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Daphne’s $10,000 After 5 Years Bear Market (Bad Market) Initial Investment $10,000 Rate of Return -10% Term 5 Years
Investment After 5 Years $5,905
SUBSTANTIAL RISK!!!
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Reward
Ris
k
CD’s Bonds
Real Estate Mutual Funds
Stocks
Checking Account
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Assessment Scratch Sheet of Paper
Will Be Turned In
Will NOT Be Graded
Number 1-5
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Question #1 1. Patrick is a senior in high school who
is working part time to save up for college. He has $4,000 saved up to pay for his first semester next year. He knows he will not need the money for another 12 months and does not want to lose it. Which investment is right for Patrick?
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Question #2 2. Jennifer and Tim just recently got
married. As a wedding present, they received $5,000 from Tim’s parents. They would like to invest the money over the long term and will not need it for another 30 years. Which investment is best for them?
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Question #3 3. Dorris is a retired grandmother with
three children. She has $25,000 that is not for anything specific. She wouldn’t mind receiving a little extra income to help her pay for her prescriptions. What investment would be right for her?
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Question #4 4. Kevin is saving up money to buy his
dream car. He wants to wait for the “perfect opportunity” to buy his dream car. He does not know if/when his it will be for sale. He has $15,000 saved up. Which investment is right for Kevin?
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Question #5 5. Explain the relationship of
Risk/Reward. Explain why the relationship is this way.