savings & investing

Savings & Investing

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© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 2Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at

the University of Arizona

Are:SafeLiquid

Used For:Large PurchasesEmergenciesFinancial Security

Savings Tools

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Are:Checking Account

Savings AccountMoney Market Account

Certificate of Deposit

U. S. Savings Bond

5 Savings Tools

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Savings Tools are Safe

$Why? Government Insured/Guaranteed

With the Exception of US Savings Bonds

FDIC-Federal Depository Insurance Corporation up to $250,000 $Federal government agency that insures

depository institutions

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Choosing a Savings Tool

$ By understanding the features of different savings tools, an individual can choose which tools will help them reach their financial goals.

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Depository Institutions

$ Features of savings tools vary between different depository institutions Interest rates Accessibility options Fees Penalties Minimum balance requirements

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Depository Institutions

$ Research and compare savings tools at different depository institutions in order to find the best option

$ Not limited to one depository institution Can have different savings tools at

different depository institutions

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$DEFINITION Account used to

transfer funds electronically and by writing checks

$INTEREST May or may not

earn interest If does earn

Interest, rate will be the lowest of the savings tools

Checking Account

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$ACCESSIBILITY Most liquid of all the savings tools

$Funds are easily accessed by:$Checks$Automated teller machines (ATMs)$Debit cards$Telephone$Internet

Checking Account

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$FEATURES Can have minimum balance requirements Can charge transaction fees Can have a limit on the number of checks

written monthly Reduces the need to carry large amounts

of cash

Checking Account

Before opening a checking account, learn all of the requirements

and restrictions.

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$ADDITIONAL INFORMATION If interest is earned on the account,

you must report it on your income taxes (unearned income) in the year it was earned$You will receive a form 1099 that tells you

the total interest you earned for the year

Checking Account

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$DEFINITION Account to

safely hold money you don’t want to spend

$INTEREST Interest earning Higher interest

rates than checking accounts

Savings Account

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Savings Account$ACCESSIBILITY

More liquid than all savings tools except a checking account$Funds may be accessed or transferred

between accounts through: Automated teller machines Telephones Internet Debit Card

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Savings Account

$FEATURES Allows for frequent deposits or

withdrawals Easily accessible (the same as checking

except no checks) Money storage for financial security Available at depository institutions May require a minimum balance or

have a limited number of withdrawals per month

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$ADDITIONAL INFORMATION Interest earned on the account

must be reported on your income taxes (unearned income) in the year it was earned$You will receive a form 1099

that tells you the total interest you earned for the year

Savings Account

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$DEFINITION This is a kind of combination

checking/savings account.

Money Market Deposit Account

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$INTEREST Minimum balance requirement with

tiered interest rates$The amount of interest earned depends on

the account balance

$For example: a balance of $10,000 will earn a 4% interest rate while a balance of $2,500 would only earn 3%

$1,000-$5,000 3%$5,001-$10,000 4%$10,001-$15,000

5%$15,001-$20,000

6%

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$ACCESSIBILITY Less liquid than checking and

savings accounts$Accessibility is limited to a certain

number of transactions per month (usually 3-6)

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$FEATURES Minimum amount required to open

the account, often $1,000 If the average monthly balance

falls below a specified amount, the account will earn a lower interest rate for the entire month

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must be reported on your income taxes (unearned income) in the year it was earned$You will receive a form 1099 that tells you

the total interest you earned for the year


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$DEFINITION An insured interest

earning savings tool that allows restricted access to the funds

Deposits have to be held for a certain length of time$Usually 7 days to 8

years

$INTEREST Varies depending

upon the time length and amount of money deposited$The longer the

period of time, the higher the interest rate


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$ACCESSIBILITY Less liquid than checking, savings,

and money market deposit accounts$Large fees are assessed if funds are

withdrawn before the end of the designated time period

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$FEATURES Minimum deposits range from

$100-$250,000 Low risk and no fees if funds are

held for the designated time period

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must be reported on your income taxes (unearned income) in the year it was earned even if you don’t touch the money$You will receive a form 1099 that

tells you the total interest you earned for the year


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US Savings BondE now EE

$DEFINITION Current bonds purchased for face

value from the U.S. Government $Loan given to the government$As of 2012, all bonds are electronic—

no paper

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US Savings Bond

$INTEREST Earns interest up to 30 years then

mature (stops)

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US Savings Bond

$ACCESSIBILITY Least liquid of all the savings tools

$Access to funds is restricted$Can only be redeemed after 1 year with

a substantial penalty$Can be redeemed after 5 years with 3

months of interest penalty$After that no penalty

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Savings Bond

$FEATURES Cannot be transferred; whoever

owns it must cash it in—if die, goes to estate

Purchased for $25 - $10,000 Any one SS# is allowed a total

yearly bond purchase of no more than $10,000

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Savings Bond

$ADDITIONAL INFORMATION Taxes

$Interest earned on a bond is tax exempt until redeemed (cashed in)

$ Once cashed in or when bond matures (30 years), interest earned on the bond must be reported on your income taxes (unearned income)

$If the bond and its interest are used to pay for higher education the interest it earned will be tax exempt when redeemed

https://www.treasurydirect.gov/indiv/planning/plan_education.htm

© Family Economics & Financial Education – May 2010 – Savings Unit – Choosing to SaveFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

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Liquidity

Examples of AssetsCash

Automobiles

Houses

Furniture

Assets: Everything an

individual owns with monetary

value.

Liquidity: How quickly and

easily an asset can be converted

to cash.

ClothingElectro

nics Savings

Accounts

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Liquidity

Checking Account

Savings Account



Savings Bond

Most Liquid

Least Liquid

Lowest Interest

Highest Interest

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$ Different savings tools can be utilized to assist in reaching personal financial goals

$ Higher interest rates are a trade-off for lower liquidityHigher

Interest

Lower Liquidi

ty

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$ When and how often access is needed to funds helps determine which savings tool to use

An individual wants to

develop an emergency

savings fund

They need a very liquid

account

A savings account is very liquid

and accessible in emergency situations

Additional info savings

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Savings Tools Scenarios

$ Read each Savings Tool Scenario$ Discuss which savings tool would be

recommended for each scenario

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Savings Tools Scenario #1

Sean is a high school student that just received his first paycheck from

his new part-time job at the local grocery store. He currently has no expenses to pay, and his goal is to

save every paycheck from his job to buy a new car in two years. He needs

to find a savings tool that will help him reach his financial goal. Which savings tool would you recommend

Sean utilize and why?

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Brittany recently moved into her first apartment. Before, she was living with her parents and had very few

expenses to keep track of. Now that she has to pay rent and utilities for her apartment, she needs to find a

savings tool that will help her manage her money and ensure she

can pay her bills every month. Which savings tool would you recommend

Brittany utilize and why? $

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Bryan has a goal to become financially secure by developing an emergency

fund. He has been saving twenty percent of his net income for the past year and now has $2,000. He plans

to maintain this balance and only use this money for emergency expenses.

Which savings tool would you recommend Bryan utilize and why?

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Saving vs. Investing

Portion of current

income not spent on

consumption

Savings Purchase of

assets with the goal of increasing

future income or

wealth used for long-term

goals

Investing

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Savings vs. Investing

• Emergencies• Large Purchases

• Financial Security

Money saved is used to pay for: • Higher

Education• Buying a Home

• Retirement

Money invested is used to pay

for:


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Liquid Assets

Savings are known as liquid assets, because they are

easily accessible (turned into cash) in emergency situations.

In most cases, investments are not as liquid as savings.

More Liquid

Savings Tools

Less LiquidInvestments

Of your assets, which are the most liquid?


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Savings

Investing

Why are Saving & Investing Important?

Provides the

foundation for

financial security

Enhances and helps

build wealth


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Saving vs. Investing Activity

• Directions:– A characteristic of saving or

investing will be identified– Decide which you think is

correct– Discuss the answer


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Characteristic:BUILDS WEALTH

Saving or Investing:INVESTING


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Characteristic:MORE LIQUID

Saving or Investing:SAVING


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Characteristic:USED TO PAY FOR

EMERGENCIESSaving or Investing:

SAVING


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How is Wealth Measured?

• The components include: – Assets – Everything a person owns with

monetary value – Liabilities – Debts (what is owed to others) – Net Worth – the amount of money left when

liabilities are subtracted from assets (indicates wealth)

Assets

Liabilities

Net Worth

Net worth statement - Describes an individual or family’s overall financial

condition on a specified date


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The Choices You Make Today Impact Your Future!

Increased Wealth!

Saving and investing…

Increase Assets

DecreaseLiabilities


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True or False?Identify if each statement is true or

false…

□If Janie makes a one time investment of $500 at age 20 in a tool that earns the historic 12% average, by age 60 the $500 will become $46,525.

□

If Samuel invests $3,000 annually from ages 22-31 (a total of $30,000 invested) in a tool earning 10% interest, he will have $1.2 million dollars by age 65.

They are both true. Now we are going to learn how!


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Time Value of MoneyMoney paid

out or received in

the future is not

equivalent to money

paid out or received

today

Three factors

affect how an

investment will grow.

Interest

Rate

Money


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Interest Rate

Interest is the price of using money.

Interest rate is the percentage rate paid on the

money invested or saved

Are you earning interest on any money?


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How Do Interest Rates Affect Time Value of Money?

$1,000 invested for 5 yearsInterest

RateAmount Investment

is Worth1% $1,051.013% $1,159.275% $1,276.287% $1,402.559% $1,538.62

Interest

Rate

More Mone

y


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Time

The longer an

individual invests, the more money

he/she will make.

Interest

Rate

Money


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A Little Goes a Long Way

• Sally Saver puts away $3,000 per year for 10 years, at age 22. She earns 10% on her investment.

• Sally invests a total of $30,000 and has earned $1,205,063 by the age of 65

• Ed Uninformed waits until he is 28 and contributes $3,000 at 10% for 37 years

• Ed invests a total of $111,000 and accumulates $1,079,856 by the age of 6553


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Amount of MoneyThe larger

the amount of

money invested, the larger the return

on investment

will be

Interest

Rate

Money


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Amount of Money

7% interest compounded annually for 5 years

Amount of Principal

Investment

Return on Investment

$100.00 $40.26$1,000.00 $402.55

$10,000.00 $4,025.52

Amount of

MoneyLarger Retur

n


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Maximizing Your Return• Time:

– Invest for as long as possible!• Amount of Money:

– Invest as much as possible, as often as possible!

• Interest:– Invest at the highest interest rate

possible!– Use compounding interest that

compounds as frequently (annually, semi-annually, quarterly, monthly, daily) as possible!


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Smart Investing

An investment earning an

interest rate of 2%

An investment earning an

interest rate of 2.1%

OR

Which would you choose?


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Simple Interest

Compounding Interest

Simple Interest vs. Compounding Interest

• Interest earned on the principal investment

• Earning interest on the principal AND past interestPrincipal is the original

amount of money invested or saved


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$1,000 x .05 x 3/12=$12.50$1,000 + $12.50=$1,012.50

$1,012.50 x .05 x 3/12=$12.66$1,012.50 + $12.66=$1,025.16

$1,025.16 x .05 x 3/12=$12.81$1,025.16 + $12.81=$1,037.97

$1,037.97 x .05 x 3/12=$12.98$1,037.97 + $12.98=$1,050.95

$1,000 invested at 5% interest rate compounded quarterly for 1 year

Return to slide 60


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$1,000 .07 5 $350

Simple Interest Equation: Step 1

P(Principal)

r(Intere

st Rate)

t(Time

Period)

I(Intere

st Earned

)

$1,000 invested at 7% interest rate for 5 years


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Simple Interest Equation: Step 2

P(Princip

al)

I (Interes

t Earned)

A(Amoun

t Investment is Worth)

$1,000 invested at 7% interest rate for 5 years

$1,000 $350 $1,3

50


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Compounding Interest Equations

There are two equations for compounding interest

1. Single sum of money• Money invested only once at

the beginning of an investment

2. Equal number of investments spread over time• Equal amounts of money is

invested multiple times (once a month, once a year, etc.)


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Compounding Interest Equation – Single Sum

$1,000 invested at 7% interest rate compounded quarterly for 5 years

(.07÷4) +1=1.017520 =1.41478 x

$1,000=$1414.78

Interest Rate # of times compounded per year

Amount Investment is

Worth

+1)(Total # of times compounded

=n; then take n

Answer from above x Principal=


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Compounding Interest Equation – Single Sum

$1,000 invested at 5% interest rate compounded quarterly for 1 year

(.05÷4) +1=1.01254 =1.0509 x

$1,000=$1,050.95

Interest Rate # of times compounded per year

Amount Investment is

Worth

+1)(Total # of times compounded

=n; then take n

Answer from above x Principal=

Go back to slide 59 for comparison


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DefinitionsReturn

is the profit or income generated by savings

and investing.Unearned income

is income derived from sources other than

employment, such as interest.


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Smart InvestingWhich would you choose?

An investment

earning compoundin

g interest

An investment

earning simple interest

OR


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Compounding Interest• The number of times interest is

compounded has an effect on return

• Interest compounding frequently will yield higher returns$1,000 invested at 7% for

5 yearsCompounding

MethodAmount

Investment is Worth

Daily $1,419.02Monthly $1,417.63Quartely $1,414.78

Semi-Annually $1,410.60Annually $1,402.55

© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 72Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

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Rate of Return• Investments usually earn

higher rates of return than savings tools

• Rate of Return–The total return (earned) on

an investment expressed as a percentage of the amount of money investedTotal

Return

Amount of

Money Invest

ed

Rate of

Return

Remember: Return is the profit or income generated by savings

and investing.


1.12.1.G1What is Mandy’s

Rate of Return?Mandy saved $2,200 in a

money market deposit account. After one year, she

has a return of $110. What is Mandy’s rate of return?

$110 $2,200

.05 = 5%

Mandy’s rate of return on investment is 5%


1.12.1.G1What is Derek’s

Rate of Return?Derek invested $900. When he withdrew his money from the investment, he had a total of

$1,050. What is Derek’s rate of return?

$150 $900.167

= 16.7

%

Derek’s rate of return on investment is 16.7%

$1,050 $900 $150 Return


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RiskPOTENTIA

L RETURN

RISK

Risk• The uncertainty regarding the outcome

of a situation or eventInvestment Risk

• The possibility that an investment will fail to pay the expected return or fail to pay a return at all


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Investment Risk• Risk is a trade-off for the

potential to receive high returns• All investments carry some

level of risk

Financial Risk PyramidIllustrates the trade-offs between risk

and return for a number of saving and investing tools

What is the risk level of

savings tools?


1.12.1.G1Financial Risk

Pyramid

Wealth Accumulati

on- Investments

Financial Security- Savings Tools

SpeculationIncreasing

potential for higher returnsIncreasing risk


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InflationInflation

The rise in the general level of prices

Inflation RiskThe danger that money won’t be worth

as much in the future as it is today

Inflation risk should not be a concern with savings since the

goal of savings is to provide current financial security

The rate of return on an investment should be

higher than the rate of inflation.


1.12.1.G1Investment

PhilosophyEach individual has a tolerance level for the

amount of risk they are willing to take on

Investment PhilosophyAn individual’s general

approach to investment risk

The greater the risk a person is willing to

make on an investment, the greater

the potential return will

be.

Generally divided into three categories: conservative, moderate, and aggressive


1.12.1.G1Portfolio

DiversificationPortfolio Diversification-

reduces risk by spreading investment money among a

wide array of investment toolsCreates a collection of

investments that will provide an acceptable

return with an acceptable exposure to risk

Assists with investment risk reduction

Referred to as “Building a Portfolio.”


1.12.1.G1Types of

Investment ToolsStocks Bonds

Mutual Funds

Index Funds

Real Estate

Speculative

Investments


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Stocks• Stock

–A share of ownership in a company

• Stockholder or shareholder–Owner of the stock

Usually a stockholder owns a very small part

of a company.


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Return on Stocks• The share of profits distributed

in cash to stockholders• Stockholder may or may not

receive dividends- depends on company profit

Dividends

• The current price that a buyer is willing to pay for stock

• If stock is sold for a market price higher than what was paid, stockholder will receive a return

• If stock is sold for a market price lower than what was paid, stockholder will lose money

Market Price


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Corporate Bonds• A loan to a company• The company pays annual interest

to the investor until the maturity date is reached– The specified time in the future when

the principal (or initial investment) amount of the bond is repaid to the bondholder

– If company fails, bondholders are given some money before stockholders

Bonds are less risky

than stocks but do not have the

potential to earn as

much as a stock.


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Mutual Funds• Mutual fund- Created when a

company combines the funds of many different investors and then invests that money in a diversified portfolio of stocks and bonds that is professionally managed.

Always research the fees

charged by a mutual

fund.

Reduces investment risk

by helping people diversify their portfolio

Fees can be high

Saves investors time


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Index Fund• Index fund

– A mutual fund that was designed to reduce fees by investing in the stocks that make up an index

• Index- a group of similar stocks and bonds– Examples- Standard and Poor 500,

Nasdaq Composite Index, Dow Jones Industrial Average

• Offer high diversification with low fees

What is the difference between a

mutual fund and an

index fund?


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Real Estate• Includes any residential or

commercial property or land as well as the rights accompanying that land

• A family home is not considered an investment asset

• Can be risky and more time consuming but has potential for large returns

Examples of real estate

investments include

rental units and

commercial property.


1.12.1.G1Speculative

Investments• Have the potential for

significant fluctuations in return over a short period of time–Examples- futures, options,

commercial paper, collectibles

• Recommended for people with an aggressive investment philosophy and a high level of financial security


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futures• Contract to buy a specific

amount of an investment at a specific time in the future for a specific amount of money.

• Example–Farmer would sell 5000

bushels of wheat for $3.50/bushel for delivery on December 1, 2016.


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Stock Option• The right to buy or sell a

specific amount of shares for a specific amount of money in a specified period of time (you don’t have to do this)

• Example–As a bonus, the company

you work for gives you a stock option to purchase 100 shares of company stock at $6/share until June 30, 2016.


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Commercial Paper• A short-term loan given to a

company• Not usually backed by

collateral so generally purchased at a discount

• Example–Coca-Cola offers

commercial paper with a face value of $100 for $80 that matures June 30, 2016

–You pay $80 and at the end of June you get $100


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DISCOUNT

BROKER

Buying and Selling Investments

Investors must utilize a brokerage firm that acts as a buying and selling agent

for the investor (except for when buying real estate and certain speculative

investments).FULL

SERVICE GENERAL

BROKERAGE FIRM

Complete investment

transactions

Offer investment advice and one-on-one attention

from a broker

Only complete

investment transactions

Offer no advice to investors

but charge 40-60% less


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Services Offered for Investing

• Retirement Planning • Saving for Retirement • Nearing or In Retirement • Life Events • College Planning • Tax • Life Insurance • Estate Planning • Charitable Giving • Financial Guidance


1.12.1.G1Investment

Companies• Goldman Sachs • JP Morgan Chase • Morgan Stanley • Citigroup • Merrill Lynch• Barclays • Lazard • Credit Suisse • Deutche Bank • Wells Fargo


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TaxationProfits earned on investments

are considered to be unearned income

Income taxes MUST be paid on this money

Includes all forms of returns: interest, dividends, and price

appreciationTaxes are due on most

investment returns in the year the unearned income is

received


1.12.1.G1Tax-Sheltered

Investments• The government tries to

encourage certain types of investments by making them tax-sheltered

• Tax-sheltered investments– Eliminate, reduce, or defer taxes

• Examples- retirement plans (IRA), education expenses (529 plan), health care expenses (employer-funded plan)

Tax-sheltered investments are not tax-free!


1.12.1.G1Tax-Sheltered

Investments• If taxes are not eliminated,

then the taxes are either paid when the money is put into the account or when the money is taken out of the account

• There are limits to the amount of money that can be invested

• An individual should invest as much money as possible in tax-sheltered investments

What is the benefit of a

tax-sheltered

investment if taxes still have to be

paid?


1.12.1.G1Employee-Sponsored

Investment Accounts• Allow employees to reduce

their tax liability and make investing automatic

• Money is automatically taken out of an employee’s paycheck

• Employers often contribute a portion of money to the investment with no additional cost from the employee

It is recommend

ed that a person

utilize these investment

tools as much as

possible if they are offered.


1.12.1.G1

Rule of 72Rule of 72

Allows a person to easily calculate when the future

value of an investment will double the principal amount

72Intere

st Rate

Number of years

needed to double the principal

investment


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Albert EinsteinCredited for

discovering the mathematical equation for

compounding interest, thus the

“Rule of 72.” At 10% interest rate, money

doubles every 7.2 years,

T=P(I+I/N)YN

“It is the greatest mathematical

discovery of all time.”

http://www.th.physik.uni-frankfurt.de/~jr/gif/phys/einstein4.jpg


1.12.1.G1What Can the “Rule

of 72” Determine?How many years

it will take an investment to

double at a given interest

rate using compounding

interest

How long it will take debt to double if

no payments are made

The interest rate an

investment must earn to double within a specific time

period

How many times money (or debt) will double in a

specific time period


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“Rule of 72” FYI• The rule is only an

approximation• The interest rate must remain

constant• Can’t add money, pay money

(loan), or take money out• Don’t convert % to decimals or

vice versa


1.12.1.G1Doug’s Certificate

of Deposit

• Invested $2,500 Interest Rate is 6.5%

Doug invested $2,500 into a Certificate of Deposit earning a 6.5%

interest rate. How long will it take Doug’s investment to double?

72 ÷ 6.5 11 Yrs=


1.12.1.G1Jessica’s Credit

Card Debt

• $2,200 balance on credit card 18% interest rate

Jessica has a $2,200 balance on her credit card with an 18% interest

rate. If Jessica chooses to not make any payments and does not receive late charges, how long will it take for

her balance to double?

72 ÷ 18 4 Yrs=


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Jacob’s Car

• $5,000 to invest • Wants investment to double in 5

years

Jacob currently has $5,000 to invest in a car after graduation in 5 years. What interest rate is required for

him to double his investment?

724

years

18% interest

rate5 14.4%


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Julie’s CollegeJulie wants to save for college. She is

5 years old now and has a possible investment that earns 8% interest.

She has $2,000 currently. How long will it take for her investment

to double? 72 8 9 years


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How much money would Julie have when she was 14?

Answer the following:1) How long did she have the investment?2) How many times will the investment

double while she had the investment?


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so Question 1) How long did she have the investment?

she’s 14 yrs old now and was 5 yrs old when she started

14 – 5 = 9 yrs that she had the investment

And

Question 2) How many times will the investment double while she had the investment?

9 yrs that she had the investment and 9 yrs to double

9 ÷ 9 =1 time that it doubles

so

$2,000 x 2 (doubled)= $4,000


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23 years old?

Question 1) How long did she have the investment?


23 – 5 = 18 yrs that she had the investment

AndQuestion 2) How many times will the investment double while she had the investment?


18 ÷ 9 =2 times that it doubles so

$2,000 x 2 (doubled)= $4,000$4,000 x 2 (doubled)= $8,000


1.12.1.G142 years old?

Question 1) How long did she have the investment?


42– 5 = 37 yrs that she had the investment

AndQuestion 2) How many times will the investment double while she had the investment?


37 ÷ 9 =4 times that it doubles (approximately)so




1.12.1.G1

Advisor Expectations• Prepare a Needs Analysis• Won’t Make any Specific

Recommendations Initially• Try to Help you Understand your

Financial Situation


1.14.1.G1

Make Saving and Investing Automatic

• Saving and investing should be considered a fixed expense that is automatic

• Pay yourself first is a saving strategy that means to set aside a predetermined portion of money for saving before any money is used for spending


1.14.1.G1

Automatic Transfers&/or

Payroll Deduction

How can savings and investing become automatic?

savings & investing

Documents

norton school of family

savings toolby

savings toolsfunds

savings investing1

consumer sciences

charge america

financial goals

university of arizonaare