Unit I - Personal Finance Building Wealth: Saving & Investing

Building Wealth

Who is wealthy? Joe Flash Grandma Smith Income - $150,000/ year Retired / $1800 month

SS checkWife & 2 kids 21, 600 / year

Retired , lives alone

Cars- 2011 BMW / 2010 Ford 150 Car – 1999 Toyota Corolla

House – 5 Bedroom, 4 bath House – three bedroom

gated community, media room 2 bath. & pool.

What is the missing information?

Personal Finance – Key Terms

Income - the money received for the exchange of services (labor), or from other sources, as rents or investments.

Ex. Wages (salary), interest on savings, dividend payments, lottery winnings, etc.

Assets- money (or equity) and or other valuable belongings (real estate, stocks, bonds, jewelry, etc)

Liabilities – financial obligations (loans (cars, home, student), credit cards, etc)

Principle – the original amount of money borrowed in a loan.

Interest – 1) the money paid for borrowing money 2) the money earned on deposited or loaned money

Liquidity – the ease of access to your cash, or in which an asset can converted to cash.

(ex. Checking account very liquid- ATM, Valuable painting not liquid)

Unit I - Personal FinanceFinancial Planning – using rational savings &

investment decisions to achieve a future goal.

Setting long & short term goals

* Short Term goals – saving for clothes, weekend trip, or new golf club. * Long Term – prom, spring break college, trip to Europe, retirement, etc.

Questions to ask: 1.What does it cost (price & other)/ how much $$ do I

need? 2.What do I have to do to achieve this goal? 3.How long will it take?

Saving & Investing •Savings – money deposited in a bank or

other financial institution* (security) for later use.

- Short term goals- clothes , cars, vacations, emergencies, etc.

• Investment- money used today to purchase an asset with expectation, not the guarantee, that the asset will increase in value.

- Long term goals – college education, retirement, vacation home, etc.

Savings / Banking Banks 2 major functions 1. Store money providing interest bearing accounts. (banks pay you interest (small %) on accounts for the use of your

money)- Currently accounts Insured up to $250,000*/FDIC

2. Loan Originator – Provide loans (financing) to individuals & businesses (Mortgages, Car, College, etc) charging interest,– (consumers pay to use the money).

***Remember businesses are consumers too, they borrow money for capital investments (ex. new office equipment, factories, etc)

Banks profit – The difference between the interest paid to customers (Saving Accts & CD’s) & the interest earned on loans (Cars, Mortgages. Etc.) = profits for banks

Pay 2% on savings accounts / charge 7% on a car loan = 5% profit for the bank!)

Additional Services provided by banks & other financial institutions: ▫ Checking accounts / debit ▫ Investments for customer: CD’s & Money Market Accounts

Saving Money: Account Options • Saving Accounts – Interest paid on Money in Account

(More $$ more return) * Interest Low (Little Risk= low return) * Minimum Deposit Required* (ex. You have to keep at least $1000 in account)* Guaranteed - $250,000* Liquid – easily converted to cash (You have access to your money with no penalty)

CDs – Certificates of Deposit (Timed Accounts) * Requires a deposit for a specified time period (ex. 5 year at 6%)* Deposits – range from $250 - $100,000* Higher Rates than other accounts & fixed * Guaranteed - $250,000* Reduced Liquidity – penalties for early withdraw

- Liquidity vs. return- in general, the more liquid an account the lower the return. Why?

Other Financial Institutions -S & L’s (Savings & Loans) – same functions as

bank (store money/ make loans) but centered on consumers (not businesses) & focused on home mortgages (loans)

-Credit Unions (Non-profits) owned by the members of the C.U. and offering banking services.

• Georgia Teachers Credit Union• Lockheed Credit Union

Saving •Start early & contribute often (every pay

check)

•Simple interest is interest paid only on the principle/ Deposit.

• (ex. $100 at 5% for one year = $5, so you end up with $105)

•Compound interest is interest paid on the principle & the accumulated interest.

• (so, after the second year of $100 at 5%, you will be paid interest on the $105 (year 2 balance = $110.25 , year 3 $115.76) – growing or compounding the money you originally invested, and so on.

InvestingInvestment - using money or capital in order to gain

profitable returns (interest), income, or appreciation in value.

Types of Investments: • Stock (Corporations) - selling shares (pieces) of the

company to the public (each share represents a % of ownership. ▫ So, if 10,000 shares are sold to the public & you own 100

shares you own 1% of the company.

Why do companies like Coca-Cola, Wal-Mart, & Home Depot sell stock? What are the costs & benefits of selling stock? Examples of companies that do not sell stock? Who owns a corporation?

Stocks provide 2 things: • Income - Stockowners receive a dividend or percent of the

year end profits (more stock = more income*). • Investment - Stockowners can hold the stock hoping the value

of the company will increase & sell at a higher price. (imagine if you bought Microsoft Stock in the 1980’s!!!)

Bonds •Bonds are issued by a corporation or govt.

(city, state, or federal) in exchange for a loan (money borrowed) from the investor.

- So, when you buy a saving bond, you are loaning the govt. money, they pay you back & pay you interest.

•Bond holders earn interest (percentage of the original amount borrowed) at intervals specified in the contract.

• (ex. 2% pay quarterly for five years)

Mutual Fund – Diversification • Investments in which money from many investors is pooled

together & invested in a variety of stocks & bonds.

• Advantages: ▫ investors do not have to personal manage their

investments▫ Risk is spread out among a number of different

investments

Investment Banks offer a variety of mutual fund options: high risk / high yield low risk / low return

Other investments opportunities •Real Estate – commercial or residential•Art•Antiques •Rare / scarce collectibles•Etc.

Investing: Risk vs. Return • In general, the greater risk you take, the higher the potential reward. • Little risk = little return

High Risk / High return

Low risk / low return

Real Estate Stock – Start ups

Stocks – Blue Chip

Corporate Bonds, State & Municipal Bonds

saving accounts & CD’s – U.S. Bonds