SAVING AND
INVESTING
VOCAB
a. Investing – purchasing securities (stocks,
bonds, mutual funds) with the goal of
increasing wealth
b. Liquidity – the quality of an asset that
permits it to be converted quickly into cash
without loss of value
c. Opportunity Cost – the value of the secondbest alternative that a person gives up when
making one choice
• Risk – the measure of the likelihood of
loss or profit of an investment’s rate of
return
• Saving – the process of setting income
aside for future spending
• Savings – money set aside for a future use
that is held in easily accessed accounts,
such as a savings account and certificates
of deposit
• Savings account – a financial institution
deposit account that pays interest and
allows withdrawals
The basic reason that people save money is
because they want something in the future.
Savings is defined as keeping money for future
use, or to redirect money from current spending
to a savings account or another form of
investment. It is important to start saving now.
What I want to buy
Price
What I will give up
It is easier when you have a goal. If you
know how much you need and how long it
takes to get there, you are more likely to
save. If you save, you will not have to
borrow money. It is better to pay yourself
than pay someone else.
Saving money is simply about making choices about how to use
your money. It means you have decided set money aside today for
something you want tomorrow. While it sounds easy, it can be
difficult because it is certainly more fun to spend today than wait.
It is also hard to save when you have made too many purchases on
a credit card. Balances on credit cards should be paid off as soon
as possible. If you do not have debt, you can start saving now to
reduce your need to borrow money later.
STRATEGIES
How do you start saving? Once you decide to
start saving, there are several things you can do.
Pay yourself first – put a minimum of 10% into
savings before doing anything else.
SAVING 2 WAYS
You can save money by putting it in a safe
place, like a bank, where it will earn a small
amount of interest. It is a good idea to have
enough money in a savings account to pay
your bills for a couple of months.
Other ways to save – government savings bonds, money
market accounts, or certificates of deposit (CDs).
Sometimes, these items pay more interest but they are not
as liquid. Liquidity is defined as how easy it is to turn an
item into cash without losing any money. Government
bonds and CDs have a guaranteed return but you have to
hold them for specific periods of time; they are not as
liquid as savings accounts.
WHY DO WE INVEST?
Investing can also be a way for you to pay yourself first.
Investing is the process of putting money some place with
the intention of make a financial gain. Investing your savings
can be a good financial decision; most financial advisors
would recommend you first save money for an emergency
fund, than you start saving for investing.
WORTH THE RISK?
While investments tend to have a slightly
higher financial gain, there is no guarantee.
Investing involves more risk than savings.
Risk is the chance of losing some or all of the money
you invested. When an investment makes money, you
have earned a return on your investment. Risk also
involves failing to make the best choice about saving
and investing your money. Example – if all of your
money is in a savings account with a lower interest rate,
you risk earning a higher rate of return through
investing
a. Investing is a good way to make money if
you have seven or more years before you
need the money to reach your goal. If your
goal is sooner, it is probably better to put the
money in a savings account or short-term
certificate of deposit (CD).
THE RULE OF 72 - VOCAB
• Compound Interest – interest
earned not only on the principal
but also on the interest already
earned
• Principal – the original amount of
money deposited or invested
• Rule of 72 – the length of time, in years, it
takes an amount of money saved to double
when it receives compound interest. This
length of time can be found by dividing the
interest rate (expressed as a whole number)
into 72
• Simple Interest – interest calculated
periodically on the loan principal or
investment principal only, not on previously
earned interest (Principle x Interest x # of years)
Why do we earn interest when we put our money in the
bank? When you put money into a savings account, you are
loaning the use of the money to the bank while it is
deposited in your account. In return, the bank guarantees
your money is available when you need, making the loan
safe. The interest is compensation for providing them the
use of your money.
• Interest is computed two ways – simple
and compound. Simple interest is
calculated on the money you invest or
loan to someone. If you have simple
interest of five percent on 100 dollars
for three years, you would earn $5 the
first year, $5 the second year, $5 the
third year.
• 100 * .05 = $5.
• Compound interest is calculated on the money that
you invest or loan someone plus any interest they
have already paid you. Example, 100 dollars with at
five percent for three years, you would have 105 at
the end of the first year. Then, you would earn $105
* .05 = 5.25 the next year. The third year, you would
earn 110.25*.05 = 5.51 the third year. Over the three
years, you would earn $15.76.
• Year one: 100*.05=5
• Year two: 105*.05 = 5.25
• Year three: 110.25*.05 = 5.51
The longer money is invested, the more impact you
receive from compounding. Do you want to be a millionaire
when you retire? One secret to accomplishing that can be
found in compound interest. Save 2,080 a year or 40 a week
when you are twenty years old. If market returns are average,
when you are 65 years old, you will have $1,062,137.5. If you
begin ten years later, you will have $455,540.33. So, time is
your friend when saving.
The rule of 72 is an easy way to discover how
long it will take your money to double using
compound interest. When the rate of return that
you have earned multiplied by the number of
years invested equals 72, then your money has
doubled. If you invest your money for 9 years
and you earn 8% interest 8*9=72
SAVINGS AND INVESTING
TOOLS - VOCAB
• Certificates of Deposit – a certificate issued by a
bank to a person depositing money in an account
for a specified period of time (6 months, 2 years); a
penalty is charged for early withdrawal
• Corporate bonds – a certificate representing the
purchaser’s agreement to lend money to a business
on the promise that the debt will be paid, with
interest, at a specific time
• Money market mutual funds – a fund restricted
by law to investing in the short-term money
market
• Mutual funds – an investment tool that pools the
money of many shareholders and invests it in a
diversified portfolio of securities, such as stocks,
bonds, and money market assets
• Rate of return - how fast money in savings
account or investment grows
• Risk – a measure of the likelihood of loss or
profit; the uncertainty of an investment’s rate of
return
• Savings account – a financial institution
deposit account that pays interest and
allows withdrawals
• Savings bonds – a document
representing a loan of more than one
year to the US government, to be
repaid, with interest on a specified date
• Stocks – an investment that represents
shares of ownership of the assets and
earnings of a corporation
SAVING STRATEGIES
 Savings accounts are interest-bearing accounts at banks and
credit unions. They usually have low interest rates and are used
to deposit small amounts of money to meet short-term goals.
Savings accounts are a great tool for establishing an emergency
fund. Be sure to use a bank has FDIC insurance or the credit
union has NCUA insurance – this protects your money if they
should close
CERTIFICATES OF DEPOSIT
Certificates of Deposit (CD) are offered by most banks and
credit unions, and they are also covered by federal insurance.
When you buy a CD, you usually have to wait a certain amount of
time until the CD “matures” to get your money. CDs may mature
in 30 days or many years. The longer the term of the CD, the
higher the interest rate. While CDs are less liquid than savings
accounts, they do tend to earn higher interest
GOVERNMENT SAVINGS
BONDS
 Government savings bonds are backed by the US government so there
is little to no risk. Default risk is the potential that the bond issuer will not
pay the interest or return your money when it matures. Savings bonds are
designed to be held for a minimum number of years before you cash them
in for your money and interest. Because of the length of maturity,
government bonds have a higher rate of return than saving accounts or
CDs.
MONEY MARKET MUTUAL
FUNDS
Money market mutual funds are designed to provide higher
rates of return than savings accounts because the money is
actually invested in very short-term investments with low risk.
Money market accounts are available at some banks and credit
unions, but may also be offered by other financial service
providers.
CHECKING ACCOUNTS
basic purpose of a checking account is NOT saving
money. Instead, it provides a convenient way to handle
personal and business transactions. However, many
checking accounts earn a very small percentage of interest if
you maintain a certain minimum balance. Always ask about
the rate of interest before opening an account
INVESTMENT STRATEGIES
When you invest, you are hoping for a higher rate of
return than when you save. Investment options tend to have
higher rates of risk than savings options, but they also tend
to have higher rates of return. While savings products may
guarantee a specific rate of return, there is no guarantee
when investing.
MUTUAL FUNDS
 Mutual funds provide an opportunity for investors to pool their
money together to buy shares of a fund that invests in many different
financial products such as stocks, bonds, and securities. They are a great
way for people with limited money and limited knowledge about
investing to get started. Mutual fund accounts have a professional money
manager who monitors the account closely to ensure it is earning the
maximum amount possible.
At the same time, mutual funds may go through periods
of time where they do not earn a high rate of return or
lose money. Their rate of return is based on a variety of
economic factors, which fluctuate. Most financial experts
highly recommend mutual funds for anyone interested in
investing because the potential benefits of gain are greater
than the potential costs of losing.
STOCKS
Buying stocks allow you to be part owner of a company.
For example, if you buy a share of stock in Merger. Inc.,
you are a shareholder in that company. Purchasing a single
company can be exciting if you are interested in what the
company does, but it does provide more risk than if you
purchased a mutual fund.
Putting all of your money into one
company is similar to the old saying of,
“putting all your eggs in a basket”. If you
drop the basket, there go your eggs! If the
company fails, there goes your investment.
Diversify your portfolio – buy stocks in
more than one company
CORPORATE BONDS
when you own corporate bonds, you basically make a loan
to the company. You allow them to use your money and they
pay you interest. The interest you receive is the value of your
investment. Buying bonds for a single company is like owning
stocks in a single company; if something happens to that
corporation, you can lose most or all of your investment.
Buying into bond mutual funds is an alternative
for individual investors because it spreads your risk.
While bond mutual funds can lose money as
interest rates increase, they tend to offer greater
protection from losses. In general, investing in
bonds is a lower risk option with lower returns than
stocks.
RATES OF RETURN
because risk levels are different for the various saving and
investing options, the rates of return also vary. The rate of
return is the amount of money you can earn when saving or
investing. The higher the average rate, the more risk you are
taking as an investor
• Common stocks – 10-13%
• Stocks of smaller companies – 14-16%
• Long term corporate bonds – 6.5-8%
• Long term US government bonds – 57.5%
• Short term US Treasury bills – 3.5-5%
TIME IS MONEY - VOCAB
• Asset class – a group of investments
with similar characteristics
• Diversification – investing in a variety
of stocks, bonds, money market
accounts, in order to spread risk
• Equities – a group of investments involving
ownership of assets
• Fixed income class – a group of investments
involving loans made to someone else
• Inflation – a rise in the general or average
price level of all the goods and services
produced in an economy
• Risk tolerance – a measure of the likelihood
of loss or profit the uncertainty of an
investment’s rate of return
TIME IS MONEY
Some basic rules of saving and investing apply to everyone
but there are numerous individual choices you have to make
when deciding how to manage your money. These choices
are based on many factors, but some of the most important
are time horizon, risk tolerance, and shortfalls in funding
future needs.
How long do you have to meet your goals? The longer
you have to invest, the more aggressively you can invest
your money. Investing in higher risk financial products is
having a more aggressive investment strategy. An asset class
is defined as a specific kind of investment. Different asset
classes have different risk levels and it is important to
match your time horizon to the asset class
Fixed Income – Bank Accounts – Immediate
access to cash; CDs – time varies based on
contract; Government bonds – money loaned to
the US government; Municipal bonds – money
loaned to a municipality (often a city); Corporate
bonds – money loaned to a business corporation
Equity items – large cap stocks – ownership in
large companies; small cap stocks – ownership in
small companies; international stocks – ownership
in foreign companies; commodities – ownership
of hard assets such as gold or oil; microcap stocks
– ownership in very small companies with a high
rate of failure
The fixed income class includes bank accounts, CDs,
and government bonds which are also savings
instruments. Municipal and corporate bonds are not
usually savings instruments because they have more
risk and are less liquid. Equities include stocks and
commodities, and are generally associated with
“ownership”.
When buying stocks, you actually own a share of a company.
When buying a commodity, you also take temporary
ownership of the product. If a stock or a commodity increases
in value, then you share those profits. However, if they decline
in value, then you share the loss. Stocks are purchased in a
stock market or in a mutual fund. Commodities are sold in a
commodities market or in a mutual fund. Both are higher risk
investments than products in the fixed income class.
RISK FACTORS
Your personality may influence how you invest
your money. Risk tolerance relates to how much
negative change (potential loss) you can handle with
your investment. If you are a risk taker, you may
really enjoy investing in the stock market.
A wise investor will consider some of
both because it provides a balance for your
investment portfolio. This is called
diversification. Portfolio is the common
term given to all of your personal assets,
including savings, investments, and cash.
INFLATION FACTORS
If you place your money in a checking account
that does not earn interest and leave it there, you are
losing money. This is because of inflation. Inflation
refers to increases in the average price of goods and
services from one year to the next.
The US has an average inflation rate
of 3% per year. With a 3% inflation
rate, $100 this year is worth $97 next
year. If you earn 8% a year, you are
really only earning 5% a year.