Saving and Investing Tools
Carl Johnson
Financial Literacy
Jenks High School
Terms to Know
Certificate of Deposit
• Corporate Bonds
• Money Market Mutual Funds
• Mutual Fund
• Rate of Return
• Risk
• Savings Account
• Savings Bonds
• Stocks
•
Savings Strategies
Your goals will determine the choices that you will want
to make when planning your savings and investments
•
Savings is generally used to meet short and medium
term goals of seven years or less, while investing is
generally used to meet long term goals
•
•There
are several options to consider when planning your
savings strategy: savings accounts, certificates of deposit
(CD’s), government savings bonds, money market mutual
funds and checking accounts
Savings Strategies
Savings Accounts
• Interest bearing accounts at banks and
credit unions
• Usually have low interest rates, are
used to deposit small amounts of money
and meet short term goals
• Great way to establish an emergency
fund
• Make sure bank has FDIC
protection/credit union has NCUA
insurance
Savings Strategies
Certificate of Deposit
• Also called CD’s
• Offered by most banks and credit unions
• Covered by federal insurance
• When purchased, you have to wait a certain
amount of time until CD matures to get your
money
• Ranges in time from 30 days to many years,
depending upon what CD you use
• The longer the term of the CD, the higher the
rate of interest
• Less liquid as a savings account, but usually
have a higher interest rate than a savings
account
Savings Strategies
Government Savings Bonds
• Backed by the U.S. government, so there is
little or no risk
• Default risk is the potential that the bond
issuer will not pay the interest or return your
money when it matures
•Many are designed to be held for a minimum
number of years before you can cash them in to
get your money and interest
• Have a higher rate of return due to the length
of maturity, but also are low risk which reduces
potential earnings
Savings Strategies
Money Market Mutual Funds
• Designed to provide higher rates of return than
savings accounts because money is actually
invested in very short term investments with
low risk
• Available at banks and credit unions, but may
be also offered by other financial service
providers
•
The ones offered by banks and credit unions are covered
by federal insurance, while those offered by other financial
service providers are not
•
To cover the additional risk, those tend to pay higher interest rates
Savings Strategies
Checking Accounts
• Basic purpose is not saving money, but to
provide a convenient way to handle personal
and business transactions
• Many checking accounts earn a very small
percentage of interest
Investing Strategies
When you invest, you are really hoping for
a higher rate of return than when you save
• Investment options tend to have higher
rates of risk than savings options, but also
tend to have higher rates of return
• As in any investment, there is no guarantee
to making money
• Most adults tend to focus their investments
on retirement benefits
•
•
It is never too early to consider your strategy for long
term goals
Investing Strategies
Mutual Funds
• Provides an opportunity for investors to pool
money together to buy shares of a fund that
invests in many different products (stocks,
bonds and securities)
• Is a great way for people with limited money
and knowledge about investing to get started
• Mutual funds accounts have a professional
money manager who monitors the account
closely to make sure that it is earning the
maximum amount possible
Investing Strategies
Mutual Funds
• Various economic factors may cause the rate of
return to fluctuate, even lose money
• Because it is a long term investment, you
generally have an opportunity to recover from
any loss
• Most financial experts recommend mutual
funds because the potential gains are greater
than the losses
Investing Strategies
Stocks
• Buying stocks allow to own part of a company
• Don’t just buy stocks in one company, you can
diversify your portfolio by buying stocks in more
than one company
•
Experts recommend owing at least ten different stocks in
different industries
Buying and selling stocks can be exciting and
profitable, but it is more risky and expensive
than owning a mutual fund
•
Investing Strategies
Corporate Bonds
• When you buy a corporate bond, you are
making a loan to the company
• You allow them to use your money, and they
pay you interest
• The interest that you receive is the value of
your investment
• Buying into bond mutual funds is an
alternative for investors because it spreads
your risk
• It is a lower risk option with lower returns
than stocks
Rates of Returns
Risk levels are different for various
savings and investment options
• The rate of return is the amount of
money that you can earn when saving
and investing
• The higher the average return, the more
risk you are taking as an investor
• Average returns do not guarantee what
you will earn, they will only show what
has happened in the past with that type
of investment
•
Average Rates of Return
Since 1926
Asset Class
Rate of Return
Common Stocks
10% - 13%
Stocks of Smaller Companies
14% - 16%
Long Term Corporate Bonds
6.5% - 8%
Long Tern Government Bonds
5% - 7.5%
Short Term U.S. Treasury Bills
3.5% - 5%