Preparing for a
Savings or Investment Program
Carl Johnson
Financial Literacy
Jenks High School
Pay Yourself First!
 People often save or invest after expenses are
paid…Sometimes there is nothing left over!
 Try this approach
 Decide on an amount to save…Pay that amount
first…Consider it as a bill you owe yourself
 Pay your living expenses
 Use any money left over for fun stuff
Employer Sponsored Retirement Plans
 Most employers offer retirement plans, such a s a
401K, or a 403B
 Take advantage of these!
 Amounts are pre-deducted out of your paycheck
 Many employers match what you put in
 This is very important as you get older, as it will
supplement your Social Security
Elective Savings Programs
 You can also arrange with a mutual fund or
brokerage firm to take an amount each month
and invest it
 You can set it up automatically so you don’t have
to think about it
 It is an easy way to fund a traditional IRA or Roth
IRA
Gifts, Inheritances and Windfalls
 What would you do with money gifts or
inheritances?
 It has to be a choice!
The Long Term Value of Investments
 Even if you have just a small amount of money, it
is still considered to be a good decision if you
invest
 Small amounts add up over time because of the
time value of money
 The increase in an amount of money due to
interest earned
Safety and Risk
 Safety and Risk have specific meanings in the financial world
 Safety means that the chance of losing your money in an
investment is fairly small
 Risk indicates that you cannot be certain about the profit
of your investment
 You can choose investments that are safe, risky or in-between
 Safe investments will usually have a low rate of return
 Speculative investments are considered to be high risk and
could earn a large profit in a short time
 The disadvantage is that at any time you could lose most or
all your investment
Safety and Risk
 Your attitude toward risk will vary according to
your circumstances
 When young, you may be willing to take more
risks than when you are older
 Without risk, it is impossible to obtain returns
that make investments grow
Five Components of Risk
 Inflation
 Interest Rates
 Business Failure
 Financial Market
 Global Investment
Inflation
 Inflation is the general rise in prices that affect everyone
 Investing your money can help you stay ahead of
inflation
 However, during times of rapid inflation, the rate of
return may not be able to stay up with the inflation
rate
 You lose buying power and your money will buy
less!
 Some investments will give you more protection
 Common stocks vs. T-bills
Inflation Rate Risk
 If you put your money in an investment that gives
you a fixed rate, the value of your of investment
will go down if interest rates go up!
 If you have to sell bonds, you will get less than
originally paid
Business Failure Risk
 This type of risk applies to common stock, preferred stock and
corporate bonds
 When you buy stock, you are investing in a particular company
 You are betting that the company will be successful
 It can fail, according to the market and supply and demand,
etc…
 Lower profits mean lower dividends
 Distribution of money, stock or other property to
shareholders
 Your best protection is to do your homework on companies in
which you want to invest
 You might want to also invest in more than one company
Financial Market Risk
 The prices of investments can also be affected by
the overall state of the financial markets
 Factors which affect financial markets are social
and political conditions
 Ex. Oil in the Middle East
Global Investment Risk
 Global mutual funds are a better investment that
individual international stocks due to risk factors
in the global marketplace
 Global mutual funds are offered by U.S. firms
and specialize in companies that operate in
another region of the world
 A mutual fund includes stocks and bonds from
many companies and may offer more safety than
one company’s stocks and bonds
Investment Income
 The safest and most predictable investments include
 Certificates of Deposit (CD’s)
 U.S. Savings Bonds
 U.S. Treasury Bills
 With these programs, you will know the interest rate
and how much income you will receive on a certain date
 High risk investments would include:
 Commodities
 Options
 Precious Metals and Gems
 Collectibles
Investment Growth
 The best opportunities for growth usually comes
from common stocks and growth stocks
 A growth stock is a common stock issued by a
corporation
 The type of stock has the potential to earn above-
average profits in comparison to corporate stocks
 Growth companies usually reinvest their stock rather
than pay dividends
 Retained earnings are profits that a company
reinvests
Investment Liquidity
 A final factor to consider when choosing investments is
investment liquidity
 The ability to buy or sell an investment quickly without
substantially reducing its value
 A passbook savings account is an example of a high-liquidity
investment because you can withdraw all of your money
immediately
 An investment in real estate is usually a low-liquidity
investment