Saving and Investing
Make your money work for you
Pay Yourself First
Save this each
week
At % Interest
In 10 years you
will have
$7.00
5%
$4,720
$14.00
5%
$9,440
$21.00
5%
$14,160
$28.00
5%
$18,880
$35.00
5%
$23,600
Can You Believe…
49% of Teens P.Y.F.
79% of Teens use savings/checking accounts
5% use certificates of deposits
33% of Teens seek advice on investment
51% of Teens who invest in the stock market are Guys ,
29% are girls
42% of Teens save money for college, 30% save for car
Time Value of Money
Relationship between time,
money, and rate of return
(interest)
Earned interest-payment
received for allowing a financial
institution/corporation to use
your money
How to meet financial goals?
1. Time- More time to save, more money you will
have
2. Money- More you save, more you will have
3. Rate of interest- Higher rate you earn, more
money you will have
Inflation
If $2 is left in your room for 2
years, it is worth $1.75 at the
end of the 2 years due to
inflation
Inflation: the prices of goods &
services increasing over time.
Examples:
In 1994, candy bars never cost
more than $0.50. Now they cost
$1.00
Gas used to cost $0.87 a gallon
in 1994 and now???
Inflation
U.S. inflation has increased .5% to over 18%
in a year; the average is 3-4%
Inflation calculator
Taxes- drain on savings/investments
Income- federal/ state gov’t collect share
Taxed on job income, savings interest,
Selling stocks/bonds.
You pay on nearly all earnings you receive
Risk
•Even lenders face risk
•Inflation- big threat to investment
that only pays interest but that you
are not adding to.
•No risk free investment
•Research investment, then invest
1st decision in investment?
Owner or Lender?
Traditional Savings
U.S. Savings Bonds
Certificates of deposits
Lender
Stocks
Stockholder owns
portion of company
Historically, Owners
outperformed
lenders
Owner
Income Investments-lenders
Savings account = Low risk, low interest
U.S. Savings Bonds = Gov’t pays cash to investors in
the form of interest. Set time period, Higher interest
rate than savings. NPR Report on Savings Bonds
Certificate of Deposit = Loans to Banks/ credit unions.
3 months, 6 months, 1 year ( Longer the time, higher
the interest) Slightly higher than savings bonds.
Money Market = Offered through banks/credit unions.
Work like checking accounts. Can take money out with
no penalty, but higher investment is needed.
Corporate/Gov’t Bonds = Highest interest rate. Gov’t
safer, time periods can be 2 months to 30 years.
Longer time period, the higher the interest rate
Income Investments-Owners
Stocks represent ownership in company
Buy low- sell high
Capital Gain- difference between purchase price
and selling price (taxable)
Real Estate
Collectibles
Mutual Funds-pools money from several investors
and purchases stocks. Uses a fund manager who
makes buy/sell decisions. Offers diversification
Choosing a Savings Account


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Factors that determine the dollar yield on an
account:
Interest rate ( also called rate of return, or
annual yield)
All money earned comes from this factor
The following factors reduce money earned
and can even turn it into a loss:
Fees, charges, and penalties
Usually based on minimum balance
requirements, or transaction fees
If you invest $1000 each year
($19.20 per week)
Interest
Rate
5 yrs
10 yrs
15 yrs
20 yrs
5%
$5,525
$12,578
$21,578
$33,065
6%
$5,637
$13,181
$23,276
$36,786
7%
$5,751
$13,816
$25,129
$40,995
8%
$5,867
$14,487
$27,152
$45,762
9%
$5,985
$15,193
$29,361
$51,160
10%
$6,105
$15,937
$31,772
$57,257
11%
$6,228
$16,722
$34,405
$64,203
12%
$6,353
$17,548
$37,279
$75,052
Savings VS Investment
Difference = time
Savings- set aside for short-term goals
Savings is safe & earns small amount of interest
Invest- set aside for future income, benefit, or profit
Invest- no guarantee, in it for long haul, opportunity to
make more money than savings
Types of Savings Accounts
Passbook Account
 Depositor receives a booklet in which
deposits, withdrawals, and interest are
recorded.
 Compare your interest rates between
banks and credit unions
 Funds are easily accessible (liquid)

Statement Accounts
Basically the same as a passbook
account except depositor receives
monthly statements instead of a
passbook
 Accounts are accessible through ATM’s
 Interest rates are the same as a
passbook account
 Funds are easily accessible (liquid)

Interest Earning Checking
Accounts
Combines benefits of checking and
savings
 Depositor earns interest on any unused
money in his/her account

Money Market Deposit Accounts
Checking and savings account
 Interest rate paid built on a complex
structure that varies with size of balance
and current level of market interest
rates
 Can access your money from an ATM,
a teller, or by writing up to three checks
a month

Benefits/ TradeOffs

Immediate access to
your money
 Average yield (rate
of return) higher
than regular savings
accounts

Usually requires a
minimum balance of
$1,000-$2500
 Limited number of
checks can be
written each month
Certificates of Deposit (CD)
Bank pays a fixed amount of interest for
a fixed amount of time
 This is a great way to diversify your
investments

Benefits/ Trade Offs

No risk
 Simple
 No fees
 Offers higher
interest rates than
savings accounts

Restricted access to
your money (not
liquid)
 Withdrawal penalty
if cashed before
expiration date
(penalty might be
higher than the
interest earned
Types of CD’s

Traditional--Deposit a fixed amount of money
for a specific term and receive a
predetermined interest rate. Cash out at the
end of the term, or roll over for another term.
 Rising Rate/Bump Up CD- with higher rates
at various intervals, such as every six months
 Stock-indexed/Brokerage CD’s
 Callable CD’s- with higher rates and longterm maturities, as high as 10-15 years.
However, the bank may “call” the account
back after a stipulated period, such as one or
two years, if interest rates drop.
Types of CD’s
Global CD- combine higher interest with
a hedge on future changes in the dollar
compared to other currencies. Hedge is
an investment made with the intention
of minimizing the impact of adverse
movements in interest rates or
securities pricess
 Promotional CD’s- attempt to attract
savers with gifts or special rates.

Value of Money

Changes over time.
When Money is working for you, it
grows in value or compounds.
 Compounding interest-idea of earning
interest on interest

Simple vs Compound Interest
Simple Interest Calculation:
 Dollar Amount x Interest rate x Length of
Time (in years) = Amount earned
 $100 in a savings account that paid 6%
simple interest, during the first year you
would earn $6 in interest
 $100 x .06 x 1 =6
 At the end of 2 years you would have earned
$12.00
 The account would continue to grow at a rate
of $6 per year, despite the accumulated
interest
Compounded Interest

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Interest is paid on original amount of deposit,
plus any interest earned.
(Original $ amount + Earned Interest) x
Interest Rate x Length of Time = Amount
Earned
$100 in savings that pay 6% interest
compounded annually, the first year you
would earn $6
$100 x .06 x 1=6
$100 + 6 = $106
Compounded Interest
With compounded interest, the second
year you would earn $6.36 in interest
 $106 x .06 x 1 -$6.36
 $106 + $6.36 = $112.36
 You want to put your money in accounts
that compound more often

Watch your money grow
Your monthly deposit of $100.00 for 10 years with an interest
rate 0f 6.500% compounded monthly with a starting balance
of $1,000
Year
Balance
6
$23531.39
1
$11906.12
7
$26343.73
2
$13939.90
8
$29344.42
3
$16109.88
9
$32546.08
4
$18425.20
10
$35962.15
5
$20895.57
Final
Balance
$35962.15
Rule of 72

To determine about how many years it
will take to double your money:

72 divided by Interest rate =Years to
double your investment
Rule of 72

To determine the interest rate that will
double your money in a set number of
years:

72 divided by years to double
investment = interest rate required
Rule of 72
72 divided by
1 % interest
72 years
72 divided by
3 % interest
24 years
72 divided by
6 % interest
12 years
72 divided by
9 % interest
8 years
72 divided by
12 % interest
6 years
72 divided by
15 % interest
4 yrs 10 months
Rule of 72
72
Interest Rate
72
=
=
Years Needed to
Double Investment
3-H
Years Needed to
Double Investment
Interest Rate
Required
Let’s invest only $5.00 each month and see how
important it is for you to get a little bit higher return on
your investment. The following table illustrates what
3% more interest will do for you
Year
1%
3%
6%
9%
12%
15%
10
631
699
816
955
1120
1315
20
1328
1638
2278
3217
4599
6635
30
2098
2901
4896
8572
15404 28159
40
2949
4597
9585
21248 48965 115233
50
3889
6877
17981 51258 153199 467498
60
4927
9941
33018 122301 476933
70
6073
14059 59947 290487
1892606
1482403 7657963
Time is on your side

Most people do not start their investment
portfolio until it’s too late
 It does not take a lot of money to build
financial independence if you start investing
early.
 The importance of time can not be
underestimated. It’s one of the most
important elements in your financial plan.
Most people fail to use time to their
advantage because they allow procrastination
to erode their savings plan
Invest Early

Suppose you are 25 and have a goal of
$100,000 cash at retirement age. You could
accomplish this by saving only $10.22 per
month at 12%. I know it seems amazing but
it is true. And it’s also true that anyone can
mange to save $10.22 per month, no matter
what their income. But if you are 55 and have
and have the same goal- $100,000 at 65 you
must save $446.36 a month. 43 times as
much as you would have needed monthly at
25.
Invest Early
Age 25
Save $10.22 monthly
Age 35
Save $32. 46 monthly
(3 times more)
Age 45
Save $108.71 monthly
(10 times more)
Age 55
Save $446.36 monthly
(43 times more)
Savings Accounts

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Balance requirements
Some accounts require a certain balance
before paying any interest.
On Money market accounts, most banks will
pay different interest rates for different size
balances (higher balance earns a higher rate)
Balance calculation method
Most calculate daily. Some use average of all
daily balances.
Truth in Savings Act
The Truth in Savings Act requires
financial institutions to disclose the
following information on savings
account plans they offer:
 Fees on deposit accounts
 The interest rate
 Other terms and conditions
 The annual percent yield (APY)

APY

Annual percentage yield which is the
percentage rate expressing the total amount
of interest that would be received on a $100
deposit based on the annual rate and
frequency of compounding for a 365 day
year, rather than 360, 366 or some other
number. This law eliminates confusion
caused by the more than eight million
variations of interest calculation methods
previously used by financial institututions.
Bonds
A bond is an IOU certifying that you
loaned money to a government or
corporation and outlining the terms of
repayment
 A buyer may purchase a bond at a
discount. The bond has a fixed interest
rate for a fixed period of time. When the
time is up, the bond is said to have
“matured” and the buyer may redeem
the bond for the full face value

Types of Bonds
Corporate- sold by private companies to
raise money for the corporation
 If the company goes bankrupt,
bondholders have first claim to the
assets before stockholders (safer risk)

Types of Bonds
Municipal
 Issued by any non federal government
 Interest paid comes from taxes or from
revenues from special projects. Earned
interest is exempt from federal income
tax

Types of Bonds
Federal Government
 The safest investment you can make.
Even if US government goes bankrupt,
they are obligated to repay bonds.

Bond Basics

Accrued Interest- Interest deemed to be
earned on a security but not yet paid to the
investor
 Ask price- price being sought for the security
by the seller
 Bid- the price at which a buyer offers to
purchase a security
 Callable bond- bonds which are redeemable
by the issuer prior to the maturity date at a
specified price at or above par
Bond Basics

Call premium: a dollar amount, usually
stated as a percent of the principal
amount call, paid by the issuer as a
penalty for the exercise of a call
provision
Bond Basics

Default: failure to pay principal or interest
when due.
 Federal Funds Rate: The interest rate
charged by banks on loans to other banks.
The Federal Reserve’s ability to add or
withdraw reserved from the banking system
gives it close control over this rate.
Bonds

Bond ratings are like grades. AAA is the
highest. D is the lowest.
 Investment grade bonds: safe bonds
because the issuers are stable and
dependable.
 Junk Bonds: a debt obligation with a Ba or
BB or lower, generally paying interest above
the return on more highly rated bonds.
Stocks

Stock represents ownership of a corporation.
Stockholders own a share of the company
and are entitled to a share of the profits as
well as a vote in how the company is run
 Company profits may be divided among
shareholders in the form of dividends.
Dividends are usually paid quarterly.
 Larger profits can be made through an
increase in the value of the stock on the open
market.
Stocks advantages/disadvantages

If the market value
goes up, the gain
can be
considerable.
 Money is easily
accessible (liquid)

If the market goes
down, the loss can
be considerable
 Selecting and
managing stock
often requires study
and the help of a
good brokerage firm
Penny Stock

In the U.S., a penny stock is a common stock
that trades for less than $5 a share and are
traded over the counter (OTC) through
quotation services such as the OTCBB or the
Pink Sheets. Although a penny stock is said
to be "thinly traded," share volumes traded
daily can be in the hundreds of millions for a
sub-penny stock. Legitimate information on
penny stock companies can be difficult to find
and a stock can be easily manipulated.
Treasury Bills (t-bills)
Sold in terms ranging from a few days
to 52 weeks. Bills are typically sold at a
discount (you might pay $990 for a
$1,000 bill). When the bill matures, you
would be paid $1,000. The difference
between the purchase price and face
value is interest.
 Secure, short term investment

Mutual Funds

Professionally managed portfolios made up of
stocks, bonds, and other investments
 Individuals buy shares, and fund uses money
to purchase stocks, bonds, and other
investments
 Profits returned to shareholders monthly,
quarterly, or semi-annually in the form of
dividends
 Advantage is that it allows small investors to
take advantage of professional account
management and diversification normally only
available to large investors
Types of Mutual Funds
Balanced Fund- includes a variety of
stocks and bonds
 Global Bond Fund- has corporate bonds
of companies from around the world
 Global Stock Fund has stocks from
companies in many parts of the world
 Growth Fund emphasizes companies
that are expected to increase in value;
also has higher risk

Types of Mutual Funds

Income Fund- features stock and bonds with
high dividends and interest
 Industry Fund- invests in stocks of companies
in a single industry (such as technology,
health care, banking)
 Municipal Bond Fund- loaning state and local
governments money for returns
 Regional Stock Fund- involves stocks of
companies from one georgraphic region of
the world (such as Asia, Latin America etc)
REAL ESTATE
Ways to invest in real estate:
 Buy a house, live in it, and sell it at a
profit
 Buy income property (such as an
apartment house or a commercial
building) and rent it
 Buy land and hold it until it rises in value

Real Estate Advantages/ Disadv.

Excellent protection
against inflation

Can be difficult to
convert into cash
 A specialized type of
investment requiring
study and
knowledge of
business
Capital Gains

Profits from the sale of a capital asset
such as stocks, bonds, or real estate.
These profits are tax-deferred; you do
not have to pay the tax on these profits
until the asset is sold. Long-term capital
gains occur on investments held more
than 12 months. Short term capital
gains occur on investments held less
than 12 months
Tax Deferred Savings
Allows to postpone taxes while building
investment
 Saving for future- part of financial
planning
 IRA (individual retirement account)
 401k and 403b through employers
 Withdrawals from accounts planned for
retirement -tax brackets are lower
 Long- Term investment
 Taxes/penalties on money withdrawn
before age 59 1/2

RETIREMENT PLANS
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Plans that help individuals set aside money to
be used after they retire
Federal income tax not immediately due on
money put into a retirement account, or on
the interest it makes
Income tax paid when money is withdrawn
Penalty charges apply if money is withdrawn
before retirement age, except under certain
circumstances
Income after retirement is usually lower, so
tax rate is lower
Types of Retirement Plans

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
IRA (Individual Retirement Account)
Allows a person to contribute up to $5,000
earning per year. Contributions can be made
in installments or in a lump sum
IRA Contribution Limits
YEAR AGE 49 & BELOW
AGE 50 +
2002-2004
$3,000
$3,500
2005
$4,000
$4,500
2006-2007
$4,000
$5,000
2008
$5,000
$6,000
ROTH IRA

While the $5,000 annual contribution to
this plan is not tax deductible, the
earnings on the account are tax-free
after five years. The funds from the
Roth IRA may be withdrawn after age
59 if the account owner is disabled, for
educational expenses, or for te
purchase of a first home
IRA vs Roth IRA



Tax deductible
contributions
(depending on income
level)
Withdraws begin at age
59 1/2 and are
mandatory by 70 1/2.
Taxes are paid on
earnings when
withdrawn from the IRA

Contributions are
not tax deductible
 No Mandatory
Distribution Age
 All earnings and
principal are 100%
tax free if rules and
regulations are
followed
IRA vs Roth IRA



Funds can be used to
purchase a variety of
investments (stocks,
bonds, certificates of
deposits, etc.)
Available to everyone;
no income restrictions
All funds withdrawn
(including principal
contributions) before 59
1/2 are subject to a
10% penalty (subject to
exception).



Funds can be used to
purchase a variety of
investments (stocks,
bonds, certificates of
deposits, etc.)
Available only to singlefilers making up to
$95,000 or married
couples making a
combined maximum of
$150,000 annually.
Principal contributions
can be withdrawn any
time without penalty
(subject to some
minimal conditions).
401 K

Allows a person to contribute to a
savings plan from his or her pre-tax
earnings, reducing the amount of tax
that must be paid. Employer matches
contributions up to a certain level
Keough Plan

Allows a self-employed person to set
aside up to 15% of income to be able to
participate in a type of a 401 K.
NEFE High School Financial Planning Program
Unit Three – Investing: Making Money Work for You
Financial
Planning
Pyramid
Highest Risk
Highest Earning
Commo- Penny
dities
Stock
Collectibles
Blue-Chip
Common
Stock
Balanced
Mutual
Funds
Money Market
Accounts
or Mutual Funds
Insured Savings /
Checking Accounts
3-J
Speculative
Stock / Bonds /
Mutual Funds
Growth
Mutual
Funds
Real
Estate
High-Grade
Preferred
Stock
High-Grade
Convertible
Bonds
High-Grade
Municipal Bonds
or Mutual Funds
U.S. Savings
Bonds
Certificates
of Deposit
High-Grade
Corporate Bonds
or Mutual Funds
Treasury
Issues
Lower
Risk
Lower
Earning
s
Diversification

Reduction of risk by spreading your
dollar in different investments
Protect Yourself from Investment
Fraud





Become informed about investments and
industries before investing
Talk with others who have made similar
investments
Obtain information from state and federal
regulatory agencies
Never buy over the phone without first
investigating the situation
Avoid investment opportunities promising
large returns in a short time that seem “too
good to be true”-they probably are…..
Common Frauds

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Pyramid Schemes
High risk penny stocks and fraudulent
securities
Fraudulent Franchises and business
opportunities
www.fraud.org
www.sec.gov
www.ftc.gov
www.nasaa.org