Savings & Investing
1.14.2.G1
Savings Tools
Are:
Safe
Liquid
Used For:
Large Purchases
Emergencies
Financial Security
© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 2
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.14.2.G1
5 Savings Tools
Are:
Checking Account
Savings Account
Money Market Account
Certificate of Deposit
Savings Bond
© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 3
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.14.2.G1
Savings Tools are
Safe
$ Why?
 Government Insured/Guaranteed
With the Exception of US Savings Bonds
 FDIC-Federal Depository Insurance Corporation
up to $250,000
$ Federal government agency that insures depository institutions
© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 4
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Choosing a
Savings Tool
$ By understanding the features of different savings
tools, an individual can choose which tools will
help them reach their financial goals.
© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 5
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.14.2.G1
Depository
Institutions
$ Features of savings tools vary between different
depository institutions





Interest rates
Accessibility options
Fees
Penalties
Minimum balance requirements
© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 6
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.14.2.G1
Depository
Institutions
$ Research and compare savings tools at different
depository institutions in order to find the best
option
$ Not limited to one depository institution
 Can have different savings tools at different depository
institutions
© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 7
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.14.2.G1
1.14.2.G1
Checking Account
$ DEFINITION
 Tool used to transfer
funds deposited into
an account to make a
cash purchase
$ INTEREST
 May be non-interest
or interest earning
 Interest rate is usually
the lowest available
for the savings tools
© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 8
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.14.2.G1
Checking Account
$ ACCESSIBILITY
 Most liquid of all the savings tools
$ Funds are easily accessed by:
 Checks
 Automated teller machines (ATMs)
 Debit cards
 Telephone
 Internet
© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 9
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.14.2.G1
Checking Account
$ FEATURES
 Can have minimum balance requirements
 Can charge transaction fees
 Can have a limit on the number of checks written
monthly
 Reduces the need to carry large amounts of cash
Before opening a checking
account, learn all of the
requirements and restrictions.
© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 10
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.14.2.G1
Checking Account
$ ADDITIONAL INFORMATION
 If interest is earned on the account, you must
report it on your income taxes (unearned income)
in the year it was earned
$ You will receive a form 1099 that tells you the total interest
you earned for the year
© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 11
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.14.2.G1
Savings Account
$ DEFINITION
 Account to hold
money not spent on
consumption
$ INTEREST
 Interest earning
 Lower interest rates
compared to the other
savings tools except
checking accounts
© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 12
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.14.2.G1
Savings Account
$ ACCESSIBILITY
 More liquid than all savings tools except a
checking account
$ Funds may be accessed or transferred between
accounts through:
 Automated teller machines
 Telephones
 Internet
 Debit Card
© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 13
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.14.2.G1
Savings Account
$ FEATURES





Allows for frequent deposits or withdrawals
Easily accessible
Money storage for emergencies and/or large purchases
Available at depository institutions
May require a minimum balance or have a limited
number of withdrawals per month
© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 14
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.14.2.G1
Savings Account
$ ADDITIONAL INFORMATION
 Interest earned on the account must be reported
on your income taxes (unearned income) in the
year it was earned
$ You will receive a form 1099
that tells you the total interest
you earned for the year
© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 15
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Money Market
Deposit Account
$ DEFINITION
 This is a kind of combination checking/savings
account.
© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 16
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.14.2.G1
Money Market
Deposit Account
$ INTEREST
 Minimum balance requirement with tiered interest rates
$ The amount of interest earned depends on the account
balance
$1,000-$5,000
3%
$5,001-$10,000
$10,001-$15,000
$15,001-$20,000
4%
5%
6%
$ For example: a balance of $10,000
will earn a 4% interest rate while a
balance of $2,500 would only earn 3%
© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 17
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.14.2.G1
Money Market
Deposit Account
$ ACCESSIBILITY
 Less liquid than checking and savings accounts
$ Accessibility is limited to a certain number of
transactions per month (usually 3-6)
© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 18
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.14.2.G1
Money Market
Deposit Account
$ FEATURES
 Minimum amount required to open the account,
often $1,000
 If the average monthly balance falls below a
specified amount, the account will earn a lower
interest rate for the entire month
© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 19
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.14.2.G1
Money Market
Deposit Account
$ ADDITIONAL INFORMATION
 Interest earned on the account must be reported
on your income taxes (unearned income) in the
year it was earned
$ You will receive a form 1099 that tells you the total interest
you earned for the year
© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 20
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.14.2.G1
Certificate of
Deposit
$ DEFINITION
 An insured interest
earning savings tool that
allows restricted access to
the funds
 Deposits have to be held
for a certain length of
time
1.14.2.G1
$ INTEREST
 Varies depending upon
the time length and
amount of money
deposited
$ The longer the period of
time, the higher the
interest rate
$ Usually 7 days to 8 years
© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 21
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Certificate of
Deposit
$ ACCESSIBILITY
 Less liquid than checking, savings, and money
market deposit accounts
$ Large fees are assessed if funds are withdrawn before
the end of the designated time period
© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 22
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.14.2.G1
Certificate of
Deposit
$ FEATURES
 Minimum deposits range from $100-$250,000
 Low risk and no fees if funds are held for the
designated time period
© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 23
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.14.2.G1
Certificate of
Deposit
$ ADDITIONAL INFORMATION
 Interest earned on the account must be reported
on your income taxes (unearned income) in the
year it was earned even if you don’t touch the
money
$ You will receive a form 1099 that
tells you the total interest you
earned for the year
© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 24
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.14.2.G1
US Savings Bond
E now EE
$ DEFINITION
 Current bonds purchased for face value from the
U.S. Government
$ Loan given to the government
$ As of 2012, all bonds are electronic—no paper
© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 25
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.14.2.G1
1.14.2.G1
US Savings Bond
$ INTEREST
 Earns interest up to 30 years then mature (stops)
© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 26
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.14.2.G1
US Savings Bond
$ ACCESSIBILITY
 Least liquid of all the savings tools
$ Access to funds is restricted
 Can only be redeemed after 1 year with a substantial
penalty
 Can be redeemed after 5 years with 3 months of
interest penalty
 After that no penalty
© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 27
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.14.2.G1
Savings Bond
$ FEATURES
 Cannot be transferred; whoever owns it must
cash it in—if die, goes to estate
 Purchased for $25 - $10,000
 Any one SS# is allowed a total yearly bond
purchase of no more than $10,000
© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 28
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.14.2.G1
Savings Bond
$ ADDITIONAL INFORMATION
 Taxes
$ Interest earned on a bond is tax exempt until redeemed
(cashed in)
 Once cashed in or when bond matures (30 years), interest earned on
the bond must be reported on your income taxes (unearned income)
$ If the bond and its interest are used to pay for higher
education the interest it earned will be tax exempt when
redeemed
© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 29
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.14.1.G1
Liquidity
Assets: Everything an
individual owns with
monetary value.
Liquidity: How quickly
and easily an asset can
be converted to cash.
Examples of Assets
© Family Economics & Financial Education – May 2010 – Savings Unit – Choosing to Save
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.14.2.G1
Liquidity
Most
Liquid
Checking Account
Savings Account
Lowest
Interest
Money Market Deposit Account
Certificate of Deposit
Least
Liquid
Savings Bond
Highest
Interest
© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 31
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Choosing a
Savings Tool
$ Different savings tools can be utilized to assist in
reaching personal financial goals
$ Higher interest rates are a trade-off for lower
liquidity
Higher
Interest
Lower
Liquidity
© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 32
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.14.2.G1
Choosing a
Savings Tool
$ When and how often access is needed to funds
helps determine which savings tool to use
An individual
wants to develop
an emergency
savings fund
They need a very
liquid account
A savings account
is very liquid and
accessible in
emergency
situations
Additional info savings
© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 33
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.14.2.G1
Savings Tools
Scenarios
$ Read each Savings Tool Scenario
$ Discuss which savings tool would be recommended
for each scenario
© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 34
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.14.2.G1
Savings Tools
Scenario #1
1.14.2.G1
Sean is a high school student that just received his
first paycheck from his new part-time job at the
local grocery store. He currently has no expenses to
pay, and his goal is to save every paycheck from his
job to buy a new car in two years. He needs to find
a savings tool that will help him reach his financial
goal. Which savings tool would you recommend
Sean utilize and why?
© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 35
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Savings Tools
Scenario #2
1.14.2.G1
Brittany recently moved into her first apartment.
Before, she was living with her parents and had very
few expenses to keep track of. Now that she has to
pay rent and utilities for her apartment, she needs
to find a savings tool that will help her manage her
money and ensure she can pay her bills every
month. Which savings tool would you recommend
Brittany utilize and why?
$
© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 36
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Savings Tools
Scenario #3
Bryan has a goal to become financially secure by
developing an emergency fund. He has been saving
twenty percent of his net income for the past year
and now has $2,000. He plans to maintain this
balance and only use this money for emergency
expenses. Which savings tool would you
recommend Bryan utilize and why?
© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 37
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.14.2.G1
1.14.2.G1
Saving vs. Investing
Savings
Portion of
current income
not spent on
consumption
Investing
Purchase of assets
with the goal of
increasing future
income or wealth
used for longterm goals
© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 38
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Savings vs.
Investing
Money saved is
used to pay for:
Money invested is
used to pay for:
•Emergencies
•Large Purchases
•Financial Security
•Higher Education
•Buying a Home
•Retirement
© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 39
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.14.2.G1
1.14.1.G1
Liquid Assets
In most cases, investments are not as liquid as savings.
Less Liquid
Investments
More Liquid
Savings Tools
Savings are known as liquid assets, because they are
easily accessible (turned into cash) in emergency
situations.
Of your assets,
which are the most liquid?
© Family Economics & Financial Education – May 2010 – Savings Unit – Choosing to Save
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.14.1.G1
Why are Saving &
Investing Important?
Savings
Investing
Provides the
foundation for
financial
security
Enhances and
helps build
wealth
© Family Economics & Financial Education – May 2010 – Savings Unit – Choosing to Save
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.14.1.G1
Saving vs. Investing
Activity
• Directions:
– A characteristic of saving or investing will
be identified
– Decide which you think is correct
– Discuss the answer
© Family Economics & Financial Education – May 2010 – Savings Unit – Choosing to Save
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.14.1.G1
Saving vs. Investing
Activity
Characteristic:
BUILDS WEALTH
Saving or Investing:
INVESTING
© Family Economics & Financial Education – May 2010 – Savings Unit – Choosing to Save
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.14.1.G1
Saving vs. Investing
Activity
Characteristic:
MORE LIQUID
Saving or Investing:
SAVING
© Family Economics & Financial Education – May 2010 – Savings Unit – Choosing to Save
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.14.1.G1
Saving vs. Investing
Activity
Characteristic:
USED TO PAY FOR
EMERGENCIES
Saving or Investing:
SAVING
© Family Economics & Financial Education – May 2010 – Savings Unit – Choosing to Save
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.14.1.G1
How is Wealth Measured?
Net worth statement - Describes an
individual or family’s overall financial
condition on a specified date
Assets
Liabilities
Net Worth
• The components include:
– Assets – Everything a person owns with monetary value
– Liabilities – Debts (what is owed to others)
– Net Worth – the amount of money left when liabilities are
subtracted from assets (indicates wealth)
© Family Economics & Financial Education – May 2010 – Savings Unit – Choosing to Save
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.14.1.G1
The Choices You Make Today
Impact Your Future!
Saving and investing…
Increase
Assets
Decrease
Liabilities
Increased Wealth!
© Family Economics & Financial Education – May 2010 – Savings Unit – Choosing to Save
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.14.1.G1
True or False?
Identify if each statement is true or false…
□
If Janie makes a one time investment of $500 at
age 20 in a tool that earns the historic 12%
average, by age 60 the $500 will become $46,525.
□
If Samuel invests $3,000 annually from ages 22-31
(a total of $30,000 invested) in a tool earning
10% interest, he will have $1.2 million dollars by
age 65.
They are both true. Now we are going to learn how!
© Family Economics & Financial Education – May 2010 – Savings Unit – Choosing to Save
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.14.1.G1
Time Value of Money
Money paid out or
received in the
future is not
equivalent to
money paid out or
received today
Time
Money
Three factors affect
how an investment
will grow.
© Family Economics & Financial Education – May 2010 – Savings Unit – Choosing to Save
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Interest
Rate
1.14.1.G1
Interest Rate
Interest is the price of using money.
Interest rate is the percentage rate paid on
the money invested or saved
Are you earning interest on any money?
© Family Economics & Financial Education – May 2010 – Savings Unit – Choosing to Save
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.14.1.G1
How Do Interest Rates
Affect Time Value of Money?
More
Money
Interest
Rate
$1,000 invested for 5 years
Interest Rate
Amount Investment is Worth
1%
3%
5%
7%
9%
$1,051.01
$1,159.27
$1,276.28
$1,402.55
$1,538.62
© Family Economics & Financial Education – May 2010 – Savings Unit – Choosing to Save
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.14.1.G1
Time
The longer an
individual invests,
the more money
he/she will make.
Time
Money
Interest
Rate
© Family Economics & Financial Education – May 2010 – Savings Unit – Choosing to Save
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
A Little Goes a
Long Way
• Sally Saver puts
away $3,000 per
year for 10 years, at
age 22. She earns
10% on her
investment.
• Sally invests a total
of $30,000 and has
earned $1,205,063
by the age of 65
1.14.1.G1
• Ed Uninformed
waits until he is 28
and contributes
$3,000 at 10% for
37 years
• Ed invests a total of
$111,000 and
accumulates
$1,079,856 by the
age of 65
© Family Economics & Financial Education – May 2010 – Savings Unit – Choosing to Save
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
53
1.14.1.G1
Amount of Money
The larger the
amount of
money invested,
the larger the
return on
investment will
be
Time
Money
© Family Economics & Financial Education – May 2010 – Savings Unit – Choosing to Save
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Interest
Rate
1.14.1.G1
Amount of Money
Amount
of
Money
Larger
Return
7% interest compounded annually for 5 years
Amount of Principal
Investment
Return on Investment
$100.00
$40.26
$1,000.00
$402.55
$10,000.00
$4,025.52
© Family Economics & Financial Education – May 2010 – Savings Unit – Choosing to Save
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.14.1.G1
Maximizing Your Return
• Time:
– Invest for as long as possible!
• Amount of Money:
– Invest as much as possible, as often as possible!
• Interest:
– Invest at the highest interest rate possible!
– Use compounding interest that compounds as
frequently (annually, semi-annually, quarterly,
monthly, daily) as possible!
© Family Economics & Financial Education – May 2010 – Savings Unit – Choosing to Save
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.14.1.G1
Smart Investing
Which would you choose?
An investment
earning an
interest rate of
2%
OR
An investment
earning an
interest rate of
2.1%
© Family Economics & Financial Education – May 2010 – Savings Unit – Choosing to Save
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.14.1.G1
Simple Interest vs.
Compounding Interest
Simple
Interest
•Interest earned on
the principal
investment
Compounding
Interest
•Earning interest on
the principal AND
past interest
Principal is the original amount
of money invested or saved
© Family Economics & Financial Education – May 2010 – Savings Unit – Choosing to Save
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
$1,000 invested at 5% interest rate
compounded quarterly for 1 year
1.14.1.G1
$1,000 x .05 x 3/12=$12.50
$1,000 + $12.50=$1,012.50
$1,012.50 x .05 x 3/12=$12.66
$1,012.50 + $12.66=$1,025.16
$1,025.16 x .05 x 3/12=$12.81
$1,025.16 + $12.81=$1,037.97
$1,037.97 x .05 x 3/12=$12.98
$1,037.97 + $12.98=$1,050.95
© Family Economics & Financial Education – May 2010 – Savings Unit – Choosing to Save
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Return to slide 60
1.14.1.G1
Simple Interest Equation:
Step 1
P
(Principal)
r
(Interest
Rate)
t
(Time
Period)
I
(Interest
Earned)
$1,000 invested at 7% interest rate for 5 years
$1,000
.07
5
© Family Economics & Financial Education – May 2010 – Savings Unit – Choosing to Save
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
$350
1.14.1.G1
Simple Interest Equation:
Step 2
P
(Principal)
I
(Interest
Earned)
A
(Amount
Investment
is Worth)
$1,000 invested at 7% interest rate for 5 years
$1,000
$350
© Family Economics & Financial Education – May 2010 – Savings Unit – Choosing to Save
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
$1,350
1.14.1.G1
Compounding Interest
Equations
There are two equations for compounding interest
1. Single sum of money
• Money invested only once at the
beginning of an investment
2. Equal number of investments spread over
time
• Equal amounts of money is invested
multiple times (once a month, once a
year, etc.)
© Family Economics & Financial Education – May 2010 – Savings Unit – Choosing to Save
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.14.1.G1
Compounding Interest
Equation – Single Sum
(
Total # of times
compounded
Interest Rate
+1 =n; then take n
# of times compounded per year
Amount
Answer from above x Principal= Investment is
Worth
)
$1,000 invested at 7% interest rate
compounded quarterly for 5 years
(.07÷4) +1=1.017520
=1.41478 x $1,000=$1414.78
© Family Economics & Financial Education – May 2010 – Savings Unit – Choosing to Save
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.14.1.G1
Compounding Interest
Equation – Single Sum
(
Total # of times
compounded
Interest Rate
+1 =n; then take n
# of times compounded per year
Amount
Answer from above x Principal= Investment is
Worth
)
$1,000 invested at 5% interest rate
compounded quarterly for 1 year
Go back to
slide 59 for
comparison
(.05÷4) +1=1.01254
=1.0509 x $1,000=$1,050.95
© Family Economics & Financial Education – May 2010 – Savings Unit – Choosing to Save
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.14.1.G1
Definitions
Return
is the profit or income generated
by savings and investing.
Unearned income
is income derived from sources
other than employment, such as
interest.
© Family Economics & Financial Education – May 2010 – Savings Unit – Choosing to Save
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.14.1.G1
Smart Investing
Which would you choose?
An investment
earning
compounding
interest
OR
An investment
earning simple
interest
© Family Economics & Financial Education – May 2010 – Savings Unit – Choosing to Save
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.14.1.G1
Compounding Interest
• The number of times interest is compounded
has an effect on return
• Interest compounding frequently will yield
higher returns
$1,000 invested at 7% for 5 years
Compounding
Method
Amount Investment is
Worth
Daily
Monthly
Quartely
Semi-Annually
Annually
$1,419.02
$1,417.63
$1,414.78
$1,410.60
$1,402.55
© Family Economics & Financial Education – May 2010 – Savings Unit – Choosing to Save
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
Rate of Return
Remember:
Return is the
profit or
income
generated by
savings and
investing.
• Investments usually earn higher rates of
return than savings tools
• Rate of Return
– The total return (earned) on an
investment expressed as a percentage
of the amount of money invested
Total
Return
Amount
of
Money
Invested
Rate of
Return
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 72
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
What is Mandy’s
Rate of Return?
1.12.1.G1
Mandy saved $2,200 in a money market
deposit account. After one year, she has a
return of $110. What is Mandy’s rate
of return?
$110
$2,200
.05 =
5%
Mandy’s rate of return on investment is 5%
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 73
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
What is Derek’s
Rate of Return?
1.12.1.G1
Derek invested $900. When he withdrew his
money from the investment, he had a total of
$1,050. What is Derek’s rate of return?
$1,050
$150
$900
$900
$150 Return
.167 =
16.7%
Derek’s rate of return on investment is 16.7%
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 74
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
Risk
POTENTIAL
RETURN
RISK
Risk
• The uncertainty regarding the outcome of a situation
or event
Investment Risk
• The possibility that an investment will fail to pay the
expected return or fail to pay a return at all
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 75
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
Investment Risk
• Risk is a trade-off for the potential to
receive high returns
• All investments carry some level of risk
What is the risk
level of savings
tools?
Financial Risk Pyramid
Illustrates the trade-offs between risk and return
for a number of saving and investing tools
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 76
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Financial Risk
Pyramid
Increasing potential for
higher returns
Increasing risk
Speculation
Wealth
AccumulationInvestments
Financial SecuritySavings Tools
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 77
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
1.12.1.G1
Inflation
Inflation
The rise in the general level of prices
The rate of
return on an
investment
should be higher
than the rate of
inflation.
Inflation Risk
The danger that money won’t be worth as
much in the future as it is today
Inflation risk should not be a concern
with savings since the goal of savings is to
provide current financial security
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 78
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Investment
Philosophy
1.12.1.G1
Each individual has a tolerance level for
the amount of risk they are willing to
take on
The greater the
risk a person is
willing to make
on an
investment, the
greater the
potential return
will be.
Investment Philosophy
An individual’s general approach to
investment risk
Generally divided into three categories:
conservative, moderate, and aggressive
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 79
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Portfolio
Diversification
Portfolio Diversification- reduces risk by
spreading investment money among a
wide array of investment tools
Referred to as
“Building a
Portfolio.”
Creates a collection of investments
that will provide an acceptable return
with an acceptable exposure to risk
Assists with investment
risk reduction
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 80
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
Types of
Investment Tools
Stocks
Bonds
Mutual
Funds
Index
Funds
Real
Estate
Speculative
Investments
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 81
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
1.12.1.G1
Stocks
• Stock
– A share of ownership in a company
• Stockholder or shareholder
– Owner of the stock
Usually a
stockholder
owns a very
small part of a
company.
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 82
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
Return on Stocks
Dividends
Market
Price
• The share of profits distributed in cash to
stockholders
• Stockholder may or may not receive
dividends- depends on company profit
• The current price that a buyer is willing to
pay for stock
• If stock is sold for a market price higher
than what was paid, stockholder will receive
a return
• If stock is sold for a market price lower than
what was paid, stockholder will lose money
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 83
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
Corporate Bonds
• A loan to a company
• The company pays annual interest to the
investor until the maturity date is reached
Bonds are less
risky than stocks
but do not have
the potential to
earn as much as
a stock.
– The specified time in the future when the
principal (or initial investment) amount of
the bond is repaid to the bondholder
– If company fails, bondholders are given
some money before stockholders
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 84
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
Mutual Funds
• Mutual fund- Created when a company combines
the funds of many different investors and then invests
that money in a diversified portfolio of stocks and
bonds that is professionally managed.
Always research
the fees charged
by a mutual
fund.
Reduces
investment risk
by helping
people diversify
their portfolio
Saves
investors
time
Fees can be
high
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 85
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
Index Fund
• Index fund
– A mutual fund that was designed to reduce
fees by investing in the stocks that make up
an index
• Index- a group of similar stocks and bonds
What is the
difference
between a
mutual fund and
an index fund?
– Examples- Standard and Poor 500, Nasdaq
Composite Index, Dow Jones Industrial
Average
• Offer high diversification with low fees
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 86
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
Real Estate
Examples of real
estate
investments
include rental
units and
commercial
property.
• Includes any residential or commercial
property or land as well as the rights
accompanying that land
• A family home is not considered an
investment asset
• Can be risky and more time consuming
but has potential for large returns
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 87
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Speculative
Investments
1.12.1.G1
• Have the potential for significant
fluctuations in return over a short period
of time
– Examples- futures, options,
commercial paper, collectibles
• Recommended for people with an
aggressive investment philosophy and a
high level of financial security
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 88
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
futures
• Contract to buy a specific amount of an
investment at a specific time in the
future for a specific amount of money.
• Example
– Farmer would sell 5000 bushels of
wheat for $3.50/bushel for delivery
on December 1, 2016.
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 89
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
Stock Option
• The right to buy or sell a specific
amount of shares for a specific amount
of money in a specified period of time
(you don’t have to do this)
• Example
– As a bonus, the company you work
for gives you a stock option to
purchase 100 shares of company stock
at $6/share until January 30, 2016.
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 90
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
Commercial Paper
• A short-term loan given to a company
• Not usually backed by collateral so
generally purchased at a discount
• Example
– Coca-Cola offers commercial paper
with a face value of $100 for $80 that
matures June 30, 2016
– You pay $80 and at the end of June
you get $100
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 91
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
Buying and Selling
Investments
Investors must utilize a brokerage firm that acts as a
buying and selling agent for the investor (except for when
buying real estate and certain speculative investments).
FULL SERVICE
GENERAL
BROKERAGE
FIRM
Complete
investment
transactions
Offer investment
advice and one-onone attention from
a broker
DISCOUNT
BROKER
Only complete
investment
transactions
Offer no advice to
investors but charge
40-60% less
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 92
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
Services Offered
for Investing
•
•
•
•
•
•
•
•
•
•
Retirement Planning
Saving for Retirement
Nearing or In Retirement
Life Events
College Planning
Tax
Life Insurance
Estate Planning
Charitable Giving
Financial Guidance
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 93
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
Investment
Companies
•
•
•
•
•
•
•
•
•
•
Goldman Sachs
JP Morgan Chase
Morgan Stanley
Citigroup
Merrill Lynch
Barclays
Lazard
Credit Suisse
Deutche Bank
Wells Fargo
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 94
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
Taxation
Profits earned on investments are considered
to be unearned income
Income taxes MUST be paid
on this money
Includes all forms of returns: interest,
dividends, and price appreciation
Taxes are due on most investment returns in
the year the unearned income is received
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 95
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Tax-Sheltered
Investments
• The government tries to encourage
certain types of investments by making
them tax-sheltered
• Tax-sheltered investments
Tax-sheltered
investments
are not taxfree!
– Eliminate, reduce, or defer taxes
• Examples- retirement plans (IRA), education
expenses (529 plan), health care expenses
(employer-funded plan)
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 96
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
Tax-Sheltered
Investments
What is the
benefit of a taxsheltered
investment if
taxes still have to
be paid?
1.12.1.G1
• If taxes are not eliminated, then the taxes
are either paid when the money is put
into the account or when the money is
taken out of the account
• There are limits to the amount of money
that can be invested
• An individual should invest as much
money as possible in tax-sheltered
investments
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 97
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
Employee-Sponsored
Investment Accounts
It is
recommended
that a person
utilize these
investment tools
as much as
possible if they
are offered.
• Allow employees to reduce their tax
liability and make investing automatic
• Money is automatically taken out of an
employee’s paycheck
• Employers often contribute a portion of
money to the investment with no
additional cost from the employee
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 98
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
Rule of 72
Rule of 72
Allows a person to easily calculate when the
future value of an investment will double
the principal amount
72
Interest
Rate
Number of years
needed to double
the principal
investment
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 99
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
Albert Einstein
Credited for discovering the
mathematical equation for
compounding interest, thus
the “Rule of 72.” At 10%
interest rate, money doubles
every 7.2 years,
“It is the greatest mathematical
discovery of all time.”
T=P(I+I/N)YN
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 100
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
What Can the “Rule
of 72” Determine?
How many years it will
take an investment to
double at a given
interest rate using
compounding interest
How long it will
take debt to double
if no payments are
made
The interest rate an
investment must
earn to double
within a specific
time period
How many times
money (or debt)
will double in a
specific time period
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 101
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
1.12.1.G1
“Rule of 72” FYI
• The rule is only an approximation
• The interest rate must remain constant
• The equation does not allow for additional
payments to be made to the original
amount
• Interest earned is reinvested
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 102
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
Doug’s Certificate
of Deposit
Doug invested $2,500 into a Certificate of Deposit
earning a 6.5% interest rate. How long will it take
Doug’s investment to double?
• Invested $2,500
72
÷
Interest Rate is 6.5%
6.5
=
11 Yrs
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 103
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
Jessica’s Credit
Card Debt
1.12.1.G1
Jessica has a $2,200 balance on her credit card with
an 18% interest rate. If Jessica chooses to not
make any payments and does not receive late
charges, how long will it take for her balance to
double?
• $2,200 balance on credit card
72
÷
18
18% interest rate
=
4 Yrs
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 104
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
Jacob’s Car
Jacob currently has $5,000 to invest in a car after
graduation in 5 years. What interest rate is
required for him to double his investment?
• $5,000 to invest
• Wants investment to double in 5 years
72
54
years
18%
14.4%
interest rate
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 105
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
Julie’s College
Julie wants to save for college. She is 5 years old
now and has a possible investment that earns 8%
interest. She has $2,000 currently. How long
will it take for her investment to double?
72
8
9 years
How much money would Julie have when she was 14?
Ask yourself—how many times will it double?
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 106
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
Doubles every 9 years so 14 yrs. Old – 5 yrs. Old= 9 yrs
9 yrs ÷ 9 yrs to double =1 time so
$2,000 x 2 (doubled)= $4,000
23 years old? Ask—how many times will it double?
Doubles every 9 years so 23 yrs. Old – 5 yrs. Old= 18 yrs
18 yrs ÷ 9 yrs to double=2 times so
$2,000 x 2 (doubled)= $4,000
$4,000 x 2 (doubled)= $8,000
42 years old? Ask—how many times will it double?
Doubles every 9 years so 42 yrs. Old – 5 yrs. Old= 37 yrs
37 yrs ÷ 9 yrs to double= 4 times so
$2,000 x 2 (doubled)= $4,000
$4,000 x 2 (doubled)= $8,000
$8,000 x 2 (doubled)= $16,000
$16,000 x 2 (doubled)= $32,000
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 107
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
Advisor Expectations
• Prepare a Needs Analysis
• Won’t Make any Specific Recommendations
Initially
• Try to Help you Understand your Financial
Situation
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 109
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.14.1.G1
Make Saving and
Investing Automatic
• Saving and investing should be
considered a fixed expense that is
automatic
• Pay yourself first is a saving strategy that
means to set aside a predetermined
portion of money for saving before any
money is used for spending
© Family Economics & Financial Education – May 2010 – Savings Unit – Choosing to Save
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.14.1.G1
How can savings and investing
become automatic?
Automatic Transfers
&/or
Payroll Deduction
© Family Economics & Financial Education – May 2010 – Savings Unit – Choosing to Save
Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona