8.01-D Analyze the factors that affect the rate of return on savings or

investment plans

Review: What is a Savings Plan?

• Putting money aside in a systematic order.• Ways to put money aside:

– Regular deposit– Automatic deposit– Electronic funds transfer

Starting a Program• Factors determining a program

– Safety• Assurance that the money you have invested will be returned to you.

– Liquidity• Ease with which an investment can be changed into cash without losing

any of its value.– Yield/Return

• Rate of return (percentage of interest that will be added to you r savings over a period of time).

– Diversification• Process of spreading your assets among several different types of

investments to lessen risk.

Factors That Affect the Rate of Return on an Investment

• Risk - Chance of loss• Rate of Return (yield)

– Amount of money the investment earns – Compounding frequency is the interest computed on the amount

saved plus the interest previously earned. • Liquidity

– Ease with which an investment can be changed into cash.• Resistance to inflation-Hedge against inflation

– Will rate of return keep up with inflation?• Tax considerations

– Some government securities are tax exempt

Investing Terms

• Liquidity – how easily an asset can be converted into cash

• Edward started an investment account. He wanted his money to be available in case of an emergency. Which investment is more liquid?– Real estate– Artwork– Certificate of deposit (CD)– Bank savings account

Investing Terms

• Volatility – how easily the interest or cash value of an investment can change

• Edward invested $5000 in corporate stock. On October 1 he purchased shares of Ford Stock for $ per share. One month later, the price per share had dropped to $ Edward was very disappointed that his investment had netted a loss.

Investing Terms

• Risk – the possibility of earning or losing money from an investment

• Edward purchased a watercolor at a yard sale for $25. The watercolor was signed by Marcus Brown, an emerging new artist, who was struggling to pay his rent.

• One Year Later, two scenarios:

• 1. Due to a tragic accident, Marcus was killed. Demand for Marcus’ works increased and Edward’s watercolor was valued at $15,000.

• 2. The watercolor Edward purchased was a forgery, not by Marcus Brown. It was only worth $25.

Investing Terms• Interest – money paid for

the use of someone else’s money over a period of time

• Edward deposited $5000 in a certificate of deposit (CD) at Sun Trust Bank. The CD required leaving the money in the account for 12 months. If Edward withdraws the money, he will be charged a penalty for early withdrawal. He earns 5% interest on the money.

Simple Interest Formula• Interest = Principle x Rate x

Time• I = P R T

• Principle= $5000• Rate = 5%• Time = I year

• $5000 x 5% x 1• Interest earned = $250

Investing Terms

• Transactions – a saving or investment activity– Deposits

• put $ in– Withdrawals

• take $ out– Transfers/rollovers

• Moving from one financial instrument to another

Edward deposited $5000 in a certificate of deposit (CD) at Sun Trust Bank.

Edward withdrew $500 by writing a check out of his Sun Trust checkjng account.

Edward transferred $15,000 in a from his 401K into his checking account when he retired.

Investing Terms

• Security – the level of safety afforded by the financial instrument

• Federal Deposit Insurance Corporation

(FDIC) insured– Depositors at national

banks are insured up to $250,000 per account

Edward decided he wanted to be sure his savings and investments could not lose money. He liquidated his stock portfolio and deposited his cash at a FDIC insured bank.

Edward deposited $5000 in a certificate of deposit (CD) at Sun Trust Bank because it was FDIC insured.

“Rules” for Saving and Investing

• Rule of Saving:

• Pay yourself first• take a portion of earnings

for saving/investing before spending any of your paycheck

• Make savings a FIXED expense!– Payroll deduction– Automatic draft

Edward signed the authorizations to have $100 withdrawn electronically (EFT) from his payroll check and deposited into his savings account.

He also signed payroll deduction authorization for $200 into his 401K retirement fund.

Now Edward does not have to remember to save money out of his paycheck for these accounts!

“Rules” for Saving and Investing

• View saving and investing as a fixed expense

• Rule of Saving: Pay yourself first; take a portion of earnings for saving/investing before spending any of your paycheck

• 70-20-10 Saving and Investing Rule: For any money earned, spend 70%, save 20%, and invest 10%

• Saving and Investing Plan: For those whose values or lifestyle make saving 30% unrealistic, start a saving and investing plan in order to continually save a fixed amount

• Rule of 72: Divide 72 by the rate of interest earned on an investment to find the number of years needed to double an amount of money invested

“Rules” for Saving and Investing

• Saving and Investing Plan: For those whose values or lifestyle make saving 30% unrealistic, start a saving and investing plan in order to continually save a fixed amount.

• Edward just purchased his first home and is about to give Hannah an engagement ring. He does not feel he can save 30%, but he did get the payroll deduction started last month.

Which stage of the family life cycle is Edward in?Which stage of the financial life cycle is Edward in?

“Rules” for Saving and Investing

• Rule of 72: Divide 72 by the rate of interest earned on an investment to find the number of years needed to double an amount of money invested

• Edward invested $5000 with a 3% return in a corporate bond. How long will it take for him to double his money?– 72 / 3 = 24 years

• What would happen if his investment earned 5%?– 72 / 5 = 14.4 years

Making Choices

• Who will decide which investments to make?

• You will. Ask people you trust for advice.

• Keep the factors of investing in mind: – Safety– Liquidity– Yield– Diversification

Factors that Affect the Selection of Financial Institutions

LocationStaff/PersonnelBusiness hoursServices offered

•Online banking•Trust management•Safety deposit boxes

Financial Security Investments (low risk)

• Cash• Savings Accounts• Money Market

Accounts• Certificate of Deposit• US Government

Bonds• Retirement Accounts

Safety and Income Investments

• US Treasury Securities• Conservative Corporate Bonds• State and Municipal Bonds• Income and Utility Stocks• Blue Chip Stocks

Growth Investments• Income and Growth Stocks• Mutual Funds

– Some riskier than others• Real Estate• Corporate Bonds

RISKIER

Speculation Investments (high risk)

• Options• Commodities• Precious Metals and Gems• Speculative Stocks • Junk Bonds• Collectibles

How are Your Savings Essential to Economic Growth?

• Individual savings allow:– Businesses to expand and create more jobs– Demand for goods and services to increase

• Failure to save will cause less money to be invested and the economy may slow as a result

• Savings contribute to our economic stability

• Government uses savings to build highways, schools, and public services