Saving and InvestingChapter 8

Establishing Your Financial Goals

• A savings or investment plan starts with a specific, measurable goal.

• Emergency Fund- A savings account that you can access quickly to pay for unexpected expenses or emergencies.

Financial Goal Questions

• How do I want to spend my money?• How much money do I need to satisfy

my goals?• How long will it take to save the money?• How much risk am I willing to take when

I invest?• What conditions in the economy or in

my life could change my investment goals?

Your Financial Check-up

1. Balance Your Budget – Spend less money than you make. Limit credit card use.

2. Have Insurance – Have enough insurance to cover losses from events such as a car accident, a medical emergency, or theft.

3. Start an Emergency Fund – Save money that you can access quickly in case of an emergency. Recommend 3 months.

4. Have Other Sources of Cash – Line of credit or cash available from credit card for serious injuries.

Money to Get Started

• ‘Pay yourself first’ – After paying required expenses; pay yourself a specified amount each pay period.

• Employer – Sponsored Retirement Plans - 401k or 403b; plans allow you to use pretax dollars and invest in them until you reach retirement age. Employers usually have a matching program.

• Elective Savings Programs• Individual Retirement Account (IRA)• Roth IRA

• Gifts, Inheritances, and Windfalls

Value of Long term investments

• Time Value of Money- The time value of money is the increase in an amount of money due to interest earned over time. • Principal + Previously Earned Interest *

Annual Interest Rate = Interest earned for the second year.

• Example: Deposit $1,000 with 3% savings; $30 interest in year one; How much will you earn after 2 years• (1,000 + $30) * .03 = $30.90 add to 1030 =

$1,060.90

Making Investment Decisions

• Safety & Risk• Safety - the chance of losing your money

in an investment is small. • Risk - You cannot be certain about the

profit of your investment.• Speculative Investment - Considered

‘high-risk’ investment that might earn a large profit in a short time.

Typical Investment Risks

SAFE INVESTINGCertificates of DepositGovernment Bonds

Treasury BillsU.S. Savings Bonds

CAN VARYStocks

Corporate BondsMutual FundsReal Estate

HIGH RISKCommodities

OptionsPrecious metals

Collectables- coins, stamps, comic books

5 Components of Risk

1. Inflation• Inflation impacts the future value of your money.

2. Interest Rate• Changes in the interest rate will impact your

future earnings on fixed interest rate investments.

3. Business Failure• If you buy stock in a corporation that does not

perform, you will lose money.

4. Financial Market• Financial conditions can impact your investment.

5. Global Investment

Types of Investments- Stocks

• Stocks • Equity Capital - money that a business

gets from its owners in order to operate. • Common Stock - A unit of ownership of a

company. It entitles the owner to voting privileges.

• Preferred Stock – A type of stock that gives the owner the advantages of receiving cash dividends before common stockholders receive cash dividends.

Corporate and Govt. Bonds

• Corporate Bond - A corporations written pledge to repay a specific amount of money, along with interest.

• Government bond – A written pledge of a government or municipality to repay a specific sum of money.

• Mutual Fund – An investment in which investors pool their money to buy stocks, bonds, and other securities.

Types of InvestmentsSpeculation

Level 3 Growth

Level 2 Safety and Insurance

Level 1 Financial Security