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CHAPTER 6Saving and Investing
CHAPTER 6SECTION 1
Why Save?
Deciding to Save
Saving: setting aside income for a period of time so that it can be used later
People save for purchases that require more funds than available, for emergencies, and for retirement.
Deciding to Save
Results of Saving Economies benefit from individuals who save
because people have more money to invest or spend, leading to expanding business.
Where to Save There are many saving options available to
customers including commercial banks, savings and loan association, savings banks, and credit unions.
When choosing a place to save, think about trade-offs.
Savings Accounts
Statement savings accounts accrue a low interest but allow immediate access to funds. Statement Savings Account: account similar to
passbook savings except that the depositor receives a monthly statement showing all transactions
The depositor can usually withdraw funds at any time without paying a penalty.
Savings Accounts
Money market accounts accrue high interest with immediate access through checks, but have a high minimum balance requirement. Money Market Deposit Account: account that
pays relatively high rates of interest, requires a minimum balance, and allows immediate access to money
Customers can usually make withdrawals from a money market account in person at any time but can only write a certain amount of checks against the account.
Time Deposits
Time deposits refers to a wide group of savings plans or certificates of deposit (CDs) with a high interest rate that increases over time.
A depositor cannot remove funds before a certain time period or maturity without paying a penalty.
Time Deposits: savings plans that require savers to leave their money on deposit for certain periods of time
Time Deposits
The period of time at the end of which deposits will pay a stated rate of interest is called maturity. The date of maturity can vary from seven days
to eight years or more.
Time deposits are often called Certificates of Deposit (CDs), or savings certificates. Certificates of Deposits: time deposits that
state the amount of the deposit, maturity, and rate of interest being paid
Time Deposits
Insuring Deposits Before the 1930s, people could lose all the money
in their accounts if the bank failed.
Presiden Franklin Roosevelt signed legislation, creating the Federal Deposit Insurance Corporation, to protect deposits after a number of banks failed during the Great Depression.
Now the federal government insures bank accounts (in FDIC member banks) up to $250,000, giving people security when making deposits.
CHAPTER 6SECTION 2Investing: Taking Risks
with Your Savings
Stocks and Bonds
Stock Returns Stockholders: people who have invested in a
corporation and own some of its stock
Corporations are required to issue stock.
Stocks entitle the buyer to future profits and assets of the corporation.
Stockholders make money through dividends, return on bought stock, or by speculating— buying stock hoping it will increase in price so they can sell it at profit.
Stocks and Bonds
Capital Gains and Losses A capital gain is money earned by selling
stock for more than you paid for it.
A capital loss is money lost by selling stock for less than you paid for it.
Taxes must be paid on capital gains whether it is increased stock value or increased property value.
Stocks and Bonds
Bonds A bond is a certificate promising to repay a
loan at a stated interest rate.
A bondholder is NOT part-owner of the organization.
Stocks and Bonds
Tax-Exempt Bonds Tax-Exempt bonds earn tax-free interest.
Tax-Exempt bonds are good investment for wealthier people who would otherwise pay high taxes on interest earned from investments.
Stocks and Bonds
Savings Bonds With savings bonds you pay half of the bond’s
face value and the interest increases yearly until the face value is reached.
The United States has issued war bonds, a type of savings bond, in the past to raise money for the military.
Stocks and Bonds
T-Bills, T-Notes, and T-Bonds T-Bills, T-Notes, and T-Bonds are government
bonds exempt from state and local tax and mainly for larger investments.
The notes are sold in minimums of $1,000. Treasury bills mature in 3 months to 1 year. Treasury notes have maturity dates of 1-10
years. Treasury bonds mature in 10 or more years.
Stock and Bond Markets
Stocks are bought/sold through brokers. Broker: person who acts as a go-between for
buyers and sellers of stocks and bonds
If an investor in interested in buying or trading corporate shares, he or she can contact a brokerage firm, which will perform the service for a fee.
Stock and Bond Markets
Stock Exchanges Stocks are traded at stock exchanges. Brokerage firms communicate with the busy
floors of the stock exchanges. The larges stock exchange is the New York
Stock Exchange (NYSE). Most of the companies traded on stock
exchanges are among the largest, most profitable corporations in the country.
Stock and Bond Markets
Over-the-Counter Markets Stocks that are not traded in a specific place
are called over-the-counter stocks. Companies on Over-the-Counter Markets are
usually smaller companies . Unlike organized stock exchanges, over-the-
counter stocks are not traded in a specific place, rather brokerage firms hold shares of stock that they hold for investors.
Stock and Bond Markets
Bond Markets Bonds are sold on exchanges and over-the-
counter markets.
Mutual Funds Mutual Funds are investment companies that
combine many investors’ funds to buy a large variety and quantity of stocks.
Some mutual funds mirror index funds. Managed mutual funds have managers who
adjust and mix the stocks bought, attempting to generate the highest yield.
Stock and Bond Markets
Money Market Funds Money market mutual funds allow investors to
write checks against the money in the fund. Money market funds usually use investors’
money to buy the short-term debt of businesses and banks.
Mutual funds and money market funds are not insured by the federal government.
Government Regulations
The Securities and Exchange Commission regulates brokerage firms, stock exchanges, and most businesses that issue stock.
Congress passed the Securities Act to avoid another stock market crash.
The Act requires a prospectus to be given to each potential buyer of stocks or bonds.
CHAPTER 6SECTION 3Special Savings Plans and Goals
Investing for Retirement
Most companies have pension plans, such as 401k, that provide retirement income.
Some people will combine a retirement plan with their Social Security checks because Social Security alone is not enough.
Personal or private pension plans have the benefit of tax savings.
Investing for Retirement
Individual Pension Plans Established by the Keogh Act of 1962 and
designed to help self-employed people set up their own pensions.
The Keogh plan is an individual retirement plan for self-employed people where they can save up to 15% of income.
Investing for Retirement
IRAs Traditional IRAs allow you to contribute up to
$3,000 per year, which is not taxed when put in, and any earnings and interest are not taxed until money is withdrawn.
Roth IRAs allow you to save up to $3,000 per year, which is taxed when put in, interest and earnings are never taxed, and money is not taxed when withdrawn.
Investing for Retirement
Real Estate as an Investment Real estate is a popular form of investing for
the future.
Housing generally increases in value over time.
Buying undeveloped land is a more risky investment.
It is hard to turn real estate into cash on short notice.
How Much to Save and Invest?
Saving involves a trade-off like every other activity.
There are many factors involved in deciding how much to save versus how much to invest. How much do you spend on your fixed expenses? What are your reasons for saving? How much interest can you earn on your savings
and, therefore, how fast will savings grow? How much income do you think you will be
earning in the future?
How Much to Save and Invest?
Invest in several different types of accounts to lower your overall risk (diversify).
If you cannot afford any losses, use banks or savings bonds.
Your values may affect your investment choices.
