Unit I - Personal Finance Building Wealth: Saving & Investing.
<ul><li><p>Unit I - Personal Finance Building Wealth: Saving & Investing </p></li><li><p> Building Wealth Who is wealthy? </p><p>Joe FlashGrandma Smith Income - $150,000/ year Retired / $1800 month SS checkWife & 2 kids 21, 600 / year Retired , lives alone </p><p>Cars- 2011 BMW / 2010 Ford 150 Car 1999 Toyota Corolla House 5 Bedroom, 4 bath House three bedroom gated community, media room2 bath. & pool. </p><p>What is the missing information? </p></li><li><p>Personal Finance Key Terms Income - the money received for the exchange of services (labor), or from other sources, as rents or investments.Ex. Wages (salary), interest on savings, dividend payments, lottery winnings, etc. </p><p>Assets- money (or equity) and or other valuable belongings (real estate, stocks, bonds, jewelry, etc) </p><p>Liabilities financial obligations (loans (cars, home, student), credit cards, etc) </p><p>Principle the original amount of money borrowed in a loan. </p><p>Interest 1) the money paid for borrowing money 2) the money earned on deposited or loaned money</p><p>Liquidity the ease of access to your cash, or in which an asset can converted to cash. (ex. Checking account very liquid- ATM, Valuable painting not liquid) </p></li><li><p>Unit I - Personal FinanceFinancial Planning using rational savings & investment decisions to achieve a future goal. </p><p>Setting long & short term goals* Short Term goals saving for clothes, weekend trip, or new golf club. * Long Term prom, spring break college, trip to Europe, retirement, etc. </p><p>Questions to ask: What does it cost (price & other)/ how much $$ do I need? What do I have to do to achieve this goal? How long will it take? </p></li><li><p>Saving & Investing Savings money deposited in a bank or other financial institution* (security) for later use.- Short term goals- clothes , cars, vacations, emergencies, etc. </p><p>Investment- money used today to purchase an asset with expectation, not the guarantee, that the asset will increase in value. - Long term goals college education, retirement, vacation home, etc. </p></li><li><p>Savings / Banking Banks 2 major functions 1. Store money providing interest bearing accounts. (banks pay you interest (small %) on accounts for the use of your money)- Currently accounts Insured up to $250,000*/FDIC </p><p>2. Loan Originator Provide loans (financing) to individuals & businesses (Mortgages, Car, College, etc) charging interest, (consumers pay to use the money). ***Remember businesses are consumers too, they borrow money for capital investments (ex. new office equipment, factories, etc) </p><p>Banks profit The difference between the interest paid to customers (Saving Accts & CDs) & the interest earned on loans (Cars, Mortgages. Etc.) = profits for banks Pay 2% on savings accounts / charge 7% on a car loan = 5% profit for the bank!)</p><p>Additional Services provided by banks & other financial institutions: Checking accounts / debit Investments for customer: CDs & Money Market Accounts </p></li><li><p>Saving Money: Account Options Saving Accounts Interest paid on Money in Account (More $$ more return) * Interest Low (Little Risk= low return) * Minimum Deposit Required* (ex. You have to keep at least $1000 in account)* Guaranteed - $250,000* Liquid easily converted to cash (You have access to your money with no penalty) </p><p>CDs Certificates of Deposit (Timed Accounts) * Requires a deposit for a specified time period (ex. 5 year at 6%)* Deposits range from $250 - $100,000* Higher Rates than other accounts & fixed * Guaranteed - $250,000* Reduced Liquidity penalties for early withdraw</p><p>- Liquidity vs. return- in general, the more liquid an account the lower the return. Why? </p></li><li><p>Other Financial Institutions -S & Ls (Savings & Loans) same functions as bank (store money/ make loans) but centered on consumers (not businesses) & focused on home mortgages (loans)</p><p>-Credit Unions (Non-profits) owned by the members of the C.U. and offering banking services. Georgia Teachers Credit UnionLockheed Credit Union </p></li><li><p>Saving Start early & contribute often (every pay check) </p><p>Simple interest is interest paid only on the principle/ Deposit. (ex. $100 at 5% for one year = $5, so you end up with $105)</p><p>Compound interest is interest paid on the principle & the accumulated interest. (so, after the second year of $100 at 5%, you will be paid interest on the $105 (year 2 balance = $110.25 , year 3 $115.76) growing or compounding the money you originally invested, and so on. </p></li><li><p>InvestingInvestment - using money or capital in order to gain profitable returns (interest), income, or appreciation in value.</p><p>Types of Investments: Stock (Corporations) - selling shares (pieces) of the company to the public (each share represents a % of ownership. So, if 10,000 shares are sold to the public & you own 100 shares you own 1% of the company. </p><p>Why do companies like Coca-Cola, Wal-Mart, & Home Depot sell stock? What are the costs & benefits of selling stock? Examples of companies that do not sell stock? Who owns a corporation? </p><p>Stocks provide 2 things: Income - Stockowners receive a dividend or percent of the year end profits (more stock = more income*). Investment - Stockowners can hold the stock hoping the value of the company will increase & sell at a higher price. (imagine if you bought Microsoft Stock in the 1980s!!!) </p></li><li><p>Bonds Bonds are issued by a corporation or govt. (city, state, or federal) in exchange for a loan (money borrowed) from the investor. - So, when you buy a saving bond, you are loaning the govt. money, they pay you back & pay you interest. </p><p>Bond holders earn interest (percentage of the original amount borrowed) at intervals specified in the contract. (ex. 2% pay quarterly for five years) </p></li><li><p>Mutual Fund Diversification Investments in which money from many investors is pooled together & invested in a variety of stocks & bonds. </p><p>Advantages: investors do not have to personal manage their investmentsRisk is spread out among a number of different investments </p><p>Investment Banks offer a variety of mutual fund options: high risk / high yield low risk / low return </p></li><li><p>Other investments opportunities Real Estate commercial or residentialArtAntiques Rare / scarce collectiblesEtc. </p></li><li><p>Investing: Risk vs. Return In general, the greater risk you take, the higher the potential reward. Little risk = little return </p><p>High Risk / High return </p><p>Low risk / low return Real Estate Stock Start ups </p><p>Stocks Blue Chip </p><p>Corporate Bonds, State & Municipal Bondssaving accounts & CDs U.S. Bonds </p></li></ul>