Investing in Your Future

1. Investing in Your Future Developed by: Joel Schumacher Associate Specialist jschumacher@montana.edu Dept. of Agricultural Economics & Economics MSU Extension

2. What are your goals? • This year: • Improve your free throw shooting? • Improve your grades? • Buy a car? • In the next few years: • Have a grand champion project at the fair? • Improve your ACT score? • Go to college?

3. How are you going to achieve your goal? • Jay’s Goal • Jay wants to be a starter on next year’s basketball team. • How does Jay achieve this goal? • Jay gives up time he could have spent doing other things. • Jay spends this time in the gym improving his basketball skills.

4. How are you going to achieve your goal? • Kayla’s Goal • Kayla wants to buy a car • How does Kayla achieve this goal? • Spends less money on food, music & clothes • Kayla gives up some of these items to save money • Kayla saves this money to help purchase a car • Spends more time working at a job • Kayla gives up time she could have spent doing other things • Kayla’s employer pays her for time & effort • Kayla uses this money to help purchase car

5. What does college cost? • Tuition & Mandatory Fees • Carroll College $25,198 • Rocky Mountain $22,892 • MSU $6,428 • MSU-Billings $5,470 • MSU-Northern $4,642 • Montana Tech $6,094 • UM $5,775 • UM-Western $3,945 * Tuition & Mandatory Fees for full time students, 2011-2012

6. College Costs • What % of MT College Graduates have student debt? • 68% • What was the average student debt? • $22,346 Source: Project on Student Debt (2009)

7. How can I invest in my future? • We all have one resource? Time • Time can be used to “work” to earn money. • Time can be used to learn new skills that will improve our future opportunities.

8. Where is this money coming from? • Job • Gifts (birthday, Christmas) • Allowance • 4-H Animal Project Sale • Others places? • Next Question: • Where do I put my money until I need it?

9. Part II: Investments

10. Investment Options • Insured Assets • Savings Account, CDs • Bonds • Corporate, Government, Savings Bonds • Stocks • Common & Preferred • Hard Assets • Livestock, Real Estate, Gold • Mutual Funds

11. Insured Investments Types of Investments • Savings Accounts • Certificates of Deposit • Some Money Market Accounts • Checking Accounts

12. What is the current national average rate for 6 month CDs? • 0.78% • 1.19% • 1.92% • 2.40% • 3.12%

13. Insured Investments • Low Risk • Generally these accounts pay interest as a set interest rate • Insured by FDIC or NCUA • Historically Lower Returns • $100 invested 1/1/1990 would be worth: 12/31/2009 • 6-Month CD: $253 • S&P 500: $326 • Gold: $285 • 20 Year Average Return: 4.59% annually

14. Insured Investments • Federal Deposit Insurance Corporation (FDIC) National Credit Union Administration (NCUA) • $250,000 per person per category • If the bank fails… • FDIC takes over the bank • It sells the pieces to other banks • Then pays depositors up to the insurance limits

15. Lower Volatility

16. Savings Bonds • Basic Information: • Savings Bond is a very small loan from you to the federal government • These bonds earn interest for 30 years or until you redeem them • Individuals under age 18 can purchase them directly • Can be purchased in amounts of $25 and up • Can be purchased online (www.treasurydirect.gov) or many financial institutions • Interest may be tax free if used for educational expenses

17. Savings Bonds • Two Types of Savings Bonds • Series I: • Part of the interest rate is fixed for the life of the bond. • Part of the interest rate is based on inflation. • Series EE: • Rate is adjusted semi-annually • Based on average rate of 10 year Treasury Securities.

18. Bonds • A bond is a loan from an investor to a company or organization • Who issues bonds? • Big Businesses • School Districts • City, County, State and Federal Governments • Water and Sewer Districts • Airport & Port Authorities

19. How a Bond Works:

20. Bond Pricing • The company holds a “bond” auction • Investors bid on bonds. • The company doesn’t know the price until the sale. • Bonds from issuers with strong credit ratings will sell for higher prices.

21. Calculating Current Yield • Divide the Interest Payment by the Price of the bond Current Price Interest Yield $ 975 $60 6.15% $1,000 $60 6.00% $1,050 $60 5.71%

22. Bond Risks • Default Risk: • The bond issuer might not make the bond payments • Some bonds have collateral • Inflation Risk: • Interest payments on bonds generally don’t adjust for inflation

23. Stocks • A share of stock represents ownership of a company • Residual Interest Holder • Everybody else gets paid before shareholders • Suppliers, Employees, Bond Holders, Banks, Utility Companies, etc. • Everything that is left belongs to shareholders

24. Risks & Rewards of Stocks • Higher Volatility • Historically Higher Returns • $100 invested 1990 would be worth: 2009 • 6-Month CD: $253 • S&P 500: $326 • Gold: $285 • 20 Year Average Return: 7.6%

25. Higher Volatility

26. Stocks Ways to make money from a stock: • The Share Price Increases Capital Appreciation • The Stock issues a Dividend Income

27. Stocks Share Price Equals: + Value of assets - Value of liabilities + Present value of future earnings Do we know what these values are?

28. Hard Assets • Examples: • Real Estate • Precious metals: Gold, Silver, etc. • Collectibles: Art, Baseball Cards, Coins • Ag Commodities: Corn, Cattle, Wheat, etc. • Energy Commodities: Oil, Natural Gas, Coal

29. Hard Assets • Different Risks than for Monetary Assets • Livestock require upkeep (feed, shots, etc.) • Livestock can die, be stolen, or fail to produce a calf. • How quickly can you convert it to cash if you need the money?

30. Mutual Funds • A mutual fund share represents a small piece of ownership in a large investment pool. • Each mutual fund has different investment goals. • Examples: • Fund X invests only in stocks of US companies. • Fund Y invests in stocks and bonds of manufacturing companies based in Europe.

31. Mutual Funds • Advantages: • Diversification: • You own dozens of stocks and bonds buy purchasing just one share of a mutual fund. • Professional Investment Management: • The fund has a professional investment management team that manages the fund.

32. Steps to Get Started • Put your goals in writing • How much will they cost? • When do you want to achieve the goal? • Where will your savings come from? • Job, animal sale, gifts • Where will you put your money until you need it? • How much risk are you willing to take?

33. Other Issues for Young Investors • Minimum Investment Rules • Lower rates for accounts will small balances • Mutual Fund companies often require $500 to $10,000 to open an account. • Restrictions on ownership for minors • Might need a joint account to own stocks & bonds

34. Investing at a Young Age • Key Points • Save for a reason. What is your reason? • What is your goal? How much and when? • Where will you put your money until you need it?

35. Questions