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Chapter 6 Saving & Investing. Deciding to Save There are many reasons to save: for purchases that require more funds than you usually have at one time. in case of emergencies. for your retirement. When an individual saves, the economy as a whole benefits.
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Chapter 6 Saving & Investing
Deciding to Save • There are many reasons to save: • for purchases that require more funds than you usually have at one time. • in case of emergencies. • for your retirement.
When an individual saves, the economy as a whole benefits. • Saving provides money for others to invest or spend. • Saving also allows businesses to expand, which provides increased income for consumers and raises the standard of living.
Savings • Setting aside income for a period of time so it can be used later. • Where to save ? • Where money can grow (interest) • FDIC- (Federal Deposit Insurance Corp.)- the federal government guarantees the safety of your deposits in member banks up to $250,000.
Interest- the payment people receive when they lend money or allow someone else to use their money.
The Power of Compounding Compounding- the ability of an investment to generate earnings that can be reinvested to earn still more earnings. Compound Interest- interest paid on the original amount deposited in saving accounts, but also on all interest earned by those savings. $1000- 6% interest 1st year- $60 ($1,000 X 0.06)= $1060 2nd year- $63.60 + $1060= $1,123.60
Rule of 72 To find the number of years required to double your money at a given interest rate, you divide the compound return into 72. The result is the approximate number of years that it will take for your investment to double. For example, if you want to know how long it will take to double your money at 12% interest, divide 12 into 72 and you get six years.
Savings Accounts Money Market-account that pays relatively high interest rates, requires a minimum balance, and allows immediate access to money.
Certificates of Deposit (CD’s)- savings plans that require savers to leave their money on deposit for certain periods of time. • Low Risk • Can open with as little as $1000. • You agree you won’t touch money you deposited for a specific period of time. Maturity-period of time at the end of which time deposits will pay a stated rate of interest.
Stocks-Investors buy shares, each of which is a unit of ownership in the company. Shareholders receive a portion of the company’s profit in the form of dividend. • Risk is high • Return is high • Stocks lose value if the company loses money.
The Dow- Dow Jones & Co.- Stock market index that shows how 30 large publicly owned companies based in the United States have traded. Standard & Poor’s (S&P) -Stock market index based on the market capitalizations of 500 leading companies publicly traded in the U.S. stock market, as determined by Standard & Poor's. NASDAQ- Stock market index that shows both U.S. and non-U.S. companies.
Bonds- a certificate issued by a company or the government in exchange for borrowed money. • Government Bonds- Investors loan the government money by buying a • bond and are paid back with interest after a fixed period of time. • Savings Bonds • Low Risk • Low Return
Corporate Bonds- Investors loan money to a company by buying a bond • and are paid back with interest after a fixed period of time. • Increased risk because companies can, and do, go out of business. • Risk-Moderate • Return- Moderate to High
Mutual Fund-Collections of stocks and bonds that are professionally managed. They help investors diversify (spreading of investments in several different types of accounts to lower overall risk.) • Money Market Fund- uses investors’ money to buy the short-term debt of businesses and banks
Pension Plans-company plans that provide retirement income for their workers 401(k)- is most common company retirement plan. • Money is taken out of an employee’s paycheck and put into a retirement account. • Employers often match all or part of an employee’s contributions.
Other Retirement Plans IRAs (individual retirement account )-private retirement accounts sponsored by the government. Individuals can deduct IRA contributions from taxable incomes or take the money out tax free when they retire. $5,500/$6,500 Seniors. Keogh Plan- people who are self-employed can set aside a specified amount each year and deduct that amount from their yearly taxable income.
Social Security- government program provides cash payments to retired workers. • Taxes paid by workers and employers fund social security. • It is a pay-as-you go system. Taxes paid now go to current retirees.
Real Estate Buying a House
