financial literacy: Saving & investing

1. financial literacy:Saving & investing Where does the “Pay Yourself First” money go???

2. Definitions • Risk: the probability that you’ll lose money if an investment you make provides a disappointing return • Principal: the original amount of money being borrowed or lent • Liquidity: the ease that an asset can be converted into cash • Rate of Return: the ratio of money gained or lost on an investment compared to the total amount of money invested • Inflation: the rate at which the prices for goods and services rise • Capital Gain: the profit that results from an investment when the selling price is higher than a purchase price • Interest: the return earned on an investment • Dividends: part of a company's net profits paid by the company to its stockholders • Asset: an item of economic value either owned by an individual or corporation which could be converted to cash • Diversify: acquiring a variety of assets in unrelated industries that tend not to change in value at the same time • Tax-deferred account: an investment vehicle that allows you to postpone paying income tax that would otherwise be due on earnings you hold until some point the future, usually at retirement

3. Inflation last 20 years • Sustained increase in the cost of goods and services over time… • Decreases the spending power of every dollar… 1990 = $1.00 / 2010 = $0.585

4. Savings Plan • Important – should be part of everyone’s personal financial activities • Used for items we need & want (prioritize)… • Used for future expenses & emergencies… • Treat savings as an expense (pay yourself first)… • Put savings into monthly budget when you earn a regular pay check… • Can save now if you have a part time job (even babysitting counts)!!!

5. Savings • What does it mean to save money??? • Put money away for the future… • Do you save money??? For what??? • Name ways/places to save money??? • At home (not so safe – no interest earned) • Banks (safe – options – earn interest) • Investments • http://www.youtube.com/watch?v=2DBdWeTxXeU

6. Simple & compound interest • Simple Interest • Earnings are calculated from the original principal • Interest = principal x interest rate x time • Example: • Mary put $1,000 in a bank account that paid 2% simple interest. She kept the money in the account for five years. • Interest =1,000 x 0.02 x 5 = $100.00 • Total amount after 5 years = $1,100 • Compound Interest • Earning interest on interest • The interest earned is added to form the new base on which future interest accumulates • Example: • Mark put $1,000 in a bank account that paid 2% compound interest. He kept the money in the account for five years. • A =1000(1+.02)5 • Total amount with compound interest= $1,104.08

7. Simple vs. Compound Interest Simple Compound

8. Doubling Your Money through Compound Interest • RULE OF 72 • An approximate calculation of compounding • Divide 72 by the interest rate to see how long it will take your money to double • http://www.youtube.com/watch?v=5KqEpVciU2E

9. Investing Vehicles… http://www.youtube.com/watch?NR=1&feature=endscreen&v=Yw0wgOCvTjo Stocks, bonds, mutual funds, real estate, collectibles, etc… • In order to expand, it is necessary for business owners/governments to tap financial resources. • Also known as securities… • 2 types of securities: • Debt Securities (bonds): • "Debt" involves borrowing money to be repaid, plus interest. • Equity Securities (stocks): • "Equity" involves raising money by selling interests in the company.

10. Why does a company sell stock??? • What is a stock (shares of a company)??? • A piece of paper that says you’ve bought a part of a company… • You’re “sharing” a company… • You’re a partner in a company with millions of other people… • As a partner, you share in the gains & losses of the company… • Companies can pay dividends (a share of the profits) based on the # of shares you own… • How the Stock Market Works: http://www.youtube.com/watch?v=GnJCOof2HJk&feature=related

11. Stocks – equity securities… • Could earn a high rate of return on your investment… • High risk involved… • Jumping into the stock market can be very over-whelming!!! • The prices of stock change often. Most active stocks change in value during a days trading. • A corporation only has a certain number of shares available to buy. • The laws of supply and demand cause the prices to fluctuate. • Prices depend on general business conditions, company earnings, and what people think is the future prospect of the corporation. • When more people want to buy, the market in stocks will rise. When more people want to sell, prices go down. The trick is to try and guess correctly; buy when the price is low, sell when the price is as high as it is going to go. • Market Value of a stock = price that a share of stock can be bought and sold in the stock market. This can change rapidly… Walking on Wall Street: http://www.youtube.com/watch?v=foaYpoH0Fnk

12. Bonds – debt securities • A bond is like an “IOU”… • A certificate that stands for a loan from you (investor) to the government or company that issued it… • There are 3 different types of bonds: • US Government Bonds (Treasuries) • http://www.youtube.com/watch?v=86cCQUFuAEA • Corporate • http://www.youtube.com/watch?v=KqDW1ut9vJ4 • State & Local Government

13. Stocks and Bonds Information • The main differences are: • A bond is a loan, a stock is equity (ownership)… • Stockholders are subjected to volatility (instability) of the company's stock, bond holders are not… • In the event of bankruptcy, bond holders get paid BEFORE stock holders… • Stockholders may be entitled to dividends, bond holders never are, as they don't own any equity in the company...

14. Certificates of Deposit (CD) Bank pays a fixed amount of interest for a fixed amount of money during a fixed amount of time No risk of loss principal No fees Higher interest rates than savings accounts Restricted access to money

15. Mutual Funds • An investment that pools the money of many shareholders and invests it in a diversified portfolio of securities • Managed by professionals • Low minimum contribution • Gives advantages to small investors that are usually restricted to large investors What is a Mutual Fund? http://www.youtube.com/watch?v=fpcvJiO-rjk Soup Example: http://www.youtube.com/watch?v=bxvr8tZpBDs&feature=related

16. Real Estate as an investment • Buying land and holding it until it rises in value • Buying a property and renting it to others • Good protection against inflation • Difficult to convert to cash

17. Collectibles • Items that are relatively rare in number… • Collectors do not make a profit, or loss, until the item is sold… • High risk… • Examples: • Coins • http://www.youtube.com/watch?v=p_ol_tKQAcg&feature=related • Paintings • Sculptures • Antiques • Baseball cards • PEZ

18. Saving .vs. investing • Process of setting money aside for future spending… • Typically for shorter term needs, 1-3 years away… • car • vacation • emergency fund • Highly liquid… • Lower risk… • Process of setting money aside for future spending… • Typically for a longer term needs, 3-5 years away… • home purchase • college tuition for young child • retirement • Low liquidity… • Varying levels of risk… SAVINGS INVESTING

19. Retirement Plans • http://www.youtube.com/watch?v=b_bRQON5wNE • Plans that help people set aside money to be used after they retire • Federal income tax advantages • Penalty charges apply if money is withdrawn before retirement age • Types • Individual Retirement Account (IRA) • Roth IRA • Pension plans

20. Tax Deferred vs. Tax Free • Tax Deferred • Money that is not subject to income tax until it is withdrawn from an account • Traditional IRA • 401k • Tax Free or Tax Exempt • No income tax has to be paid on earnings produced • Roth IRA • 529 college savings plan • http://www.youtube.com/watch?v=xDIu7bdZuko

21. How to be a Smart Investor • Choose the method of investing that is right for you • Develop a plan and stick to it • The biggest risk is not investing at all • Investing is a necessity NOT a luxury • Set investment goals • Facebook – AOL • http://www.youtube.com/watch?v=lpaYT2DNxCE

22. Use it in a sentence… • You invest for future gain and benefits… • You want to accumulate assets… • You want to build wealth… • You want to invest in assets that will appreciate in value… • You want to limit your spending on depreciating assets… • All savings and investment vehicles subject you to one or more types of risk! • Diversify to minimize risk! • You want to save by “paying yourself first”…

23. A Look At Jay-Z's $450 Million Empire • Is Jay-Z so wealthy just from his music career??? • http://www.youtube.com/watch?v=QQO_TbxGGMo&feature=related