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Unit 5: Saving and Investing

Personal Finance Holmen High School. Unit 5: Saving and Investing. Objectives. Understand various types of investments Understand advantages/disadvantages of each type of investment Analyze appropriate investments for different life decisions. Understanding Risk.

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Unit 5: Saving and Investing

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  1. Personal Finance Holmen High School Unit 5: Saving and Investing

  2. Objectives • Understand various types of investments • Understand advantages/disadvantages of each type of investment • Analyze appropriate investments for different life decisions

  3. Understanding Risk • Risk is the potential of loss. • Explain the relationship between personal risk and financial risk.

  4. Meet Daphne • Daphne’s grandmother just passed away. • Daphne received $10,000 as an inheritance.

  5. Daphne Needs to Think About • Goals • Time Frame • Risk Tolerance

  6. Daphne’s Options • Checking Account • Certificate of Deposit • Bonds • Real Estate • Stocks • Mutual Funds/ETF’s Lending Investments Ownership Investments

  7. Daphne Opens a Checking Account • Daphne puts $10,000 into a checking account

  8. Advantages of Checking Account • No Risk • FDIC Insurance on $250,000 • Liquidity • Easy access to your money • Convenience • Online Bill Pay, Direct Deposit, ATM • Building Relationship • Easier to get loans (Homes, Cars, Business)

  9. Disadvantages of Checking Accounts • Lousy Interest Rate • Under 1% • Inflation • Typically 3% • Fees • Debit Card, Overdraft • Not a Long Term Investment

  10. Daphne’s $10,000 After 5 Years • Initial Investment $10,000 • Interest Rate .25% • Term 5 Years • Return After 5 Years $10,125

  11. Certificates of Deposit • Lend Money to Bank • Specific Term • 3 Months • 6 Months • 1 Year • 2 Years • 5 Years • Guaranteed Rate of Return • 1%-3%

  12. Current CD Rates

  13. Certificate of Deposit • Set Payoff Date • Guaranteed Interest • Short Term Goals • Inflation • Penalty for Early Withdrawal • Not Long Term Investment Advantages Disadvantages

  14. Daphne’s $10,000 After 5 Years • Initial Investment $10,000 • Interest Rate 1.68% • Term 5 Years • Investment After 5 Years $10,868

  15. Bonds • Issued by corporations or governments when they need to borrow money • Interest Payments every six months • Set Payoff Date

  16. Coca-Cola Issues Bonds • Coca-Cola needs to borrow money to build a new plant • Agrees to issue bonds paying 6% • Will pay back money in 5 years

  17. Coca-Cola Issues Bonds • Investors Loan Money • Paid Interest Twice a Year • Money is Repaid At End of Term

  18. Daphne’s $10,000 Investment • Lends $10,000 to Coke • Receives $300 Every January • Receives $300 Every July • After 5 Years, Daphne gets her $10,000 Back

  19. Daphne’s $10,000 After 5 Years • Initial Investment $10,000 • Interest Rate 6% • Term 5 Years • Investment After 5 Years $10,000 • Interest Paid Over 5 Years $3,000 • (6% a Year)

  20. Advantages Disadvantages • Wanted Steady Income • Elderly • Doesn’t need the Money • Enjoys Safety • AAA Rating (Gov’t) • Company Goes Broke • Blockbuster, Best Buy • Inflation • 3% per year • Needs the Money • Illiquid A Bond would be good for her if… A Bond would not be good for her if…

  21. Stocks • Ownership in a Company • Profit When Company Does Well • Lose Money When Company Performs Poorly

  22. Advantages Disadvantages • Highest Return • Long Investment Timeframe • Okay with Risks • Company Goes Broke • Blockbuster, Best Buy • Volatile Market • +20% • -50% Stocks would be good for her if… Stocks would not be good for her if…

  23. Daphne’s $10,000 After 5 Years • Bull Market (Good Market) • Initial Investment $10,000 • Rate of Return 20% • Term 5 Years • Investment After 5 Years $24,883 • Nothing Else Comes Close!

  24. Daphne’s $10,000 After 5 Years • Average Market • Initial Investment $10,000 • Rate of Return 10% • Term 5 Years • Investment After 5 Years $16,105 • That’s Average!

  25. Daphne’s $10,000 After 5 Years • Bear Market (Bad Market) • Initial Investment $10,000 • Rate of Return -10% • Term 5 Years • Investment After 5 Years $5,905 • SUBSTANTIAL RISK!!!

  26. Checking Account

  27. Assessment • Scratch Sheet of Paper • Will Be Turned In • Will NOT Be Graded • Number 1-5

  28. Question #1 • 1. Patrick is a senior in high school who is working part time to save up for college. He has $4,000 saved up to pay for his first semester next year. He knows he will not need the money for another 12 months and does not want to lose it. Which investment is right for Patrick?

  29. Question #2 • 2. Jennifer and Tim just recently got married. As a wedding present, they received $5,000 from Tim’s parents. They would like to invest the money over the long term and will not need it for another 30 years. Which investment is best for them?

  30. Question #3 • 3. Dorris is a retired grandmother with three children. She has $25,000 that is not for anything specific. She wouldn’t mind receiving a little extra income to help her pay for her prescriptions. What investment would be right for her?

  31. Question #4 • 4. Kevin is saving up money to buy his dream car. He wants to wait for the “perfect opportunity” to buy his dream car. He does not know if/when his it will be for sale. He has $15,000 saved up. Which investment is right for Kevin?

  32. Question #5 • 5. Explain the relationship of Risk/Reward. Explain why the relationship is this way.

  33. Climbing a Radio Tower

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