Savings & Investments

Saving VS. Investing Taxes TIME VALUE OF MONEY Savings & Investments RETURNS Risk Mutual Funds

Time Value of Money – Page 1 • The more time you have to save, the more money you will have at the end of the time period. • The more money you have to save, the more money you will have at the end of the time period. • The higher the rate of interest you can earn, the more money you will have at the end of the time period.

Time Value of Money – Sample 1 Jean has $400 to invest at 5% interest. How much will the money be worth in two years? N _________ I% _________ PV _________ PMT _________ FV _________ Change the number of years to 5. What is the new future value? Change the dollar value to $500. What is the new future value? Change the interest rate to 6%. What is the new future value?

Time Value of Money – Sample 2 Your parents will give you $1,000 each year for your four years of college if you maintain a GPA of 3.0 or higher. How much money will you have at the end of the four years if the money earns 7%? N _________ I% _________ PV _________ PMT _________ FV _________ Change the number of years to 5. What is the new future value? Change the dollar value to $1,500. What is the new future value? Change the interest rate to 8%. What is the new future value?

Dollar Cost Averaging • Investing roughly equal amounts of money at regular intervals • Results in you buying most of your shares at a price that is lower than the average price per share.

$213 ÷ 12 months = $17.75 average price per share $300 ÷ 17.058 shares = $17.59 average price per share

EARLY INVESTOR Value at Age 65: $579,471 Less Investment: 18,000 Net Gain: $561,471 LATE INVESTOR Value at Age 65: $470,249 Less Investment: 70,000 Net Gain: $400,249 Key Concept Alert! Starting your savings and investing early is better than waiting until you are older.

Rule of 72 • You can figure out how long it will take an investment to double by using the Rule of 72. • Simply divide 72 by the interest rate. Example: If an investment is earning 12% interest, the investment will double in 6 years. 72  12 = 6

Inflation and Taxes – Page 3 • Inflation occurs when the price of goods and services rises. • Taxes are usually due on saving and investment earnings. • When making your financial plan you hope to earn enough money to cover losses due to inflation and taxes.

Retirement Plans and Taxes • Set up by the federal government • Allow you to save money from your paycheck before taxes are deducted • You do not pay taxes on the deposits or the investment gain until you withdraw the money • You cannot withdraw any money from the plan before your age 59½ without paying a 10% tax penalty in addition to regular taxes

Employer-Sponsored Plans • 401(k) plans - medium and large corporations • 403(b) plans - non profit organizations like schools and hospitals • SEP and KEOGH Plans - small companies and the self-employed

Individual Plans • Traditional IRA - allows you to put untaxed money up to $4,000 a year into the plan; taxes are due when you withdraw the money • Roth IRA - allows you to invest taxed funds into the plan; no taxes are due when you withdraw the money

Comparison Chart

Tax-Deferred v. Taxable Plans 33% tax bracket

Mutual Funds – page 5 A mutual fund is a pool of stock, bonds or other investments managed by an investment company.

Types of Mutual Funds • Money Market – highly liquid investments • Stock – ownership in a company • Bond – a special loan in a company • Balanced – mixture of stocks and bonds • Global – international stocks and/or bonds • Sector – particular market sector • Indexed – same investments as those in an index Stocks Bonds • Bonds can be… • Domestic – U.S. companies • International – foreign companies • Municipal – local governments

Pricing Mutual Funds The purchase price of a mutual fund is its net asset value or NAV. Total Value of Investments Number of Shares Sold Net Asset Value = The Fidelity Growth Discovery fund has a total value of $968.5 million. The total number of shares outstanding is 66.8 million. What is the net asset value of this fund? $14.50

Mutual Fund Fees Because a mutual fund is managed by a professional, you will be charged fund fees. These fees result in you earning a lower return than if you purchased the same investments individually. Loads: fees charged when you buy or sell shares of the fund. Expense Ratio: the annual percentage the fund takes as payment for its services. Key Concept Alert! Mutual funds provide diversificationand professional management, but you pay for these benefits with fees and lowerreturns.

Saving vs. Investing – Page 4 SAVINGS INVESTING Money you set aside for long-term goals. Include stocks, bonds, mutual funds, and real estate Investments offer no guarantees that your money will grow. • Money you set aside for short-term goals. • Include savings accounts, CDs, and money markets. • Relatively safewith a small return.

Investment Return – Page 4 The rate of return, or yield, is how fast your money grows as a percentageof your original investment. You invested $500 in a stock. Your stock paid out $40 this past year. At the end of the year, you sold the stock for $580. Return = (Sales Price + Dividends) – Purchase Price Purchase Price = ($580 + $40) - $500 = 24% $500 x 100 x 100

Savings & Investments