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Chapter 7

Chapter 7. Saving and Investing. Focus Questions. Why should you save? What is the difference between saving and investing?. Save this each week … at % interest … in 10 years you’ll have $7.00 5% $4,720 14.00 5% $9,440 21.00 5% $14,160 28.00 5% $18,880

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Chapter 7

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  1. Chapter 7 Saving and Investing

  2. Focus Questions • Why should you save? • What is the difference between saving and investing?

  3. Save this each week … at % interest … in 10 years you’ll have $7.00 5% $4,720 14.00 5% $9,440 21.00 5% $14,160 28.00 5% $18,880 35.00 5% $23,600 You can buy … two fast food meals or one movie ticket (and a candy bar) or save $7.00 this week. You can buy … two small cheese pizzas or one large pepperoni pizza, delivered or one new CD or save $14.00 this week. What can you give up to save for your financial goals? pay yourself first (a little can add up) teens – lesson 12 - slide 12-A

  4. What is Saving? • Saving—the setting aside of income for a period of time so that it can be used later. • Results of saving? • When an individual saves, the economy as a whole benefits because savings provides money for others to invest or spend. • FDR created the FDIC (Federal Deposit Insurance Corporation) to protect all savings after the Depression.

  5. Interest is returned to saver/depositor People deposit savings to get interest. Businesses pay interest to financial institutions Businesses use $ to expand and improve Financial Institutions loan $ to businesses Computers Trucks Plant Equipment

  6. Where Do You Save? • Some people save at home • Financial Institutions • Savings Plans • Something with interest. • Interest is the payment people receive when they lend money or allow someone else to use their money.

  7. Savings Account • Passbook Savings Account • Account for which a depositor receives a booklet in which deposits, withdrawals, and interest are recorded. • Statement Savings Account • Account similar to a passbook except that the depositor receives a monthly statement showing all transactions. • Money-Market Deposit Account • Account that pays a higher interest rate and allows you to write checks. The trade-off is that you must keep a higher minimum balance.

  8. Time Deposits • Time Deposits • Savings plans that require savers to leave their money on deposit for a certain amount of time. The period is known as maturity. • CD’s—Certificate on Deposit

  9. simple interest calculation Dollar Amount x Interest rate x Length of Time (in years) = Amount Earned example If you had $100 in a savings account that paid 6% simple interest, during the first year you would earn $6 in interest. $100 x 0.06 x 1 = $6 At the end of two years you would have earned $12. The account would continue to grow at a rate of $6 per year, despite the accumulated interest. compound interest calculation Interest is paid on original amount of deposit, plus any interest earned. (Original $ Amount + Earned Interest) x Interest Rate x Length of Time = Amount Earned example If you had $100 in a savings account that paid 6% interest compounded annually, the first year you would earn $6.36 in interest. $100 x 0.06 x 1 = $6 $100 + $6 = $106 With compound interest, the second year you would earn $6.36 in interest. The calculation the second year would look like this: $106 x 0.06 x 1 = $6.36 $106 + 6.36 = $112.36 How simple and compound interest are calculated teens – lesson 12 - slide 12-E

  10. Relating Saving to the Economy • How can saving benefit the economy?

  11. Investing • Taking risks with your savings • Types of investing • Stocks • Bonds • Mutual Funds • Real Estate

  12. Stocks • Corporations are formed by selling shares of stock (also called securities). • A stock gives you ownership of a corporation. Thus you are called a stockholder. • Stockholders make money by dividends and speculation. • A dividend is money paid to each stockholder during a time of profit. • Speculation is the money earned by selling your stock back during a profit time. • Money gained or lost during a stock holding time is known as capital gains and capital loss.

  13. Capital Gain Example On December 1, you buy 100 shares of Best Buy @ $45 per share. You hold on to the shares until July 15 at which time they are selling for $52 per share. What is your capital gain? $52 x 100 = $5200 $45 x 100 = $4500 Capital gain = $700 Capital Loss Example On December 1, you buy 100 shares of Best Buy @ $45 per share. You hold on to the shares until July 15 at which time they are selling for $42 per share. What is your capital loss? $45 x 100 = $4500 $42 x 100 = $4200 Capital loss = $300 Capital Gain/Loss

  14. Bonds • A bond is a certificate issued by a company or the government in exchange for borrowed money. • In return it promises to pay a stated rate of interest over a stated period of time, and then to repay the borrowed amount (principal) in full at the end of that time.

  15. Types of Bonds • Tax-exempt bonds • Sold by local and sate governments without federal, state, or local tax. • Interest is not taxable • Savings bonds • Sold by the federal government. • You receive interest updates every 6 months • Interest is Taxable • T-Bills • Minimum $10,000—matures in 3 months to 1 year • Interest is only taxable by federal govn’t • T-Note • Minimum $1000-$5000—matures in 2-10 years. • Interest is only taxable by federal govn’t • T-Bond • Minimum $1000-$5000—matures in 10 or more years. • Interest is only taxable by federal govn’t

  16. Difference Between Stocks and Bonds

  17. Stocks are bought and sold through brokers on a stock exchange either at a brokerage firm or on the internet. A broker is a go between for buyers and sellers NYSE—New York Stock Exchange Stocks can also be acquired on your own. These are called over-the-counter stocks. NASDAQ has the largest volume of over-the-counter stocks Bonds Bonds are sold over-the-counter and on the Internet How do you buy stocks and bonds?

  18. Mutual Funds Investing in the stock market where your money is pooled with many other individuals to buy stocks, bonds, or other investments. Usually a diversified portfolio of stocks and bonds. Most are invested into one of two indexes. DJIA S&P Money Market Fund A type of mutual fund used to buy the short term debt of businesses and banks You may write a check against the amount you have in that fund. Mutual Funds and Money Market Funds

  19. Government Regulations • SEC • Securities and Exchange Commission • Regulates brokerage firms, stock exchanges, most businesses that issue stock. • Investigates any dealings among corporations that affect the value of stock • Mergers

  20. Is property the route to wealth?

  21. Special Savings Plans and Goals Retirement

  22. Special Savings Plans and Goals • Investing for retirement • Pension plans are the most popular of the retirement income plans. • 401K is the most popular • A portion of your check is withheld and a company matches that amount to be paid with interest upon retirement or buyout. 60 Minutes: The 401K Fallout

  23. Special Savings Plans and Goals • Investing for retirement • Pension plans are the most popular of the retirement income plans. • 401K is the most popular • A portion of your check is withheld and a company matches that amount to be paid with interest upon retirement or buyout. • Individuals can set up their own plans: • Keogh Plan—15% of your income, deductible for yearly taxes • Traditional IRA—Set up for people earning less than $30,000 a year. You can contribute up to $5000 a year and deduct that amount from your taxes. • Roth IRA—You can contribute up to $5000 a year. This amount is not tax deductible now, but rather later the interest earned is tax deductible.

  24. IRAs – an example of a returnon investment contributions made only between ages of 22–30 (9 years) • $2,000 contributed each year • Total investment of $18,000 • At an interest rate of 9%, by age 65 will have $579,471 contributions made only between ages of 31–65 (35 years) • $2,000 made contributed each year • Total investment of $70,000 • At an interest rate of 9%, by age 65 will have $470,249 teens – lesson 12 - slide 12-N

  25. Real Estate as an Investment ways to invest • Buy a house, live in it, and sell it later at a profit. • Buy income property (such as an apartment house or a commercial building)and rent it. • Buy land and hold it until it rises in value. advantages • Excellent protection against inflation. disadvantages • Can be difficult to convert into cash. • A specialized type of investment requiring study and knowledge of business. capital gains: profits from the sale of a capital asset such as stocks, bonds, or real estate. These profits are tax-deferred; you do not have to pay the tax on these profits until the asset is sold. Long-term capital gains occur on investments held more than 12 months. Short-term capital gains occur on investments held lessthan 12 months. teens – lesson 12 - slide 12-L

  26. How Much Do You Save? • Evaluate your amount of risk • If investing, spread your investments out—diversification • How much do you value now or later?

  27. the rule of 72 How many years will it take to double my money? 72 DIVIDED BY = YEARS TO DOUBLE A SUM OF MONEY INTEREST RATE At what interest rate will my money double in a set number of years? 72 DIVIDED BY = INTEREST RATE REQUIRED YEARS TO DOUBLE INVESTMENT

  28. Relating Investing to the Economy • How does investing play a part in the economy?

  29. Career Opportunity • Stock Broker • Job Description • Relay investors’ stock orders to the floor of a securities exchange • Offer financial counseling and advice on the purchase or sale of particular securities. • Qualifications • College Degree • Pass a state licensing exam and the General Securities Registered Representative Exam • Median Salary:$38,800 • Job Outlook: Above Average

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