Preparing for a Savings or Investment Program Chapter 8.
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Transcript of Preparing for a Savings or Investment Program Chapter 8.
Saving and Investing
Section 8.1 Objectives How to establish goals for a savings or
investment program How to discuss ways to obtain funds for
investing How to identify the factors that affect your
investment choices
Establishing Your Financial Goals
Goals should be specific and measurableYour goals should correspond with your valuesAsk yourself these questions as you make goals
How do I want to spend my money?How much money do I need to satisfy my goals?How will I get the money?How long will it take to save the money?How much risk am I willing to take when I invest?What conditions in the economy or in my life could
change my investment goals?Are my goals reasonable, considering my
circumstances or future circumstances?Am I willing to make sacrifices to save?What will happen if I do not meet my goals?
Perform a Financial Check-Up
Balance your budget Spend less than you make Limit credit card usage
Have insurance Cover losses from car, home, health
Start an emergency fund Save enough for 3-9 months of expenses
Have other sources of cash Have line of credit available or cash advance capability
for serious emergencies
Money to Get Started
Pay yourself first Treat investment like a normal expense
Employer sponsored retirement plans 401k or 403b
Elective savings programs IRA or Roth IRA
Special savings effort Periodic cuts on spending
Gifts, inheritances, and windfalls
Value of Long-term Savings Plans
How much money do you think you
would have at the age of 60 if you
invested $2,000 every year starting at the
age of 20 at 10% interest? $885,180
Rate of Return
1 5 10 20 30 40
4% 2,0002,000 10,83210,832 24,01224,012 59,55659,556 112,170112,170 190,052190,052
5% 2,0002,000 11,05211,052 25,15625,156 66,13266,132 132,878132,878 241,600241,600
6% 2,0002,000 11,27411,274 26,36226,362 73,57273,572 158,116158,116 309,520309,520
7% 2,0002,000 11,50211,502 27,63227,632 81,99081,990 188,922188,922 399,280399,280
8% 2,0002,000 11,73411,734 28,97428,974 91,52491,524 226,560226,560 518,120518,120
9% 2,0002,000 11,97011,970 30,38630,386 102,320102,320 272,620272,620 675,780675,780
10% 2,0002,000 12,21012,210 31,87431,874 114,550114,550 328,980328,980 885,180885,180
11% 2,0002,000 12,45612,456 33,44433,444 128,406128,406 398,040398,040 1,163,6601,163,660
12% 2,0002,000 12,70612,706 35,09835,098 144,104144,104 482,660482,660 1,534,1801,534,180
Safety and Risk
Safety – chance of losing money is smallRisk – cannot be certain of investmentSpeculative investment – high risk which
might earn large profit in short timeYoung investors tend to take bigger risks,
less to loseOlder investors are conservative so they
can protect savings
Safety and Risk
Safe Can Vary High Risk
Govt bonds and securities Treasury bills Treasury notes Treasury bonds Municipal bonds US Savings Bonds
Savings accounts CDs
Stocks Corporate bonds Mutual funds Real estate
Commodities Options Precious metals and
gems Collectibles such as
coins, stamps, and comic books
These are considered
speculative investments, may earn large profits in short time, but high risk involved
Chance of losing money small
Cannot be certain about the profit of investment
Five Components of Risk
Inflation Return may not keep up with rapid inflation
Interest Rate Fixed rates may hurts you is outside rate rise
Business Failure Lose money on stocks/bonds when business is bad
Financial Market Could be affected by social and political conditions
Global Investment May be risky, keep in mind economics and political stability
Investment Income
Dependable sources CDs, US savings bonds, US treasury
bills – will know exactly how much and
when you will get it
Stock and bonds Research the company and past
payouts
Real estate rentals Speculative investments
Only for those experienced in these markets
Investment Growth
Best ones are common stocks and growth stocks Growth companies usually reinvest profits so immediate dividends not likely, but will grow in value
Investment Liquidity
The ability to buy and sell quickly with
substantially reducing its value
Market conditions may prevent regaining
original investment
Section 8.2 Objectives
How to identify the main types of savings and investment alternatives
How to explain the steps involved in developing a personal investment plan
Stocks
Stockholders buy equity in a company and in turn become a part owner Two types:
Common Stock Preferred Stock
Consider before investing Must find someone to sell to if you want out Current value is partially determined by how much you could sell it for No guarantee of dividend payments
Common Stock
Provides ownership in company Entitles owner to voting privileges Sometimes provides dividends Can provide growth profits if $ value
rises Owner could gain more shares by “stock
splits”
Preferred Stock
Gives advantage of receiving dividends
before common stockholders Consider these before investment in any
stock Company does not have to repay what you paid for
stock Current value of stock is partially determined
by how much someone is willing to pay Company does not have to pay dividends
Corporate and Government Bonds
A bond is a written pledge of company or govt. to repay a specific amount of money, along with interest Matures anywhere from 1 to 30 year with interest paid every 6 months if they can afford it Two key factors affect value of bond
Whether it will be repaid at maturity Whether the corporation/govt. will be able to pay interest until maturity
Mutual Funds
Investors pool money to buy stocks, bonds, and other securities Professional managers who work for investment companies select purchases Great for inexperience investors to have knowledge available for purchases Loss of one fund could be offset by gain in another
Real Estate
Goal is to own property that increases in value to sell at a profit or receive rental income When investing compare with similar properties for pricing, know what financing is available, and cost of
property taxes When purchasing ask:
Why are they selling? Is it in good condition? What is condition of other properties in area? Is there a chance it will decrease in value?
When selling ask: Can you find an interested buyer? Can they get the financing to purchase it?
Evaluating Investment Alternatives
Level 1
Financial Security
Level 4
Speculation
Level 3
Growth
Level 2
Safety and Income
Options, commodities, precious metals and gems, speculative stocks, junk bonds,
collectibles
Income and growth stocks, mutual funds, real estate, convertible bonds
US Treasury securities, conservative corporate bonds, state and municipal govt.
bonds, income and utility stocks
Cash, CDs, savings accounts, money market accounts, US govt.bonds
Low Risk
High Risk
Diversify to spread risk
Developing a Personal Investment Plan
Establish investment goals Decide how much money you will need and by
when Determine the amount of money you have invest List al the investments you want to evaluate Reduce your list of possible investments to a
reasonable number Choose at least two investments so you have
some diversity Recheck regularly to make changes
Section 8.3 Objectives
How to describe your role in a personal investment program
How to identify sources of financial information
Financial Planners
Two things to consider 1) Your income level 2) Your willingness to make your own
financial decisions
If you make less than $45,000 a year,
you may not need one
Types of Financial Planners
Fee-only planners Charge hourly rate ($75 - $200) or flat fee ($500 - several
thousand), may also charge annual fee of .04 to 1% of value on
investments they handle Fee-offset planners
Charge hourly or annual, but reduce it with earnings they make buying/selling investments
Fee-and-commission planners Charge a fixed fee for financial plan, earn commissions
from products they sell Commission-only planners
Earn all money thru commission they make on sales of investments
Selecting a Financial Planner
Look for a planner who will do the following:
Assess your current financial situation Offer a clearly written plan with investment recommendations Discuss the plan with you and answer questions Help you keep track of your progress Guide you to other financial experts and services as needed
Every state varies on certification and licensing required
Managing Your Investments
Evaluate investments Monitor investments
Keep track using Internet and newspaper
Keep accurate records Keep purchase records, commissions and
fees you have paid
Consider tax consequences Tax exempt, tax deferred, taxable
Sources of Investment Information
Internet Newspapers and TV News Programs
Wall Street Journal and CNN Fn Business Publications
BusinessWeek, Forbes, Fortune, Consumer Reports Government Publications
Federal Reserve Bulletin Corporate Reports
Prospectus that discloses information about company selling securities
Statistical Averages Standard & Poor’s 500 Stock Index or Dow Jones Industrial
Investor Services Newsletters and publication from financial people