Savings and Investing Maggie O’Shea E Block. What is Savings? Savings accounts are one of the most...

Savings and Investing

Maggie O’Shea

E Block

What is Savings?

•Savings accounts are one of the most important parts of a solid financial plan. They allow you to access your money at any given time.

•Savings is what people do to meet short-term goals.

•Savings can be built by adding a small portion of each paycheck received. It is recommended to have 6 month to a year’s worth of money saved incase of an emergency.

Calculate your savings using the Savings Caculator!

Savings Calculator: http://www.dinkytown.net/java/CompoundSavings.html

What types of savings accounts are there?

•Passbook Savings Accounts:

•Low-fee accounts

•Usually don’t require a minimum balance

•You are given a small ledger where you record all transactions such as withdrawing and depositing

•High-Yield Savings Accounts:

•Usually require a minimum balance to avoid monthly fees

•Yields a higher interest rate then passbook savings accounts

http://www.ehow.com/about_5408266_definition-interest-rate-savings-account.html

What is investing?

Investing is the use of money for future profit. Investing is risky because there is potential for you to lose money.

There is no guarantee that invested money will grow.

The greater the risk you take with your money, the higher the potential returns on your investment.

What types of investing can you do?

Stocks – (medium to high risk) Your purchase makes you a part-owner of the business. As the company’s value rises or falls, so does the value of the stock. A stock’s value can fluctuate on a daily basis.

Bonds – (low risk) Refers to any securities that are founded on debt. You are lending your money to the government or a business that will pay you back with interest. Bonds are a fixed-income security because the income they pay is fixed when the bond is sold.

Mutual Funds – (risk level varies according to holdings in the fund) Another way for you to invest in stocks without having to take the risk of investing in individual stocks. Mutual funds are very diverse as they represent a variety of markets.

Money Market Funds – (low risk) Mutual funds that invest in short-term bonds. They usually pay better interest rates than a savings account but not as much as a CD (certificate of deposit)

Index Funds – (risk level depends on which index the fund invests in) An index fund is passively managed and simply mirrors the performance of the designated stock or bond index. An example of a particular market index is S&P 500 which includes stocks that are large publicly held companies that trade on either the New York Stock Exchange or NASDAQ.

http://www.invest.us/what-are-mutual-funds.htmlhttp://www.investopedia.com/university/beginner/beginner5.asp

2010 Consumer Action Handbook, pg. 34

Who can invest and save? How do you go about doing it?

Anyone can invest and save. To go about investing:

1. You can do research yourself and invest your money yourself. 2. You can go through an agency who will invest the money for

you. To go about saving:

1. You can go to your local bank to open a savings account and start depositing money right there. You will be asked to for personal identification, your Social Security

number, your address, phone number, current employment information, and your signature.

NEFE High School Financial Planning Program Student Guide, pg. 61

What is diversification? Is it important?

Yes, it is important. Diversification means that an investor should buy investments that aren’t concentrated into one company, industry, or country. In other words, an investor should not put all their eggs in one basket. Diversity lessens your risk of losing a significant amount of money because if some of your holdings go up, others may go up, or at least not go down as much.

Ways to diversify your portfolio: Asset Classes: stocks, bonds, and cash are usually not correlated with each other so

owning some of each group will help you diversify. Industry: Make sure that there is an adequate representation from different industries

(oil, automobile, fast-food, electronics, etc.) Country: Most investors own lots in their own country which lessens their

diversification.

A mutual fund is an example of an investment that uses diversification.

http://www.abcsofinvesting.net/investment-diversification/http://money.cnn.com/magazines/moneymag/money101/

Are savings/investments secured or insured? By whom?

Insured by the Federal Deposit Insurance Corporation (FDIC): Savings accounts up to $250,000.

After January 1, 2014 the standard insurance of up to $100,000 returns.

Investments are not insured.

http://www.fdic.gov/deposit/deposits/ http://money.cnn.com/magazines/moneymag/money101/

Savings Fees

Inactivity fees may be subject to savings accounts. This is a monthly fee that is assessed once you have gone a certain period of time (such as a few years) without any activity in the account. Depositing and withdrawing counts as activity in your account.

Some accounts have minimum deposit requirements which means if your account goes below the minimum, the bank may not pay you interest on the money you deposited and you may be charged extra fees.

Third-party ATM fees are assessed if you use another banks ATM (automated teller machine).

You might be charged a withdrawal fee if you exceed a certain number of monthly withdrawals.

Your bank can charge you a returned check fee if a check deposited into your account is returned for insufficient funds.

http://www.money-rates.com/blog/2010/10/ask-the-expert-fees-on-savings-accounts-and-money-market-accounts.htm2010 Consumer Action Handbook, pg. 4


Investing Fees Expense Ratio/Internal Expense – It costs money to put together a

mutual fund so they charge operating expenses. The ratio deducted from the investment return rather then your account.

Investment Management Fees – These are charged as a percentage of the total assets managed.

Transaction Fee – Charged when you buy or sell a stock. Can range from $9.95 to $50 for a single trade.

Front End Load – Commission Back End Load/Surrender Charge – Charged at the time you sell your

fund, it usually decreases each year you own the fund. Annual Account Fee – Can range from $25 to $90 annually just for

having an account.

http://moneyover55.about.com/od/howtoinvest/a/feesexpenses.htm

Advantages and Disadvantages of Savings

Advantages: It is an easy, no-risk way to save money because the money is not

risked as part of an investment. If not removed, the money will continue to grow as long as the account

is kept open. The money is easy to remove in case of an emergency. Starting a child out with a savings account at a young age could turn

them into financially responsible adults because they will learn about money, saving money, and making money grow at a young age.

Disadvantages: Savings accounts don’t generally come with high interest rates.

http://www.visualeconomics.com/savings-account-tool-for-teaching-kids-about-money_2010-12-13/

http://www.visualeconomics.com/savings-accounts/

Advantages and Disadvantages of Investing

Advantages: By investing wisely a person can make a bigger profit compared to if the

money was put in a savings account. You can hire someone to invest your money for you.

Disadvantages: It is possible for a person to lose the money that they invested. It requires research if you want to be successful and do it individually. If you hire someone to handle your investments there will be a fee.

http://www.ehow.com/about_4728174_advantages-disadvantages-investing.html

What are dividends? How are they related to savings and investing?

Dividend – For every share you own, you are paid a portion of the company’s earnings.

Some companies offer dividends while others do not. It is usually a larger, more stable company that offers dividends.

Dividends are usually paid quarterly. Dividends can be reinvested or saved.

http://www.wisegeek.com/what-is-a-dividend.htm

What is interest? Interest – The charge for the privilege of borrowing

money. The bank will pay you a certain percent of whatever you put into your account annually because you have loaned it to them for them to invest.

interest = amount of money x interest rate x time

Current interest rates range from .9% - 2.01%. Interest rates vary according to the type of account

(savings, CDs, money markets).

http://www.investopedia.com/terms/i/interest.asphttp://www.fivecentnickel.com/2008/09/23/current-online-savings-account-interest-rates/

Difference in Interest Rates Passbook savings account interest rates range from .05%

- .65%. http://www.bankrate.com/brm/publ/passbk.asp

High-yield savings account interest rates range from .90% - 2.01%.

http://www.getrichslowly.org/blog/2007/03/21/which-online-high-yield-savings-account-is-best/

I also stumbled across a cool calculator, it calculates how long it will take for you to become a millionaire!

http://www.bankrate.com/calculators/savings/saving-million-dollars.aspx

What is liquidity? How is it related to savings and investing?

Liquidity is how easily an asset can be converted into cash. Assets that can by easily bought or sold, are known as liquid

assets. Money from savings accounts are highly liquid because

money can be removed easily at the time of an emergency. It is hard to remove money from an investment at the time

of an emergency and fees are often assessed for early removal.

http://www.investopedia.com/terms/l/liquidity.asp

When should you save?

You should save: If you are setting aside money for a big purchase in the near

future. Example – If you have saved enough money to put a down

payment on a home you want to be sure it is there when you need it so you should put it in a savings account.

When you are preparing for unexpected emergencies. If you have a sum of money that you want to invest but are

unsure of how you want to invest it at the present time.

http://www.lendingtree.com/smartborrower/saving-money/checking-savings-accounts/savings-account-basics/

When should you invest?

You should invest if you have a long period of time during which you will try to grow your money. Example - A grandparent investing in stocks to help

pay for their grandchild’s college education.

http://www.aarpfinancial.com/content/Learning/investments_save_choosestrategy.cfm

What is compounding?

Compounding is earning interest on interest. To work it needs two things: Reinvestment of earnings Time

A = P (1 + i)n

A = amount in account, P = principal (original amount invested), i = interest rate expressed as a decimal, n = number of years compounded

Example: If you invest $10,000 at 6%, you will have $10,600 in one year. Instead of withdrawing the $600 earned from interest, you keep it in there for one more year at the same rate of 6%.Your investment will grow to $11,236 by the end of the second year. Because that $600 was reinvested, it works together with the original investment, which earns you $636. As long as you keep reinvesting your interest will continue to compound.

http://www.investopedia.com/university/beginner/beginner2.asp

How does the time value of money relate to savings and investing?

Time value of money refers to the relationship among time, money, and rate of interest.

Savings: The longer that money is held in a savings account, the more

interest it will earn. The more money that is put into the savings account, the more

interest it will earn. Investing:

Stock market values fluctuate so it is better to keep the money invested for a long period of time rather then taking it out when the value goes down because it will bounce back.

The more money you have to be invested the more stocks you can buy, and the greater diversity of the investment is possible.


Risks in terms of savings and investing

Risks in terms of savings: None

Risks in terms of investing: There is potential to lose the amount of money that you

invested.

How does savings and investing impact your financial plan and

budget? Savings and investing could help you save for your long-

term goals. Savings and investing can affect your budget when you

put money aside from your income to invest or put in a savings account.

Savings accounts can affect your long-term budget because you will have earned interest.

Investing can affect your long-term budget, because if invested correctly, you can earn a profit so you could save for a vacation, home, car, etc.

Saving/investing money for your financial goals can make you less tempted to spend it because it is in a separate account from your everyday spending.

Rule of 72

The rule says that to find the number of years required to double your money at a given interest rate, you just divide 72 by the interest rate. Example: You got $300 for your birthday and you

want to use it to start saving money for college. You put the money into an account that earns 6% interest in a year. How long will it take for the money to double?72 / 6% interest = 12 years


Rule of 72

This rule can also be used to find the interest rate. Example: What interest rate would be necessary to

double a $100 investment in 24 years?72 / 24years = 3% interest rate


Financial Planning Pyramid• The financial planning pyramid is

a visual aid to help people understand the necessary steps to reaching financial freedom.

• At the top of the pyramid are the things that have the highest risk value but also has the possibility to pay out the highest earnings. At the bottom of the pyramid are the things that have the lowest risk and the lowest earnings.

http://financialhighway.com/financial-planning-basics-the-financial-pyramid/

http://www.ehow.com/about_6330505_definition-high-grade-preferred-stock.html


Bottom Level: Insured Savings/Checking Accounts, U.S. Savings Bonds, CDs,

Treasury Issues (government debt in the form of bills, notes, and bonds)

2nd Level: Money Market Account/Mutual Funds, Mutual Funds, High-Grade

Corporate Bonds (debt securities that are issued and redeemed by strong companies)

3rd Level: Balanced Mutual Funds (combines components of stocks, bonds, and money

markets), High-Grade Preferred stock (price doesn’t change as much as common stocks)

4th Level: Real Estate, Growth Mutual Funds

5th Level: Collectibles

Top Level: Commodities (gold, oil, agricultural products)

What is inflation? How is it related to savings and investing?

•Inflation is the rate at which the general level of prices for goods and services is rising. Purchase power falls as inflation rises.

•When inflation is HIGH, it is taking away from peoples’ savings.

•Day to day goods cost more as inflation rises so there is less money available to save or invest.

Calculate Inflation Yourself!

Inflation Calculator: http://www.westegg.com/inflation/

http://www.investopedia.com/terms/i/inflation.asp

Questions What are 2 types of savings accounts?

Passbook savings accounts and high-yield savings accounts. Who insures savings accounts?

The FDIC What interest rate would be necessary to double a $500

investment in 12 years? 72 / 12 years = 6% interest rate

What are the advantages of investing? You can hire someone invest for you and you can make more money then

if you put it in a savings account. What are some examples of fees for savings accounts?

Inactivity fee and a start up fee.

Savings and Investing Maggie O’Shea E Block. What is Savings? Savings accounts are one of the most...

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