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Preparing for a Savings or Investment Program Chapter 8 Preparing for a Savings or Investment Program Chapter 8

Saving and Investing l Section 8. 1 ¡Establish goals for savings or investing ¡Discuss Saving and Investing l Section 8. 1 ¡Establish goals for savings or investing ¡Discuss ways to obtain funds for investing ¡Identify factors that affect your investment choices

Establishing Your Financial Goals should be SMART goals (specific, measurable, attainable, realistic, time frame) Establishing Your Financial Goals should be SMART goals (specific, measurable, attainable, realistic, time frame) l Your goals should correspond with your values l Ask 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 l Balance your budget ¡ Spend less than you make Perform a Financial Check-Up l Balance your budget ¡ Spend less than you make ¡ Limit credit card usage l Have insurance ¡ Cover losses from car, home, health l Start an emergency fund ¡ Save enough for 3 -9 months of expenses l Have other sources of cash ¡ Have line of credit available or cash advance capability for serious emergencies

Money to Get Started l Pay yourself first ¡ Treat investment like a normal Money to Get Started l Pay yourself first ¡ Treat investment like a normal expense l Employer sponsored retirement plans ¡ 401 k or 403 b l Elective savings programs ¡ IRA or Roth IRA l Special savings effort ¡ Periodic cuts on spending l Gifts, inheritances, and windfalls ¡Unexpected money, bonuses, tax refunds

Value of Long-term Savings Plans l How much money do you think you would Value of Long-term Savings Plans l 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? l $885, 180

Rate of Return 1 5 10 20 30 40 4% 2, 000 10, 832 Rate of Return 1 5 10 20 30 40 4% 2, 000 10, 832 24, 012 59, 556 112, 170 190, 052 5% 2, 000 11, 052 25, 156 66, 132, 878 241, 600 6% 2, 000 11, 274 26, 362 73, 572 158, 116 309, 520 7% 2, 000 11, 502 27, 632 81, 990 188, 922 399, 280 8% 2, 000 11, 734 28, 974 91, 524 226, 560 518, 120 9% 2, 000 11, 970 30, 386 102, 320 272, 620 675, 780 10% 2, 000 12, 210 31, 874 114, 550 328, 980 885, 180 11% 2, 000 12, 456 33, 444 128, 406 398, 040 1, 163, 660 12% 2, 000 12, 706 35, 098 144, 104 482, 660 1, 534, 180

Story of Ben and Arthur l http: //www. daveramsey. com/blog/howteens-can-become-millionaires/ Story of Ben and Arthur l http: //www. daveramsey. com/blog/howteens-can-become-millionaires/

Safety and Risk l Safety – chance of losing money is small l Risk Safety and Risk l Safety – chance of losing money is small l Risk – cannot be certain of the profit of your investment l Speculative investment is considered a high risk investment which might earn large profit in short time, but could lose most or all of your money l Young investors tend to take bigger risks, less to lose, older investors are conservative so they can protect savings

Chance of losing money small l Safety and Risk Safe l Govt bonds and Chance of losing money small l Safety and Risk Safe l Govt bonds and securities ¡ Treasury bills ¡ Treasury notes ¡ Treasury bonds ¡ Municipal bonds ¡ US Savings Bonds l Savings accounts l CDs Can Vary l l Stocks Corporate bonds Mutual funds Real estate Cannot be certain about the profit of investment High Risk l Commodities l Options l Precious metals and gems l Collectibles such as coins, stamps, and comic books l These are considered speculative investments, may earn large profits in short time, but high risk involved

Five Components of Risk l Inflation ¡ Investment return may not keep up with Five Components of Risk l Inflation ¡ Investment return may not keep up with rapid inflation l Interest Rate ¡ Fixed rates may hurt you if interest rates go up l Business Failure ¡ Lose money on stocks/bonds when business fails l Financial Market ¡ Stock value affected by social and political conditions l Global Investment ¡ Keep in mind exchange rate, as well as economic and political stability

Investment Income l Safe and Predictable Income ¡ Savings accounts, CDs, US savings bonds, Investment Income l Safe and Predictable Income ¡ Savings accounts, CDs, US savings bonds, US treasury bills – will know exactly how much and when you will get it l Varying Income ¡ Stock, bonds, annuities, mutual funds, rental properties l High Risk Income ¡ Precious metals, gems, collectibles, and commodities

Investment Growth l Best ones are common stocks and growth stocks l Retained earnings Investment Growth l Best ones are common stocks and growth stocks l Retained earnings – profit reinvested for expansion, research, and development l Won’t receive immediate dividends, but stock increases in value

Investment Liquidity l The ability to buy and sell quickly without substantially reducing its Investment Liquidity l The ability to buy and sell quickly without substantially reducing its value l Market conditions may prevent regaining original investment

Savings and Investment Options Section 8. 2 Savings and Investment Options Section 8. 2

Types of Investments l l l Stocks Corporate Bonds Government Bonds Mutual Funds Real Types of Investments l l l Stocks Corporate Bonds Government Bonds Mutual Funds Real Estate

Stocks l Stockholders buy equity in a company and in turn become a part Stocks l Stockholders buy equity in a company and in turn become a part owner l Two types: ¡ Common Stock ¡ Preferred Stock

Common Stock l Provides ownership in company l Stockholder has voting privileges l May Common Stock l Provides ownership in company l Stockholder has voting privileges l May provide dividends, money paid out from profits l Owner could gain more shares by “stock splits”

Preferred Stock l Stockholders receive dividends before common stockholders Preferred Stock l Stockholders receive dividends before common stockholders

Consider Before Buying Stock l Company does not have to pay dividends l Company Consider Before Buying Stock l Company does not have to pay dividends l Company does not have to buy back stock l Value of stock is partially determined by market value

Corporate and Government Bonds l A bond is a written pledge of company or Corporate and Government Bonds l A bond is a written pledge of company or govt. to repay a specific amount of money, along with interest l Matures anywhere from 1 to 30 years with interest paid every 6 months if they can afford it l Two key factors affect value of bond ¡ Whether it will be repaid at maturity ¡ Whether interest will be paid until maturity

Mutual Funds l Investors pool money to buy stocks, bonds, and other securities l Mutual Funds l Investors pool money to buy stocks, bonds, and other securities l Professional managers who work for investment companies select purchases l Great for inexperienced investors l Loss of one fund could be offset by gain in another

Real Estate l Goal is to own property that increases in value to ¡ Real Estate l Goal is to own property that increases in value to ¡ Sell at a profit OR ¡ Receive rental income l When investing ¡ Compare with similar properties for pricing ¡ Know what financing is available ¡ Know the cost of the property taxes

Investment Pyramid High Risk Diversify to spread risk Options, commodities, precious metals and gems, Investment Pyramid High Risk Diversify to spread risk Options, commodities, precious metals and gems, speculative stocks, junk bonds, collectibles Level 4 Speculation Income and growth stocks, mutual funds, real estate, convertible bonds Level 3 Growth US Treasury securities, conservative corporate bonds, state and municipal govt. bonds, income and utility stocks Level 2 Safety and Income Level 1 Financial Security Low Risk Cash, CDs, savings accounts, money market accounts, US govt. bonds

Developing a Personal Investment Plan l Establish investment goals l Decide how much money Developing a Personal Investment Plan l Establish investment goals l Decide how much money you will need and by when l Determine the amount of money you have invest l List all the investments you want to evaluate l Reduce your list of possible investments to a reasonable number l Choose at least two investments so you have some diversity l Recheck regularly to make changes

Reducing Risk and Sources of Information Section 8. 3 Reducing Risk and Sources of Information Section 8. 3

Financial Planners l Two things to consider ¡ 1) Your income level ¡ 2) Financial Planners l Two things to consider ¡ 1) Your income level ¡ 2) Your willingness to make your own financial decisions l If you make less than $45, 000 a year, you may not need one

Types of Financial Planners l Fee-only planners ¡ Charge hourly rate ($75 - $200) Types of Financial Planners l 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 l Fee-offset planners ¡ Charge hourly or annual, but reduce it with earnings they make buying/selling investments l Fee-and-commission planners ¡ Charge a fixed fee for financial plan, earn commissions from products they sell l Commission-only planners ¡ Earn all money thru commission they make on sales of investments

Selecting a Financial Planner l Look for a planner who will do the following: Selecting a Financial Planner l 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 l Every state varies on certification and licensing required

Selecting a Financial Planner l Questions to ask: ¡ What are your areas of Selecting a Financial Planner l Questions to ask: ¡ What are your areas of expertise? ¡ Are you affiliated with a major finance company or do you work independently? ¡ Are you licensed or certified? ¡ What is your education or training? ¡ How is your fee determined? ¡ Am I allowed a free initial consultation? ¡ May I see a sample of a written financial plan? ¡ May I contact some of your clients as references?

Managing Your Investments l Evaluate investments l Monitor investments ¡ Keep track using Internet Managing Your Investments l Evaluate investments l Monitor investments ¡ Keep track using Internet and newspaper l Keep accurate records ¡ Keep purchase records, commissions and fees you have paid l Consider tax consequences ¡ Tax exempt – not taxed, ¡ Tax deferred – taxed at later date

Sources of Investment Information l Internet l Newspapers and TV News Programs ¡ Wall Sources of Investment Information l Internet l Newspapers and TV News Programs ¡ Wall Street Journal and CNN Fn l Business Publications ¡ Business. Week, Forbes, Fortune, Consumer Reports l Government Publications ¡ Federal Reserve Bulletin l Corporate Reports ¡ Prospectus that discloses information about company selling securities l Statistical Averages ¡ Standard & Poor’s 500 Stock Index or Dow Jones Industrial l Investor Services ¡ Newsletters and publication from financial people