Saving and Investing

Chapter 6

Deciding to Save

• Benefits of Saving: (6 months of housing)– Make large purchases without paying interest– Funds for others– Allows business expansion

• Increases Income for Others– Allows Higher Standard of Living

– Earns interest on savings• Savings Trade-offs:– Immediate Access = Low Interest Paid– Higher Interest = Minimum Balance Required

Savings Accounts and Time Deposits

• Savings Account – Interest-earning account that has no set maturity– Immediate withdrawal – no penalty

• Money Market Deposit Account – Pays high rates of interest and allows immediate access through checks– Usually have minimum balance (1,000-2,500)– Only allowed certain # of withdrawals a month

Time Deposits• Requires deposits to remain for certain period of

time• Most Common is a CD (Certificate of Deposit)– States amount deposited, Length time till maturity,

Rate of interest being paid– Longer term = Higher interest paid

• Advantages:– Pays higher interest than savings account– Rate usually keeps with cost of living

• Disadvantages:– Penalty for early withdrawal

Insuring Deposits

• 1929 Stock Market Collapse New Deal– Signed by Franklin Roosevelt

• Created Federal Deposit Insurance Corporation (FDIC)– Protects: Savings, MMDAs, CDs, and Checking– Protection up to $250,000– Protects some special retirement accounts

• National Credit Union Association (NCUA)– Protects member owned banks

Investing: Taking Risks With Your Savings

Stocks and Bonds• Corporations sell stock

– Use for Expansion• Stock Returns

– Stockholders (ownership) 2 benefits:• Dividends• Sell higher than purchase

• Capital Gains and Losses– Capital Gain – Profit from sale of stock– Capital Loss – Losses after sale of stock

Bonds

• Receipt from business or government for borrowing funds

• Promise to repay borrowed funds with interest over stated period of time

• NO OWNERSHIP!!

Differences in Stocks and Bonds

STOCKS• Issued by ALL Corporations• Represent Ownership• No fixed dividend rate• Dividends only paid if profits• No maturity date• Stockholders elect BoD which

controls corporation• Stockholders only have claim after all

creditors have been paid

BONDS• Corporations not required to issue

bonds.• Bonds represent debt• Bonds pay fixed rate of interest• Interest must always be paid,

whether profits or not• Have a maturity date for repayment• No voice or control in running of

corporation• Have claim against property and

income of a corporations BEFORE stockholders

Types of Bonds• Tax-Exempt Bonds

– Issued by State and Local Gov’t– Earnings Not Taxed by Gov’t (fed, state, or local)– Investment for wealthier

• Savings Bonds– Issued by Fed Gov’t – Range face value $50-$10,000– Very Safe, Not taxed until cashed– Purchased at ½ of face value. Upon maturity paid face value

• T-Bills, T-Notes, T-Bonds– Sold by Treasury Department

• Interest is Tax Exempt from State and Local BUT NOT Federal Government– T-Bills

• Mature few days to 26 weeks• Minimum Investment $1,000

– T- Notes• Maturity dates 2 to 10 years

– T-Bonds• Matures in 30 years

Stock Markets• Broker – Go between for buyers and sellers

– Charges a fee based on $ amount traded– Online Trading available as well

• Stock Exchanges– New York Stock Exchange – Largest

• Also regional and among many countries– Companies are largest most profitable in world

• Over the Counter Markets– Stocks not listed on organized exchanges– National Association of Securities Dealers Automated Quotations (NASDAQ) – largest

• Brokerage firms hold shares of stock and buy and sell for investors• Usually sold in amounts of 100 shares

• Stock Market Indexes– Indicator used to determine what happened to stocks on market

• Dow Jones Industrial Average– 30 major industrial companies in the United States

• Standard & Poor’s 500– Tracks stock prices of 500 companies

Bond Markets• New York Exchange Bond Market and American Exchange Bond Market (2

largest)– Sold Over-the-Counter and Online

• Mutual Funds– Pulls money from many investors– Diversified

• Managed Mutual Fund– Individual constantly views and switches investments

» Collects Fee

– Mutual Funds are NOT Insured by the Federal Government

Government Regulations on Stocks, Bonds, Mutual Funds

• Securities and Exchange Act of 1934– Sets up the Securities and Exchange Commission• Attempt to avoid another Stock Market Crash• Uncover Fraud in buying and selling

Investing for Retirement

• Social Security Act (1935)– Retirement account for the elderly– Designed to get elderly to retire and open up jobs

for unemployed during the Great Depression– Today, only a supplemental– Encouraged to have separate retirement plan

Individual Pension Plans• 401(k)

– Offered through Employer– Portion of check withheld– Matched by Employer– Tax-Exempt until withdrawal

• Keogh Plan– Keogh Act of 1962

• Allows Self-Employed to contribute to own retirement• Max 15% of Income a year• Tax-Exempt until withdrawal

• IRA– Only for those earning < $30,000 a year– Contribute up to $4,000 a year– Contributions and Interest Earned not taxed until Withdrawal (after 59 ½)

• Roth IRA– Contribute up to $4,000 a year– Pay taxes before money goes in– Interest earned is tax-free forever if taken out after 59 ½ – No taxes when money gets withdrawn

Real Estate Investment

• Advantages:– Values tend to increase over time• Up 700% since 1980

• Disadvantages:– No guarantee for demand in future (especially on

raw land)– Cannot turn into cash fast

How Much to Save and Invest?

• Trade-Offs– More you save = More you can buy later• HOWEVER – Less you can buy NOW

– Other high interest debt?• Pay it off first

Other Considerations• Amount of Risk

– Higher Risk = Greater Return– Liquidity

• Spreading Out Your Investments– Diversification

• Little Income – Secured accounts in local banks• Greater Income – Take greater risks

• Values– Community needs more development – Savings Bank– Companies that promote the same values and ideas as you?

• Environmental Protection Companies?• Charitable Companies?