Preparing for a Savings or Investment Program
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Transcript Preparing for a Savings or Investment Program
Preparing for a
Savings or Investment Program
Carl Johnson
Financial Literacy
Jenks High School
Pay Yourself First!
People often save or invest after expenses are
paid…Sometimes there is nothing left over!
Try this approach
Decide on an amount to save…Pay that amount
first…Consider it as a bill you owe yourself
Pay your living expenses
Use any money left over for fun stuff
Employer Sponsored Retirement Plans
Most employers offer retirement plans, such a s a
401K, or a 403B
Take advantage of these!
Amounts are pre-deducted out of your paycheck
Many employers match what you put in
This is very important as you get older, as it will
supplement your Social Security
Elective Savings Programs
You can also arrange with a mutual fund or
brokerage firm to take an amount each month
and invest it
You can set it up automatically so you don’t have
to think about it
It is an easy way to fund a traditional IRA or Roth
IRA
Gifts, Inheritances and Windfalls
What would you do with money gifts or
inheritances?
It has to be a choice!
The Long Term Value of Investments
Even if you have just a small amount of money, it
is still considered to be a good decision if you
invest
Small amounts add up over time because of the
time value of money
The increase in an amount of money due to
interest earned
Safety and Risk
Safety and Risk have specific meanings in the financial world
Safety means that the chance of losing your money in an
investment is fairly small
Risk indicates that you cannot be certain about the profit
of your investment
You can choose investments that are safe, risky or in-between
Safe investments will usually have a low rate of return
Speculative investments are considered to be high risk and
could earn a large profit in a short time
The disadvantage is that at any time you could lose most or
all your investment
Safety and Risk
Your attitude toward risk will vary according to
your circumstances
When young, you may be willing to take more
risks than when you are older
Without risk, it is impossible to obtain returns
that make investments grow
Five Components of Risk
Inflation
Interest Rates
Business Failure
Financial Market
Global Investment
Inflation
Inflation is the general rise in prices that affect everyone
Investing your money can help you stay ahead of
inflation
However, during times of rapid inflation, the rate of
return may not be able to stay up with the inflation
rate
You lose buying power and your money will buy
less!
Some investments will give you more protection
Common stocks vs. T-bills
Inflation Rate Risk
If you put your money in an investment that gives
you a fixed rate, the value of your of investment
will go down if interest rates go up!
If you have to sell bonds, you will get less than
originally paid
Business Failure Risk
This type of risk applies to common stock, preferred stock and
corporate bonds
When you buy stock, you are investing in a particular company
You are betting that the company will be successful
It can fail, according to the market and supply and demand,
etc…
Lower profits mean lower dividends
Distribution of money, stock or other property to
shareholders
Your best protection is to do your homework on companies in
which you want to invest
You might want to also invest in more than one company
Financial Market Risk
The prices of investments can also be affected by
the overall state of the financial markets
Factors which affect financial markets are social
and political conditions
Ex. Oil in the Middle East
Global Investment Risk
Global mutual funds are a better investment that
individual international stocks due to risk factors
in the global marketplace
Global mutual funds are offered by U.S. firms
and specialize in companies that operate in
another region of the world
A mutual fund includes stocks and bonds from
many companies and may offer more safety than
one company’s stocks and bonds
Investment Income
The safest and most predictable investments include
Certificates of Deposit (CD’s)
U.S. Savings Bonds
U.S. Treasury Bills
With these programs, you will know the interest rate
and how much income you will receive on a certain date
High risk investments would include:
Commodities
Options
Precious Metals and Gems
Collectibles
Investment Growth
The best opportunities for growth usually comes
from common stocks and growth stocks
A growth stock is a common stock issued by a
corporation
The type of stock has the potential to earn above-
average profits in comparison to corporate stocks
Growth companies usually reinvest their stock rather
than pay dividends
Retained earnings are profits that a company
reinvests
Investment Liquidity
A final factor to consider when choosing investments is
investment liquidity
The ability to buy or sell an investment quickly without
substantially reducing its value
A passbook savings account is an example of a high-liquidity
investment because you can withdraw all of your money
immediately
An investment in real estate is usually a low-liquidity
investment