Investing for Your Future

PERSONAL FINANCE UNIT FIVE: INVESTING

IINVESTING FOR YYOUR FFUTURE

Put-and-Take  Money left in savings/checking for you to use as Account needed  Should include emergency find (3-6 months of salary) VS.

Systematic Investing  Investing on a regular and planned basis  Regularly set aside money each month for investing to meet long-term goals  Higher risk in beginning – lowest risk towards retirement  Retirement-planning

Reasons for 1. Investing helps beat inflation Investing 2. Investing increases wealth 3. Investing is fun and challenging

Choosing an 1. Safety (minimal risk of loss) Investment 2. High LIQUIDITY (getting your money quickly) 3. High dividends or interest 4. Growth in value that exceeds the inflation rate 5. Reasonable (low) purchase price (or initial cost) 6. Tax benefits (saving or postponing tax liability)

Wise Investment Define your financial goals Practices Go slowly Follow through – put money in riskier investments Keep good records – net worth, balances, insurance Seek Good Investment Advice Keep investment knowledge current Know Your Limits – risk tolerance, how much you can afford

1 PERSONAL FINANCE UNIT FIVE: INVESTING Risk and Return  RISK is the chance that an investment’s value will decrease. All types of investment have some degree of risk  The greater the risk, the greater the potential returns  DIVERSIFICATION means spreading risk among many types of investments

Types of Risk Interest-Rate Risk – the chance that the investment’s return will not keep pace with inflation

Political Risk – government actions that may decrease the success of an investment

Market Risk – caused by business declines, national/world events, interest rate fluctuations

Company/Industry Risk – affect only one company or industry

SAVINGS AND INVESTING PYRAMID

2 PERSONAL FINANCE UNIT FIVE: INVESTING

TYPES OF RETIREMENT PLANS

GOVERNMENT- SOCIAL SECURITY SPONSORED  People contribute while they are working and get a portion of it back when they reach age 65

PERSONAL PLANS TRADITIONAL IRA – allows individuals to save on their own for retirement. contributions are pre-tax and withdrawals are fully taxable. max contribution for age <50 is $5,000/year

ROTH IRA – similar to Traditional IRA, but contributions are made after-tax and all withdrawals are tax free

ANNUITIES  An insurance product that pays out income, and can be used as part of a retirement strategy.  A popular choice for investors who want to receive a steady income stream in retirement.  You make an investment in the annuity, and it then makes payments to you on a future date or series of dates.

3 PERSONAL FINANCE UNIT FIVE: INVESTING EMPLOYER- SPONSORED PLANS

Company retirement plans in which a retired employee receives a DEFINED BENEFIT specific amount based on salary history and years of service, and PLANS in which the employer bears the investment risk. The employee, the employer, or both may make contributions.

PENSIONS:  Workers pay a percentage of their salary towards the pension each paycheck. This is typically three to five percent per paycheck. In turn, the company the employee works for will help the employee finance his retirement.  The government guarantees pension benefits to a certain extent

DEFINED CONTRIBUTION The employer and/or employee make contributions, and the final PLANS benefits depend on how much was in the account and the rate earned by the account's investments. The federal government does not guarantee a participant's pension benefits; instead, the plan is "participant-directed", meaning that the employee makes the investment decisions based on the employer's options.

1. Traditional 401(k): most common type of employer-sponsored plan. Used with for-profit companies, which allows employees to save pre-tax dollars.

2. Traditional 403(b): similar to 401(k) but used for non-profit organizations

3. Profit sharing: An employer alone makes contributions based on an employee's current-year compensation.

4. Stock bonus plan: A type of profit sharing plan, where contributions are made in the form of company stock.

SSOURCES OF FFINANCIAL IINFORMATION

Newspapers  Financial pages of local newspapers  The Wall Street Journal, Barron’s

Investor Services Companies that provide extensive financial data to investors  Moody’s Investors Service (www.moodys.com)  Standard and Poor’s Reports (www.standardandpoor.com)  Value Line (www.valueline.com)

Financial Magazines Business Week, Forbes, Money Fortune, Kiplinger’s Personal Finance, The Economist

Brokers Full Service Brokers – provide clients with analysis and opinions based on their judgments and the opinions of experts at the company (Merrill Lynch, Fidelity Investments Discount Brokers – buy and sell securities for clients at a reduced commission, with little or no investment advice (Charles Schwab, Ameritrade, E- Trade) Financial Advisors

Work at financial institutions to help guide investors Annual Reports and Financial Statements  An ANNUAL REPORT, is a summary of a company’s financial results for the year and prospects for the future  Filed with the Securities and Exchange Commission Online Investor (SEC) Education

www.teenvestor.com, www.fool.com (Motley Fool)

SSIMPLE IINVESTING MMATH

Time Value of The relationship among time, money and rate of Money interest. Example: You put $100 in your dresser drawer and keep it for one year. At the end of the year, you still have $100. But in a year, $100 may buy less than it does not because of INFLATION.

Simple Interest Principal Balance X Interest Rate X Time in Years = Earned Interest

Compound The idea of earning interest on interest. Interest You put $100 into an investment that earns 10% a year. At the end of the year, you have $110 in the account. That $110 stays in the account for a year and earns another 10%, now you have $121 in the account. This keeps going and going…

A = P (1+i)n A = amount in account P = principal i – interest rate n = number of years compounding

The Rule of 72 Used to find out how long it will take you to double your money at a certain interest rate.

72 ÷ Interest Rate = number of years

Return on The amount of money you make on an investment, Investment expressed as a percentage of your initial investment. Return = (Ending Value – Beginning Value) Beginning Value

IINVESTMENT OOPTIONS

STOCKS

Form of ownership in a corporation  Stockholder gets dividends and appreciated stock value  Corporation gets EQUITY CAPITAL – money they can use for whatever they want.

Basic types of Stock:

COMMON STOCK – a unit of ownership of a company. Entitles stockholder to voting privileges and dividends (sometimes) (Blue-Chip stock, Income stock, Growth stock, Cyclical stock, Defensive Stock, large-Small cap stock, Penny stock)

PREFERRED STOCK – a type of stock that gives the owner the advantage of receiving cash dividends before common stock holders receive cash dividends, limited voting rights

Special Types of Stock:

GROWTH STOCK – company reinvests profits in an attempt to grow their business. Stockholders, therefore, rarely receive dividends.

VALUE STOCK – the company is well established and not trying to grow market share, so it usually gives dividends to stockholders.

BLUE CHIP STOCK – from large companies with a long history of strong market performance

PENNY STOCK – stocks usually trading at less than $1.00, but never more than $5.00. They have high volatility.

CORPORATE AND GOVERNMENT CORPORATE BOND – a corporation’s written pledge BONDS to repay a specific amount of money, along with interest.

GOVERNMENT BOND – written pledge of a government or municipality (city) to repay a specific sum of money with interest

MUTUAL FUNDS An investment in which investors pool their money to buy a “package” of stocks, bonds and other securities selected by professional managers who work for an investment company  All securities in a Mutual Fund usually are within a common industry  Mutual Funds are only traded at the end of the day

EXCHANGE-TRADED FUNDS (EFTs) Like mutual funds, but are traded throughout the day, not at closing

FUTURES/ COMMODITIES A contract for the purchase of a good in the future  You are hoping to get a low price for the item now and then hope the actual selling price in the future is much higher

REAL ESTATE  Buying real estate with the hope that the value will increase  Buying real estate and renting it for additional income

COLLECTIBLES

 Assets that appreciate in value because they are rare and in demard  Examples include: coins, fine art, sports cards, antiques, jelwery, precious metals  Stay within your “circle of confidence” (Warren Buffett)