Unit 3 Investing: Making Money Work for You

Unit 3 – Investing: Making Money Work for You NEFE Book pp. 27-40 Savings vs. Investing:  Savings – money put away for a temporary time-frame; easy to get to; used to pay for short-term goals; earns a small amount of interest  Investing – money put away for a longer period of time; used to pay for longer-term goals or retirement income; risky but can earn more than a savings account; fluctuates in value Time Value of Money – refers to 3 elements: 1. Time – the sooner you start saving/investing, the more likely you will earn more “new” money 2. Money – the more money you invest, the more money you will earn on it 3. Rate of Interest – the higher the interest rate, the more money you will earn I. INTEREST INVESTMENTS A. Savings Accounts (Time Deposits)  Money put into an account for more long-term savings (but for short-term goals); very liquid  Withdraw money using a withdrawal slip provided by the bank  Earns Interest (“earned income”) 1. Money you earn when you leave money in a savings account.  Banks LEND it to other people (via loans) 2. Money you pay when BORROWING money from the bank (via loans) 3. Compound Interest – when you earn interest on previously earned interest + principal (p. 31) 4. Interest rates on savings accounts may NOT keep pace with inflation (price increases) 5. Rule of 72 ( p. 32) How long will it take to double the money? 72 divided by interest rate = amount of years What interest rate do I need to double the money? 72 divided by # of yrs=required interest rate B. Certificate of Deposit (CD) 1. A type of “time deposit” account 2. Must leave $$ in bank until it matures (3 mths, 6 mths, 1 yr, 2 yrs, etc.). The longer you keep it in, the higher the interest rate 3. At maturation date, you can remove it or keep it in 4. Interest rates adjust every time it renews 5. Severe penalties if remove money before it matures C. Savings Bonds (Series EE) 1. A loan to the government (War/Municipal) 2. Purchase at ½ of the face value ($50 buy for $25) 3. Can be cashed after 20+ years 4. Corporate Bonds – pay the highest interest rates; U.S. government bonds are AKA Treasury Bonds (are safer); invest in a company directly

1 D. Money Market Deposit Accounts 1. Like a savings account but pays a higher interest rate (but lower than CDs) 2. Can write checks from, but limited in number as to how many can be written 3. Must maintain a HIGH balance E. Money Market Mutual Funds 1. When you have a company invest money for you into different stocks/securities of other companies 2. Earns a higher interest rate than the Money Market Deposit Accounts II. GROWTH INVESTMENTS (p. 36) The riskier it is, the potential for growth is higher Look at the rate of return – rate of interest or the annual % “profit” on an investment A. Stock Market (high risk) – purchase a “share” of ownership in a company  Common Stock – lower priced; have voting rights; last ones to get paid a “dividend” (only if there are “leftovers”)  Preferred Stock – sold at a higher price than common stock; NO voting rights; if dividends are paid out to stockholders, they get it first  Capital Gains – when you sell your shares of stock at a higher price than what you paid for it  Capital Loss – when shares of stock are sold at a lower price than what was paid for it B. Real Estate – land, buildings, malls, apartment buildings, C. Collectibles – artwork, baseball cards, antiques; small market for them so considered high risk D. Mutual Funds – a portfolio manager invests your money based on your wishes: 20% international; 50% conservatively; 10% in corporate bonds; 20% in stocks DIVERSIFICATION IS THE KEY!!! III. TYPES OF BANKS A. Commercial Banks 1. Chartered by the federal or state government 2. If chartered by the federal government, then considered a national bank — has “national” in its title 3. Insured by the Federal Deposit Insurance Corporation (FDIC) 4. In the past, had served more businesses Ex. National City Bank & Huntington National Bank B. Savings & Loans (S & L) 1. In the past, had served more individuals 2. Insured by the Savings Association Insurance Fund (SAIF) 3. Emphasize more “savings” 4. Sometimes have better interest rates 5. AKA: Thrifts Ex. Third Federal Savings & Loan

2 C. Credit Unions 1. Made up of individuals who work for the same company or community organization 2. Insured by the National Credit Union Share Insurance Fund Ex. Steel workers or Teachers

Deregulation of banks in 1980 –

Savings & Loan Crisis –