+ Why Save? + Savings & Investing

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1 + + Why Save? Savings is the setting aside of income for a period of time so that it can be used later. For What? - Major Purchases, Emergencies, Retirement Savings provides funds for others to invest or spend. Savings and Investing Interest is the payment savers receive when they lend funds, or allow someone else to use their funds. Savings methods will vary depending of life situations. Chapter 6 Economics Today and Tomorrow At age 25, Nick s twin brother, Jeff, starts saving $1,000 a year and also earns 9% per year. He continues to invest $1,000 a year for the next 25 years. Nick and Jeff are not both 50 years old. Nick saved 10,000 over 10 years. Jeff saved 25,000 over 25 years. At age 25, Nick s twin brother, Jeff, starts saving $1,000 a year and also earns 9% per year. He continues to invest $1,000 a year for the next 25 years. Nick and Jeff are not both 50 years old. Who has made the most money, Nick or Jeff?

2 Nick saved 10,000 over 10 years. Jeff saved 25,000 over 25 years. At age 50 Nick has a balance of $131,050 Jeff has a balance of $84,701 Rule of 72 Dividing 72 by the interest rate gives you an estimate of how long it will take for your money to double. Divide 72 by the number of years in which you want your money to double gives you an estimate of the interest rate required. Difference due to starting early is $46, Types of Savings Plans + Savings Accounts Savings Account Money Market Savings Options Time Interest-earning account No set maturity waiting period to earn interest Funds can be withdrawn at any time without penalty Number of withdrawal transactions may have a limit. + Money Market Account + Time s Funds required to be deposited for a certain amount of time. Pays relatively high rates of interest Allows immediate access to funds through checks Minimum balance of $1,00 to $2,500 Can make withdrawals in person at any time Only allowed a few checks per month The time at which the deposits will pay a stated rate of interest is maturity. Often called certificates of deposit (CD) and state: Amount of Length of time until maturity is reached Rate of Interest being paid Higher interest than regular savings accounts. Pay a penalty if you cash a time deposit before maturity.

3 + Insuring gyour + Insuring gyour Federal Insurance Corporation (FDIC) Roosevelt signed legislation after crash of 1929 Insures up to $100, Has been temporarily increased to $250,000 Some retirement accounts currently have a limit of up to $250,000 Beginning January 1, 2011, the $100,000 deposit limit will be adjusted by the amount of inflation for the past 5 years FDIC Insured Checking Accounts (including money market deposit accounts) Savings Accounts (including passbook accounts) Certificates of Not FDIC Insured Investments in mutual funds (stock, bond or money market mutual funds), whether purchased from a bank, brokerage or dealer Annuities (underwritten by insurance companies, but sold at some banks) Stocks, bonds, Treasury securities or other investment products, whether purchased through a bank or a broker/dealer NCUA National Credit Union Association + Investing Taking Risks With Your Savings Stocks and bonds will offer investors greater returns, but more risk is involved. Stocks Stockholders own a share of the company and benefit in two ways. Dividends & Selling Stock for more than purchased + Bonds Bond Certificate issued by a company or the government in exchange for borrowed funds Pays a stated rate of interest over a stated period of time, then repays the borrowed amount in full. Do not receive any ownership in the company or government Capital Gains Increase in value from time bought to time sold. Buy for $20, Sell for $30, Profit of $10 is Capital Gain Capital Loss Decrease in value from time bought to time sold. Buy for $20, Sell for $10, Loss of $10 is Capital Loss + Bonds + T-Bills, T-Notes, and T-Bonds Tax-Exempt bonds Interest is not taxed by federal government. Exempt from city and state income taxes Issued by local and state governments Savings Bonds Range from $50 to $10,000 Interest earned is not taxed until bond is cashed Pays half the face value Bond increases in value every 6 months until the face value is reached. If redeemed before maturity, face value is not earned. All sold by the US Treasury Department Exempt from state and local income taxes, but not from federal income tax Treasury Bills mature in a few days to 26 weeks Minimum investment is $1,000 Treasury notes maturity dates of 2 to 10 years Minimum investment of $1,000 Treasury Bonds Minimum investment of $1,000 Matures in 30 years

4 + Stock and Bond Markets + Government Regulations Bond Markets New York Exchange Bond Market American Exchange Bond Market Mutual Fund investment company that pools the funds of many individuals to buy stocks, bonds, or other investments Losses in one area are made up by gains in another Money Market Fund type of mutual fund that uses investors funds to make short-term loans to businesses and banks Stock market heavily regulated by state and federal govt. Securities and Exchange Commission Created by Securities Exchange Act of 1934 Responsible for administrating all federal security laws Investigates deals among corporations, such as mergers. Institutions must file a registration with the federal government. States have security laws designed to prevent schemes taking advantage of investors. Savings can be used to supplement Social Security Pension Plan company plan that provides retirement income for their workers 401(K) Portion of pay is withheld and company matches the amount Don t have to pay federal income tax on contributions to a certain point Don t pay federal income tax until you withdraw funds from the plan at retirement Individual Pension Plans Keogh Plan Keogh Act of 1962 Self-employed can set aside 15% of their income up to a certain amount each year. Contributions are tax deductable for the year. Individual Retirement Account (IRA) For those earning less than $30,000 Can contribute up to $4,000 a year Contributions are tax deductable Pay taxes only when funds are taken out of IRA Withdrawals allowed beginning i at age 59 1/2 Roth IRA Can contribute up to $4,000 a year Contributions are not tax deductable Interest is tax free forever! Don t pay additional taxes when funds are withdrawn Real Estate Buying land and buildings as a form of investing Resale values have soared at times Usually a good investment in the long run Raw or undeveloped land is riskier can t guarantee future demand Not very liquid may be on the market for an extended time.

5 + How to Save and Invest? + Look at the options available and look at the trade-offs. How much risk are you willing to take? A riskier method will generally result in a higher potential return. A safer method will generally result in a lower potential return. Diversify your investments spread investments out over a variety of types to help lower overall risk.