CHAPTER 6 Saving and Investing CHAPTER 6 SECTION

CHAPTER 6 Saving and Investing

CHAPTER 6 SECTION 1 Why Save?

Deciding to Save � Saving: setting aside income for a period of time so that it can be used later � People save for purchases that require more funds than available, for emergencies, and for retirement.

Deciding to Save � Results of Saving � Economies benefit from individuals who save because people have more money to invest or spend, leading to expanding business. � Where to Save � There are many saving options available to customers including commercial banks, savings and loan association, savings banks, and credit unions. � When choosing a place to save, think about tradeoffs.

Savings Accounts � Statement savings accounts accrue a low interest but allow immediate access to funds. � Statement Savings Account: account similar to passbook savings except that the depositor receives a monthly statement showing all transactions � The depositor can usually withdraw funds at any time without paying a penalty.

Savings Accounts � Money market accounts accrue high interest with immediate access through checks, but have a high minimum balance requirement. � Money Market Deposit Account: account that pays relatively high rates of interest, requires a minimum balance, and allows immediate access to money � Customers can usually make withdrawals from a money market account in person at any time but can only write a certain amount of checks against the account.

Time Deposits � Time deposits refers to a wide group of savings plans or certificates of deposit (CDs) with a high interest rate that increases over time. � A depositor cannot remove funds before a certain time period or maturity without paying a penalty. � Time Deposits: savings plans that require savers to leave their money on deposit for certain periods of time

Time Deposits � The period of time at the end of which deposits will pay a stated rate of interest is called maturity. � The date of maturity can vary from seven days to eight years or more. � Time deposits are often called Certificates of Deposit (CDs), or savings certificates. � Certificates of Deposits: time deposits that state the amount of the deposit, maturity, and rate of interest being paid

Time Deposits � Insuring Deposits � Before the 1930 s, people could lose all the money in their accounts if the bank failed. � Presiden Franklin Roosevelt signed legislation, creating the Federal Deposit Insurance Corporation, to protect deposits after a number of banks failed during the Great Depression. � Now the federal government insures bank accounts (in FDIC member banks) up to $250, 000, giving people security when making deposits.

CHAPTER 6 SECTION 2 Investing: Taking Risks with Your Savings

Stocks and Bonds � Stock Returns � Stockholders: people who have invested in a corporation and own some of its stock � Corporations are required to issue stock. � Stocks entitle the buyer to future profits and assets of the corporation. � Stockholders make money through dividends, return on bought stock, or by speculating— buying stock hoping it will increase in price so they can sell it at profit.

Stocks and Bonds � Capital Gains and Losses �A capital gain is money earned by selling stock for more than you paid for it. �A capital loss is money lost by selling stock for less than you paid for it. � Taxes must be paid on capital gains whether it is increased stock value or increased property value.

Stocks and Bonds �A bond is a certificate promising to repay a loan at a stated interest rate. �A bondholder is NOT part-owner of the organization.

Stocks and Bonds � Tax-Exempt bonds earn tax-free interest. bonds are good investment for wealthier people who would otherwise pay high taxes on interest earned from investments.

Stocks and Bonds � Savings Bonds � With savings bonds you pay half of the bond’s face value and the interest increases yearly until the face value is reached. � The United States has issued war bonds, a type of savings bond, in the past to raise money for the military.

Stocks and Bonds � T-Bills, T-Notes, and T-Bonds � T-Bills, T-Notes, and T-Bonds are government bonds exempt from state and local tax and mainly for larger investments. � The notes are sold in minimums of $1, 000. � Treasury bills mature in 3 months to 1 year. � Treasury notes have maturity dates of 1 -10 years. � Treasury bonds mature in 10 or more years.

Stock and Bond Markets � Stocks are bought/sold through brokers. � Broker: person who acts as a go-between for buyers and sellers of stocks and bonds � If an investor in interested in buying or trading corporate shares, he or she can contact a brokerage firm, which will perform the service for a fee.

Stock and Bond Markets � Stock Exchanges � Stocks are traded at stock exchanges. � Brokerage firms communicate with the busy floors of the stock exchanges. � The larges stock exchange is the New York Stock Exchange (NYSE). � Most of the companies traded on stock exchanges are among the largest, most profitable corporations in the country.

Stock and Bond Markets � Over-the-Counter Markets � Stocks that are not traded in a specific place are called over-the-counter stocks. � Companies on Over-the-Counter Markets are usually smaller companies. � Unlike organized stock exchanges, over-the-counter stocks are not traded in a specific place, rather brokerage firms hold shares of stock that they hold for investors.

Stock and Bond Markets � Bonds are sold on exchanges and over-the-counter markets. � Mutual Funds are investment companies that combine many investors’ funds to buy a large variety and quantity of stocks. � Some mutual funds mirror index funds. � Managed mutual funds have managers who adjust and mix the stocks bought, attempting to generate the highest yield.

Stock and Bond Markets � Money Market Funds � Money market mutual funds allow investors to write checks against the money in the fund. � Money market funds usually use investors’ money to buy the short-term debt of businesses and banks. � Mutual funds and money market funds are not insured by the federal government.

Government Regulations � The Securities and Exchange Commission regulates brokerage firms, stock exchanges, and most businesses that issue stock. � Congress passed the Securities Act to avoid another stock market crash. � The Act requires a prospectus to be given to each potential buyer of stocks or bonds.

CHAPTER 6 SECTION 3 Special Savings Plans and Goals

Investing for Retirement � Most companies have pension plans, such as 401 k, that provide retirement income. � Some people will combine a retirement plan with their Social Security checks because Social Security alone is not enough. � Personal or private pension plans have the benefit of tax savings.

Investing for Retirement � Individual Pension Plans � Established by the Keogh Act of 1962 and designed to help self-employed people set up their own pensions. � The Keogh plan is an individual retirement plan for self-employed people where they can save up to 15% of income.

Investing for Retirement � IRAs � Traditional IRAs allow you to contribute up to $3, 000 per year, which is not taxed when put in, and any earnings and interest are not taxed until money is withdrawn. � Roth IRAs allow you to save up to $3, 000 per year, which is taxed when put in, interest and earnings are never taxed, and money is not taxed when withdrawn.

Investing for Retirement � Real Estate as an Investment � Real estate is a popular form of investing for the future. � Housing � Buying � It generally increases in value over time. undeveloped land is a more risky investment. is hard to turn real estate into cash on short notice.

How Much to Save and Invest? � Saving involves a trade-off like every other activity. � There are many factors involved in deciding how much to save versus how much to invest. � How much do you spend on your fixed expenses? � What are your reasons for saving? � How much interest can you earn on your savings and, therefore, how fast will savings grow? � How much income do you think you will be earning in the future?

How Much to Save and Invest? � Invest in several different types of accounts to lower your overall risk (diversify). � If you cannot afford any losses, use banks or savings bonds. � Your values may affect your investment choices.