UNIT FOUR Savings and Investments: Your Money at Work

1
UNIT FOURSavings and Investments Your Money at
Work
2
How risky are you?

• Take out 3 SMALL pieces of scratch paper and
  write your name on each.
• How will you distribute your money?
• Low Risk, Medium Risk, High Risk

Ms. Seguin
Ms. Seguin
Ms. Seguin
3
Saving and Investing

• Fill out the first 2 columns of your KWL sheet.
  What do you KNOW?
• What do you WANT to know?

4

• It can buy a House, but not a Home-
• It can buy a Bed, but not Sleep-
• It can buy a Clock, but not Time-
• It can buy you a Book, but not Knowledge-
• It can buy you Position, but not Respect-
• It can buy you Medicine, but not Health-
• It can buy you Blood, but not Life-
• It can buy you Sex, but not Love-
• So you see, money isnt everything
• And it often causes pain and suffering.
• I tell you this because I am your Teacher,
• And as your teacher I want to take away all your
  pain and suffering.
• So give me all your money and I will suffer for
  you.
• Cash only please.

Money
Source Unknown
5
Take a guess

1. ____ of teenagers pay themselves first when they
   receive an allowance or get paid for work.
2. ____ of teenagers usually put savings into a
   checking or savings account, while _____ put
   savings into a certificate of deposit, mutual
   fund or stock.
3. ____ of teenagers have sought advice (usually
   from a parent) on how or where to best save or
   invest their money.
4. Of all young people who are familiar with
   investing in the stock market, ____ of teenagers
   are guys and _____ are teenage girls.
5. ____ of teenagers are savings money for college,
   and ____ are saving for a car.

6
Questions to be answered

• How can you develop the habit of saving?
• What is the difference between saving and
  investing?
• What does time value of money mean, and why is it
  such a neat thing for one to know now?
• What is a quick way to find out how long it will
  take your money to double?
• What is the difference between a stock and a
  bond?
• How do mutual funds work?
• Do you have any more to add?

7
Saving vs. Investing

• How can you make your money work for you?
• Where does the money come from?
• Two significant ways savings and investments.
• Are they the same?

8
Savings

• Money set aside for a short-term goals.
• Money in savings may be invested later.
• Usually very safe
• Earns a small amount of interest.
• Can pull money out at any time (liquid).

9
Investing

• Money set aside for future income, benefit, or
  profit to meet LONG-TERM goals
• No guarantee money will grow or increase.
• Potentially huge earnings or losses.
• Investor recognizes it usually takes a LONG TIME
  to earn big bucks in it for the LONG HAUL.

10
Imagine

• Imagine there is a bank which credits your
  account each morning with 86,400, carries over
  no balance from day to day, allows you to keep no
  cash balance, and every evening cancels whatever
  part of the amount you had failed to use during
  the day.
• What would you do?

11

• There is a bank like this YOU.
• Every morning, it credits you with 86,400
  seconds.Every night it writes off, as lost,
  whatever of this you have failed to invest to
  good purpose.It carries over no balance. It
  allows no overdraft.

12

• Each day it opens a new account for you.Each
  night it burns the records of the day.If you
  fail to use the day's deposits, the loss is
  yours.There is no going back. There is no
  drawing against the tomorrow.You must live in
  the present on today's deposits.Invest it so as
  to get from it the utmost in health, happiness
  and success!The clock is running.
• Make the most of today.
• What you do with this time
• determines your success.

13
What is your time worth?

• As you read/listen to the following poem, think
  about what TIME means to you.

14

• To realize the value of ONE YEAR, ask a student
  who failed a grade.To realize the value of ONE
  MONTH, ask a mother who gave birth to a premature
  baby.To realize the value of ONE WEEK, ask the
  editor of a weekly newspaper.To realize the
  value of ONE HOUR, ask the lovers who are waiting
  to meet.To realize the value of ONE MINUTE, ask
  a person who missed the train.To realize the
  value of ONE SECOND, ask a person who just
  avoided an accident.To realize the value of ONE
  MILLISECOND, ask the person who won a silver
  medal in the Olympics.

Source 7 Habits of Highly Effective Teens
(Covey)
15
What is your time worth?

• Assignment list 5 ways time is valuable to you.
• Ex to realize the value of a
• Saturday morning, ask a
• student who spent 4 hours
• in detention.

Hootie and the Blowfish Time http//www.youtube.
com/watch?voFLysouG86Iobav2n
16
Time Value of Money

• Is the relationship between
• time, money and rate of
• return (interest), and
• their effect on earnings
• growth.
• Earned Interest you receive for letting
  someone else use your money.

17
Factors that determine how much money you will
have

• Time
• Money
• Rate of Interest (Interest Rate)

18

• The more TIME you have to save, the more money
  you will have at the end of the time period.
• The more MONEY you have to save, the more money
  you will have at the end of the time period.
• The higher the RATE OF INTEREST you can earn, the
  more money you have at the end of the time period.

19
Compounding

• Compounding the idea of earning interest on
  interest (snowball effect).
• One of the greatest aspects of personal finance.
• Compounding is the 8th wonder of the world.
  attributed to Albert Einstein.

20
Compounding Example (Assume return rate is 10)

• First year 100 x 10 10 100 110
• Second year 110 x 10 11 110 121
• Third year 121 x 10 12.10 121
  133.10
• Fourth year
• 133.10 x 10 13.31 133.10 146.41
• You are earning INTEREST on
  INTEREST

Compounding explained http//www.youtube.com/wa
tch?viIwyMif5EOg
21

• Try this! Go to your parents and suggest that
  they give you an allowance of one penny, and
  double it each day for one month. By the end of
  thirty days, they would owe you over five million
  dollars a day. Hard to believe? Take a
  calculator and punch in 0.01. Then punch "x 2",
  then just keep hitting "". It goes slow for a
  while, then around day 20... wow!

1 0.01
2 0.02
3 0.04
4 0.08
5 0.16
6 0.32
7 0.64
8 1.28
9 2.56
10 5.12
11 10.24
12 20.48
13 40.96
14 81.92
15 163.84
16 327.68
17 655.36
18 1,310.72
19 2,621.44
20 5,242.88
21 10,485.76
22 20,971.52
23 41,943.04
24 83,886.08
25 167,772.16
26 335,544.32
27 671,088.64
28 1,342,177.28
29 2,684,354.56
30 5,368,709.12
22
How much fits into your budget?
Both are great, but what would you prefer?
23

• The cool thing is that people your age have the
  dynamics of time and compound interest on your
  side because you have more time to save and
  invest.

24
Rule of 72(when you know interest rate)

• Tells you how long it takes for your money to
  double in value.
• 72 interest rate number of years for your
  money to double.

25
Rule of 72(with a deadline)

• 72 (number of years) rate needed to double
  your money
• If you want to double your money in 10 years
• 72 10 years 7.2 interest.

26
Try It!Apply the Rule of 72 to find the time.

• Assume you can earn 8 interest on your money.
  How long will it take 100 to grow to 200?

• 72 8 9 years

27
Try It!Apply the Rule of 72 to find the rate.

• If you have 2,000 today and need 4,000 in 6
  years, what interest rate do you need to earn?

• 72 6 12 Interest

28
Time

• The more time you have to reach your savings
  goals, the more money you will have at the end of
  that time.
• or
• Example Figure 4.1

8
29
Risk and Return

• The risk-to-return relationship is a key
  investment principle.
• The more risk you take, the greater the potential
  return you can receive.
• Less risk, less return on your money.

30
(No Transcript)
31
Risk and Return
SP 500 price history for the last 120 years.
32
Rate of Return

• Rate of return same as interest rate (how fast
  your money grows).
• When we are investing, we want a HIGH interest
  rate
• For credit, we wanted LOW

33
Diversification Dont put all your eggs in one
basket.
Explain.
34
Diversification

• Reducing your risk by spreading your money among
  several different investments.
• People have different ideas about how much risk
  to take with their money.

35
Inflation and Taxes

• Inflation occurs when the price of goods and
  services rise. Has been around for decades
  ranging from barely .5 to 18
• Average is 3-4

36
Inflation Rates
Year Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Ave
2010 2.63 2.14 2.31 2.24 2.02 1.05 1.24 1.15 1.14 NA NA NA NA
2009 0.03 0.24 -0.38 -0.74 -1.28 -1.43 -2.10 -1.48 -1.29 -0.18 1.84 2.72 -0.34
2008 4.28 4.03 3.98 3.94 4.18 5.02 5.60 5.37 4.94 3.66 1.07 0.09 3.85
2007 2.08 2.42 2.78 2.57 2.69 2.69 2.36 1.97 2.76 3.54 4.31 4.08 2.85
2006 3.99 3.60 3.36 3.55 4.17 4.32 4.15 3.82 2.06 1.31 1.97 2.54 3.24
2005 2.97 3.01 3.15 3.51 2.80 2.53 3.17 3.64 4.69 4.35 3.46 3.42 3.39
2004 1.93 1.69 1.74 2.29 3.05 3.27 2.99 2.65 2.54 3.19 3.52 3.26 2.68
2003 2.60 2.98 3.02 2.22 2.06 2.11 2.11 2.16 2.32 2.04 1.77 1.88 2.27
2002 1.14 1.14 1.48 1.64 1.18 1.07 1.46 1.80 1.51 2.03 2.20 2.38 1.59
2001 3.73 3.53 2.92 3.27 3.62 3.25 2.72 2.72 2.65 2.13 1.90 1.55 2.83
2000 2.74 3.22 3.76 3.07 3.19 3.73 3.66 3.41 3.45 3.45 3.45 3.39 3.38
Note Red indicates Deflation, NA indicates data not yet released. Note Red indicates Deflation, NA indicates data not yet released. Note Red indicates Deflation, NA indicates data not yet released. Note Red indicates Deflation, NA indicates data not yet released. Note Red indicates Deflation, NA indicates data not yet released. Note Red indicates Deflation, NA indicates data not yet released. Note Red indicates Deflation, NA indicates data not yet released. Note Red indicates Deflation, NA indicates data not yet released. Note Red indicates Deflation, NA indicates data not yet released. Note Red indicates Deflation, NA indicates data not yet released. Note Red indicates Deflation, NA indicates data not yet released. Note Red indicates Deflation, NA indicates data not yet released. Note Red indicates Deflation, NA indicates data not yet released. Note Red indicates Deflation, NA indicates data not yet released.
37
Why should you care?

• It means you are going to be paying more in the
  future for the same items.
• A dollar in the future wont buy as much as a
  dollar today.
• Depending on your type of investments, inflation
  can go up faster than your earnings.
• Learn to invest wisely, follow the rate of
  inflation, and make sure your investment rates
  are higher than those of inflation.

38
Taxes

• Taxes are another drain on your savings and
  investments.
• Just a few other taxes
• Earnings from a job
• Income from savings
• Income from investment.

39
Put Your Money to Work

• Two reasons Income or Growth.
• Income you get paid in cash for holding certain
  types of investments (Lender)
• More reliable, less risk, lower return
• Growth - you hold an investment with the hope
  that it will increase in value over time (Owner).
  
• We will look at many examples...

40
Owner or Lender

• Lender- you lend your money to a business or the
  government and receive interest (income).
• Owner- you actually buy a piece of a business and
  hope the business goes up in value (growth).
• More risky

41
Income Investments (Lenders)

• Savings Accounts payments are called interest.
• U.S. Savings Bonds formal agreement between you
  (lender), the U.S. government (borrower)
  covering a set time period
• You earn interest
• Penalty if cashed in early.

42
More Income Investments (Lenders)

• Certificates of Deposit (CD) just like bonds,
  but issued through banks (instead of government).
• Money Market Accounts Work like checking
  accounts and pay a higher rate of interest than
  savings accounts. You can take money out
  whenever you want and usually with no penalty.
• Corporate and Government Bonds Government bonds
  tend to be safer than company bonds, so corporate
  bonds usually pay higher rates of interest. Time
  periods can be 2 to 30 years.

43
Growth Investments (Owners)

• Stocks Investments that represent ownership in a
  company.
• Buy low sell high.
• The difference between the purchase price and
  selling price is the investors earnings, which
  is called capital gain.

44
More Growth Investments (Owners)

• Real Estate. Investors buy pieces of property.
• Collectibles. Are usually unique items that are
  relatively rare in number.
• Very high risk, because popularity and demand can
  change.
• Ex baseball cards, art, Beanie Babies.

45
More Growth Investments (Owners)

• Mutual Funds
• Pools money from several investors
• A fund manager, who is an investment expert,
  makes all the buy and sell decisions.
• Because mutual funds own a variety of
  investments, investors enjoy the benefits of
  diversification, and are a great choice of
  investing.

46

• Get started with your savings habit now!
• Complete Action Steps

47
Analogy

• Drawing comparisons in order to show similarities
• Example A computer is like a brain because of
  the way it networks information.

48

• Divide into pairs
• Complete the following analogy
• Investing is like ______________.
• Develop at least three supporting reasons for the
  comparison.
• Create a visual representation of the analogy.
  List reasons on poster.
• Present analogy to the class.