Personal Finance Unit 5: Saving and Investing

If you are a debt investor, how do you make money from your investment?

Lending money and charging interest

Liquidty

Liquidity means that you can get your money out and use it easily.

Strategies for Saving

-Collect Coins -Pay Yourself First -Spend Wisely -Find Discounts

Good Investments

-Grow in value, so it's worth more in the future than it is now. -Produce income, so you get a steady, predictable amount of money on a regular basis.

Which conditions might cause someone to save more than three months' worth of expenses? (choose three)

-The job market in their field is very competitive. -They have large non-discretionary (not optional) expenses. -Their income is unpredictable.

Which of the following types of accounts offers tax deferred investing for retirement?

A 401(k) plan

401(k) Plan

A 401(k) plan is a common type of retirement account. 401(k) plans are offered by businesses or companies to their employees. Employees can invest part of their income into a traditional 401(k) account without paying taxes on that income. Money in the 401(k) account is not taxed until you reach retirement age and begin removing money from the account. This is called a tax deferred account, because the taxes are deferred (delayed) until later. EXAMPLE If your salary is $30,000 and you want to invest 10% of it in a 401(k) plan, you'll be able to deposit $3,000 each year, without subtracting taxes from your salary first. Some employers might match the contributions you make to a 401(k) plan, as a benefit of your job. This is a very valuable benefit, since it allows your retirement account to grow more quickly than it would if you were the only one making contributions.

529 Plan

A 529 plan is a fund that allows parents to prepay or save for their children's future college expenses. You do not need to pay federal income tax on money that you remove from a 529 plan to pay for college expenses. Some states may require that you report and pay taxes on this income as a part of your state income tax. Be sure you understand your state's tax policy before you purchase a 529 plan

Broker

A broker is a finance professional who buys and sells stock and other securities on behalf of an investor.

Commodities Mutual Fund

A commodities mutual fund is a fund that's specifically for investments in commodities such as livestock or energy sources. Commodities mutual funds can be attractive to investors since the process of investing in commodities can be expensive and complicated, making it a challenge for individuals to invest on their own.

Dividend

A dividend is a payment you receive as a stockholder. Usually, a company issues dividend payments to stockholders at regular intervals throughout a year.

Financial Reserve

A financial reserve is an amount of money that's set aside in savings for financial emergencies, such as losing your job or having unexpected medical expenses.

Liquidation Policy

A liquidation policy tells you when and how you're able to remove money from the account.

Money Market Account

A money market account invests your money in low risk investments with predictable interest rates.

Mutual Funds

A mutual fund is a company that takes money from many investors, pools that money together, and then invests the money in stocks, bonds, other securities, or a combination of these. Mutual funds let investors benefit from investment opportunities that might not be reasonable for them as individuals investing without a fund. -reasonable amount of liquidity

Prepaid 529 Plan

A prepaid 529 plan lets parents purchase college tuition at today's rates, with the guarantee that they'll be able to apply today's rates to college in the future, no matter how much they go up. EXAMPLE If four years of college costs $20,000 now, and $30,000 when the child goes to college, the investment has a $10,000 or 50% rate of return. The money in the account can only be used for college tuition, not for other educational expenses such as textbooks. A prepaid 529 plan is fairly low risk, since it's unlikely that the cost of college courses will decrease over time.

Public and Private Stock

A publicly held stock is a registered stock that is available to the general public. Publicly held stocks are traded in public, in exchanges like the New York Stock Exchange. A privately held stock is an unregistered stock that is not traded on public markets. Companies that issue privately held stock usually do so to a very small number of investors.

Real Estate Investment

A real estate investment is the purchase of property in the form of buildings or land, such as a home, an office building, or land with nothing built on it. Real estate investments often require a large amount of money. Buying and selling real estate takes a long time, and it may be difficult to sell real estate when you want to. Real estate doesn't have very good liquidity.

Savings 529 Plan

A savings 529 plan is an investment account where money is set aside for college expenses. When you make deposits into a savings 529 plan, you aren't purchasing future college tuition. Instead, you're setting money aside that will eventually be used for educational expenses. Most savings 529 plans do not have an age limit. -Up to $12,000 a year can be contributed into a savings 529 plan. If a person with a savings 529 plan chooses not to go to college, the plan can be transferred to another relative. Or the money can be removed from the plan, but if it's not used for education, it's taxed as income and charged a 10% penalty. The money in a savings 529 plan can also be used for other college expenses such as textbooks or housing. Money in a savings 529 plan can be used at any college or university, not just those that have agreed to participate in the plan.

Short-Term and Long-Term Capital Gain

A short-term capital gain is a capital gain on an investment you've had for one year or less. Federal taxes due on short-term capital gains are always equal to the percentage of your income that you pay in taxes. A long-term capital gain is a capital gain on an investment you've held for over one year. Long-term capital gains are taxed at lower rates than short-term capital gains.

Compound Interest

Compound interest is interest that is added to the principal in the account, so that the interest you receive starts to generate its own interest. This process is called compounding.

IRA (individual retirement account)

An IRA (individual retirement account) is another common type of retirement account that you can get directly from an investment company.

Annuities

An annuity is an agreement you can make with an insurance company in which you pay the company a specific amount of money, and the insurance company agrees to pay you back a larger amount of money in regular payments in the future. Usually used for retirement. A straight annuity begins issuing regular payments to you at the time you agreed on, and then keeps making these payments for the rest of your life. An installment-certain annuity (or period certainty) issues regular payments to you for a set number of years.

Index Fund and Stock Market Index

An index fund is a fund that works similarly to a mutual fund, except that instead of being managed closely by an investment expert, it is set up to track the overall performance of the stock market. A stock market index is an indicator of how the stock market as a whole is doing. It analyzes the stock prices and values of a specific group of representative stocks and averages them out to show how the market as a whole is doing.

Investment Accounts

An investment account is a diversified account that a finance professional sets up and maintains for you. This way, you'll have help setting up your portfolio.

Investment Commodities

An investment commodity is a very basic good or service. Commodities have utility for the majority of consumers. They are almost always needs instead of wants. Commodities are usually precious metals, agricultural products, energy sources, or sources of meat.

Bond Investment

Bonds are a type of debt investment in which you lend money to a company or a government, and the company or government gives you a document called a bond. The bond is a promise that the company or government will pay you back a specific amount on a specific date in the future, so you are promised a specific return on your investment. Bonds from a stable and reliable company or government are a fairly safe type of investment, because the company or government is likely to pay you back the amount they say they will. If you invest in bonds from an unstable company or government, you may be able to get a higher interest rate, but your risk will also be higher.

Cash Investments

Cash investments, such as deposits in a savings account or money in a money market account, have almost no risk. Money in a savings account gains a small amount of interest slowly over time. It doesn't have the potential to grow at higher speeds or in larger amounts.

Which type of interest is added to the principal in the account, so that the interest generates its own interest?

Compound Interest

Debt Investments

Debt investments are investments without ownership that promise a specific return on the investment. -Debt investors are choosing safety and predictability over the potential for high returns. -Debt investments are sometimes called income investments, because the investor is usually hoping to get a steady, predictable income from them. -Debt investments are usually lower risk investments, but they can be risky if you lend money to an unreliable company or person.

Diversification

Diversification is an investment strategy in which you spread out your investments among many different types. You can help protect yourself against risk by creating a diverse investment portfolio. An investment portfolio is a collection of investments and financial holdings

Which type of investment income happens when a company shares its profits with investors?

Dividends

In order for your savings and investments to truly increase in value, what must they do?

Increase faster than the interest rate

As you get closer to needing the money from an investment, what happens to your risk tolerance?

It decreases, so you can't handle as much risk.

Equity Investments

Equity investments are investments in the ownership of something, such as a company or real estate, with the hope that the investment will increase in value and be worth more at some future date. -A capital gain is money gained on the sale of equity investments. -Equity investments don't promise the investor a specific return. They are usually more volatile and unpredictable than debt investments

Exponential Growth

Exponential growth is growth that speeds up as the value of the account grows.

More on Retirement

If you're retiring in 10 years, you'll want an account with a much lower amount of risk, since you'll need the money soon. If you're retiring in 30 years, you can tolerate a higher amount of risk, since there will be more time for the account to even out over time. Most retirement accounts are not very liquid, because they assume you won't use the money until you reach retirement age. If you remove money from a retirement account before you reach retirement age, you may have to pay large fees on the money you remove.

Investment Risk

In most investments, the higher the risk and volatility, the higher the potential return. Very safe investments usually don't have a very high potential return.

Microfinance

Microfinance is providing loans or other financial services to low-income individuals or small groups who can't access banks or wouldn't qualify for loans. The borrowers use these loans to fund small business ideas, which ideally helps them escape poverty.

NASDAQ

NASDAQ is another major stock market. Its trades take place over computers, not in person.

If you want to be able to compare different investments, which piece of information is the most helpful?

ROI percentage

Registered Stocks

Registered stocks are stocks that have been through the SEC's registration process. To register with the SEC, a company must provide the SEC with: -A description of what the company does. -A description of the security the company wants to sell to the public. -Information about who manages the company. -Statements about the company's finances. -Disclosure

To take advantage of the power of compounding, what should you do with the money an investment produces?

Reinvestment

What can diversification help you deal with?

Risk

Securities

Securities are investment opportunities, such as stocks or bonds, represented by a document. This document is usually on paper, but some securities are represented by online or computer-based documents. The Securities and Exchange Commission (SEC) is a U.S. government agency with the purpose of regulating the securities market and protecting investors. One of the main roles of the SEC is protecting investors from fraud. Fraud is illegal, dishonest behavior by an individual or company. The SEC deals with fraud that's designed to cheat investors out of their money or mislead them about investments.

If you are an equity investor, how do you make money from your investment?

Selling the investment for more than you paid for it

Simple Interest

Simple interest is interest gained only on the principal amount of an account.

Social Investing

Social investing is when the goal of an investment is to both have a high financial return and make a positive impact on the world.

Stock Investments

Stocks are a popular type of equity investment in which you can buy partial ownership of a company in a tiny fractional amount called a share. Stocks are often called equities. Because stocks are available in tiny fractional amounts called shares, they don't require a large investment. An investor can start investing in stocks even with a small amount of money available to invest. Historically, the stock market has offered good long- term return on investment, but it is volatile and has dramatic highs and lows.

Dow Jones Industrial Average

The Dow Jones Industrial Average is an indicator of how stock markets are performing over time. It averages the stock prices of the 30 biggest U.S. companies in the NYSE and NASDAQ stock markets. This average is used as an indicator for how the stock market as a whole is performing.

NASDAQ Composite Index

The NASDAQ Composite Index tracks a set of representative stocks in the NASDAQ stock market and uses them as an indicator of how the NASDAQ stock market as a whole is performing. It calculates the values similarly to the S&P 500 Index, by comparing the number of shares with the price of each share. The NASDAQ Composite Index tracks thousands of different stocks.

Standard & Poor's 500 Index

The Standard & Poor's 500 Index is another commonly used indicator of how the stock market is doing. This index is usually called the S&P 500 for short. It includes a large group of 500 companies selected by a committee to represent all aspects of the market well. The S&P 500 calculates stock values differently from the Dow Jones Industrial Average. The S&P 500 compares the number of shares with the price of each share to determine its value.

Which of the following is a risk of investing in a privately held company, instead of a publicly held company?

The investment isn't regulated by the SEC.

Which of the following is usually found in a stock listing?

The price the stock was selling for at the opening of the business day

Rule of 72

The rule of 72 helps you calculate the number of years required to double the principal of an account based on its annual compound interest rate. To use the rule of 72, divide 72 by the interest rate of the account. EXAMPLE An account has an 8% annual compound interest rate. 72 divided by 8 is 9, so it will take 9 years to double the principal of the account.

Which of the following is a reason to purchase bonds?

To receive a specific and reliable return on your investment

Venture Capital

Venture capital is money used to fund a business in its early stages. However, venture capital investments happen in stages of the business that are more stable than the very beginning startup stage. Venture capital investor groups usually have more money to invest, so venture capital investments are usually larger than angel investments. Venture capital investments typically come after angel investments, after the company has shown it can succeed on a smaller scale and is ready to expand. This makes venture capital investing slightly less risky than angel investing.

You should try to get the lowest interest rate possible in which of the following situations?

You are borrowing money from anther person

Which of the following is a good reason to have a financial reserve that's larger than normal?

You have a large monthly car payment.

Which option allows you to pool your money and invest in a portfolio with other investors?

a mutual fund

What is a stock?

a partial ownership in a company

What is a volatile investment?

an investment that can change quickly without warning

Which type of investment income happens when an investor sells ownership in an equity investment that's gained value?

capital gains

What is compounding interest?

interest that's added to the principal of an account

Which policy is a way the SEC protects investors?

requiring companies to disclose financial information

Which portion would not be part of an investment portfolio?

savings account

How does an equity investor make money?

selling an investment for more than they paid for it

Which example is an investment commodity?

steel

What piece of information is most helpful when you're comparing investments?

the ROI percentages

Which piece of information is typically included in a stock listing?

the number of shares of stock sold in a previous day

What is opportunity cost?

the value of an investment opportunity you pass up in order to take another investment opportunity

What is the New York Stock Exchange?

the world's largest exchange for trading stocks and other securities

When is your risk tolerance lowest?

when you are closest to needing the money you invested