Chapter 17 - Saving and Investing - 2-9-20

CFP (certified financial planner)

A nancial planner may have credentials, such as Certi ed Financial Planner (CFP) or Chartered Financial Consultant (ChFC). Not all planners are licensed, however.

Indexes

A sequential arrangement of material, esp. in alphabetical or numerical order.

IPO

A stock or bond sold by a corporation for the first time. Proceeds (money from sale) may be used to retire debts, build new plants or buy new equipment or for additional working capital. (Initial Public Offering).

Investments

Aer paying my bills, I do not have much money left over. I save any extra that I get. Since I do not have a lot of money, why should I even consider investing? A If inflation increases at a higher rate than your savings account return, you can lose purchasing power. To stay ahead of inflation and taxes, the money you set aside for long-term goals will need to earn more than the rates usually paid on savings accounts. Consider other investments that can earn a higher return.

Taxable Income Includes

Dividends Interest Income Rental Income

Preparing for a Financial Crisis

Establish a larger emergency fund (3-6 months worth). Know what you owe. Reduce spending. Pay off credit cards. Apply for a line of credit at your financial institution. Notify creditors if you are unable to make a payment. Monitor your investments and retirement accounts. Live below your means but within your needs

What Should You Do to Manage Your Investments?

Evaluate Investments Monitor Investments Think About Tax Considerations

Types of Financial Planners

Fee-Only Planners - pay them a fee and you discuss - charge an hourly rate from $75 to $200 or a flat fee, ranging from about $500 to several thousand dollars. They may also charge an annual fee ranging from 0.04 percent to1 percent of the value of the investments they manage. Fee-Offset Planners - charge an hourly or annual fee,but they reduce, or offset, it with the commissions, or earnings, they make by buying or selling investments. Commission-Only Planners - push you financial products that benefit them - earn all their money through the commissions they make on sales of insurance, mutual funds, and other investments. Fee-and-CommissionPlanners - charge a fixed fee for a financial plan and earn commissions from the products they sell.

fixed costs vs. variable costs

Fixed Costs: business costs, such as rent, that are constant whatever the quantity of goods or services produced. remain constant regardless of output Insurance Interest expense. Property taxes. Variable Costs: a cost that varies with the level of output. Direct materials. Piece rate labor. Production supplies.

401K plan

If your employer offers a retirement plan, usually a 401(k) or403(b) plan, you can take advantage of a ready-made investment program

sources of information

Internet Newspapers Business and government publications Corporate reports - prospectus Statistical averages Investor services

Long-Term Investment Programs - 4 tiers of risk

Level 1 - Low Risk - Financial Security - Cash, CDs, savings accounts, money market accounts, US gov bonds - You may not make more than the inflation rate Level 2 - Safety and Income - US Treasury securities, conservative corporate bonds, state and municipal gov bonds, income and utility stocks Level 3 - Growth - Income and growth stocks, mutual funds, real estate, convertible bonds Level 4 - High Risk - Speculation - Options, commodities, precious metals and gems, speculative stocks, junk bonds, collectibles (beanie babies)

Sources of Money to Invest

Pay Yourself First Employer-Sponsored Retirement Plans: 401(k) or 403(b) Elective Savings Programs Special Savings Effort Gifts, Inheritances, and Windfalls

interest rate (a.k.a. coupon rate)

Percentage of amount borrowed to be added to the amount loaned and paid back

Sources of Investment Income

Savings accounts Certificates of deposit (CDs) U.S. Savings Bonds U.S. Treasury bills Corporate bonds Preferred stocks Mutual funds Real estate Commodities Precious metals Gems Collectibles

Collectible items, such as sports memorabilia, comic books, and vintage toys, can be valuable and may make for a good investment. Do you think the risk of investing in collectibles is high, moderate, or low? Explain your answer.

Some students may say it is a high risk because collectibles may lose value or become worthless, or they can be stolen or damaged. Others may say it is a low or moderate risk because collectors who are experts on the items may have a solid base of safe investments and may feel confident in making speculative investments.

Earned interest and dividends from savings accounts, investments, and rental income are taxed like ordinary income. Explain whether or not you think this is fair.

Some students may say it is fair because it should be taxed like any other income that you earn. Others may say it unfair because you already paid taxes on the money that was invested.

Developing a Personal Investment Plan SLIDE 14

Step 1 - my investment goals - to buy a home

How investing can grow your money - invest $2k/yr

The Power of Compounding LOOK AT SLIDE 8

miracle of compounding interest

The concept simply involves earning a return not only on your original savings but also on the accumulated interest that you have earned on your past investment of your savings.

real estate

The goal of real estate investing is to own property that increases in value so that you can sell it at a pro t—or to receive rental income. When you invest in real estate, you need to nd out if the property is priced as similar properties. You also need to know what nancing is available and the cost of property taxes.

dividend

The portion of corporate profits paid out to stockholders

Capital Loss

The sale of an investment for less than its purchase price. For taxes you usually can subtract up to a $3k in loss a year from your ordinary income.

Questions to Ask Before Investing in a Piece of Real Estate

Why are the present owners selling? Is the property in good condition? What is the condition of other properties in the area? Is there a chance the property will decrease in value? Will you be able to find an interested buyer? Can an interested buyer get the financing to buy the property?

investment goals

Your goals should correspond with your values. At one extreme, some people save or invest as much of each paycheck as possible.e satisfaction they get from ful lling long-term nancial goals is more important to them than spending a lot of money on something temporary, such as a weekend trip. At the other extreme, some people spend every cent they earn, and then run out of money before they receive their next paycheck. Remember there are three types of goals: short-term - pay off car loan, credit card debt intermediate - complete college, one month vacation long-term - pay off student loans, buy home, save for retirement

municipal bond

a bond issued by a state or local government or municipality to finance such improvements as highways, state buildings, libraries, parks, and schools

brokerage firm

a business that specializes in trading stocks

growth stock

a common stock issued by a corporation. This type of stock has the potential to earn above- average pro ts in comparison to other corporate stocks.

corporate bond

a corporation's written pledge to repay a specific amount of money, along with interest

Prospectus

a document that discloses information about a company's earnings, assets and liabilities, its products or services, a particular stock, and the quali cations of its management.

line of credit

a preapproved loan and will provide access to cash for future emergencies.

emergency fund

a savings account that you can access quickly to pay for unexpected expenses or emergencies. For example, if you had to pay for an unexpected car repair or if you lost your job, you could use the money you put away in your emergency fund.

financial planner

a specialist who is trained to offer specific financial help and advice

pension

a sum paid regularly to a person, usually after retirement

preferred stock

a type of stock that gives the owner the advantage of receiving cash dividends before common stockholders receivecash dividends. If a company fails, preferred stockholders receive dividends first and any assets that are le before common stockholders receive anything

common stock

a unit of ownership of a company, and it entitles the owner, or stockholder, to voting privileges. Common stock can sometimes provide a source of income if the company pays dividends.

par value

a value assigned to a share of stock and printed on the stock certificate

CD (certificate of deposit)

an account that guarantees a certain interest rate and has a specified maturity date if interest rates on certificates of deposit are high, you might invest some of your money in a CD.

down payment

an initial payment made when something is bought on credit.

mutual fund

an investment in which investors pool their money to buy stocks, bonds, and other securities selected by professional managers who work for an investment company.

bankruptcy

bankruptcy should be a last resort, or choice. e reason is simple. A bankruptcy will remain on your credit report for up to ten years.

"pay yourself first"

best way to accumulate savings is to set it aside immediately when you get your paycheck. Include the amount you want to save in your monthly expenses. Pay that amount first. Consider it as a bill that you owe to yourself. Pay your monthly living expenses ,such as rent and food. Use money that is leftover for personal expenses, such as going to the movies or buying a new CD.

speculative investment

considered a high-risk investment that might earn a large profit in a short time. The disadvantage of a speculative investment is the possibility that you could lose most or all of the money you invest

stock split

if the company "splits" its stock, or divides shares into a larger number of shares, the stockholder gains because he or she will get more shares

Tax-exempt income

income that is not taxed, for example, interest you can receive from state and municipal bonds is mostly exempt from federal income tax.

Tax-deferred income

income that is taxed at a later date. For example, IRA (Individual Retirement Accounts and 401K) taxes are paid when you withdraw the money.

Five Components of Risk

inflation risk - This is the risk that the value of your portfolio will be eroded by a decline in the purchasing power of your savings, as a result of inflation. Inflation risk needs to be considered when evaluating conservative investments, such as bonds, bond funds, and money market funds* as long-term investments. While your investment may post gains over time, it may actually be losing value if it does not at least keep pace with the rate of inflation. interest rate risk - Most often associated with fixed-income investments, this is the risk that the price of a bond or the price of a bond fund will fall with rising interest rates. business failure risk - is type of risk applies to common stock, preferred stock, and corporate bonds. When you buy stocks or corporate bonds, you are investing in a particular company. Youare betting that the company will succeed. However, it could fail, especially if the company is managed poorly. Even if the company o ers a valuable product or service, positive response from customers is not guaranteed. Lower pro ts usually mean lower dividends,which are distributions of money, stock, or other property that a corporation pays to stockholders. If the company declares bankruptcy, your investment may become worthless financial market risk - Economic growth is not as predictable as most investors believe. Sometimes the prices of stocks, bonds, mutual funds, and other investments go up or down because of the overall state of nancial markets. e value of a stock may decrease, even though a company is nancially healthy. Factors that a ect nancial markets include social and political conditions. For example, the price of oil stocks may be a ected by the political situation in the Middle East, where much of the world's oil supply is produced. global investment risk - Corona - Today many investors are investing their money in stocks and bonds issued by companies in other countriesin an e ort to diversify their portfolios. When the U.S. marketsare in decline, other markets around the world may be increasing. Because these types of investments may be risky, nancial analysts advise small investors to invest in global mutual funds, instead of individual international stocks. U.S. rms o er global mutual funds. ese mutual funds specialize in companies that operate in another nation or region of the world. A mutual fund includes stocks or bonds from many companies and may o er more safety than one company's stocks or bonds.

equity capital

money that a business gets from its owners in order to operate. A corporation gets its equity capital from its stockholders, who become owners when they buy shares of stock in the company. e two basic types of stock are common and preferred.

income stock

pays higher-than-average dividends compared to other stock issues

retained earnings

profits that a company reinvests, usually for expansion or to conduct research and development.

goals + values =

risk tolerance

investment liquidity

the ability to buy or sell an investment quickly without substantially reducing its value.

return on investment

the percentage of the total cost of purchasing an investment and the profit made from selling that investment

diversification

the process of spreading your assets among several di erent types of investments to reduce risk.

Capital Gain

the profit from the sale of assets such as stocks, bonds, or real estate. Capital gains are taxed according to how long you own an asset (usually less or more than 12 months)

maturity

the state of a nancial arrangement when it falls due for payment. Maturity dates range from 1 to 30 years, and interest on bonds is usually paid every six months. You can keep a bond until maturity and then redeem it, or you can sell it to another investor.

government bond

the written pledge of a government or a municipality, such as a city, to repay a speci c sum of money with interest.

windfall

unexpected financial gain

Surviving a Financial Crisis

1. Establish a larger than usual emergency fund. Under normal circumstances, an emergency fund or three months' living expenses is considered adequate, but you may want to increase your fund in anticipation of a crisis. You may consider saving six month's worth of expenses in your emergency fund. 2. Know what you owe. Make a list of all your debts and the amount of the required monthly payments, and then identify the debts that must be paid. Typically these include the mortgage or rent, medicine, utilities, food, and transportation costs. 3. Reduce spending. Cut back to the basics and reduce the amount of money spent on entertainment, dining at restaurants, and vacations. Although this is not pleasant, the money saved from reduced spending can be used to increase your emergency fund or pay for everyday necessities. 4. Pay off credit cards. Get in the habit of paying your credit card bills in full each month. If you have credit card balances, begin by paying off the balance on the credit card with the highest interest rate. 5. Apply for a line of credit at your bank, credit union, or financial institution. A line of credit is a preapproved loan and will provide access to cash for future emergencies. 6. Notify credit card companies and lenders if you are unable to make payments. Although not all lenders are willing to help, many will work with you and lower your interest rate, reduce your monthly payment, or extend the time for repayment. 7. Monitor the value of your investment and retirement accounts. Tracking the value of your stock, mutual fund, and retirement accounts, for example, will help you decide which investmentsto sell if you need cash for emergencies. Continued evaluation of your investments can also help you reallocate your investments to reduce investment risk.

portfolio

A collection of financial assets

Basic Services of a Good Financial Planner

Assess your current financial position Offer a clearly written plan with recommendations Discuss the plan with you and answer questions Help you keep track of your progress Guide you to other financial experts as needed

Economic Institutions

Banks Not-For-ProfitOrganizations Corporations Stockbrokers Real Estate Agents Financial Advisors