PF 4- REVIEW

Special Savings Accounts It's much easier to maintain a savings account, compared to a checking account. When you make withdrawals and deposits, the calculations are done for you in a bankbook.

Here are some of the special savings accounts: - 'Savings bonds' are one type of savings product. These savings products look like a certificate and are issued by the U.S. government. You can purchase a savings bond worth anywhere from $50 to $10,000. - 'CDs' are certificates of deposit. This type of savings account usually offers the highest interest of any savings option at a bank. And generally, the longer you promise to keep your money in the account, the higher the interest rate. - Money market accounts offer a higher rate of interest, compared with a basic savings account. To open a money market account, you must start with a large deposit, and there are restrictions on how often you can withdraw money. - A '529 Plan' is a savings plan for education. This type of savings account is operated by a state or educational institution such as a college. The purpose is to help set aside money to pay for future college expenses. - An 'IDA' is an individual development account. These are savings accounts where the money you deposit is matched. This means an organization, such as a foundation, corporation, or government agency, makes a deposit that matches the amount you deposit. - A 'club account' is for saving money for a special reason, such as a holiday, family vacation, or college. - Treasury Securities include bills, notes, and Treasury Inflation-Protected Securities, or TIPS.

Investing There are some important differences between saving and investing. They are shown in the table below.

Investing - risk - potentially earn more money - not federally insured - money sometimes earned through dividends - necessary to sell an investment to use the money Saving - safety - earn a lower amount in interest - federally insured - no dividends; earns interest - no need to sell; make withdrawals

Stock This is the process for buying and selling stock: 1. A company or individual sells shares of stock. 2. An individual puts in an order to buy stock with a broker. 3. The trade is executed on the exchange floor or electronically. 4. The individual waits and watches the stock. 5. The individual puts in an order to sell stock. 6. The sale is executed either electronically or on the exchange floor. 7. Money is sent to seller.

To get a 'stock quote', you can visit certain web sites, enter the 'stock symbol' in the space provided, click on a button and the quote appears. Here's an example of what a stock quote looks like.

stock symbol

a unique set of letters assigned to a company for the stock market

Being prepared to invest means that you've paid off your credit card balance, built an emergency fund, and have learned about investing. Some investments you may choose are:

- 'Stocks', that is, purchased certificates representing shares of ownership in a company. If the company does well, the value of the stock increases; if it does poorly, the value decreases. - 'Mutual funds', which are professionally managed collections of money from a group of investors. A fund manager decides where to invest the money while trying to outperform other investments and minimize risk. - Retirement investments, which let you save and invest money tax-free until you withdraw it when you retire. In addition, you design the investment strategy within the investment plan. - Real estate, which is another common way for individuals to invest their money. To invest in real estate, individuals buy and sell land, houses, and buildings.

Principles and strategies help guide individuals when they're planning where to save and invest. The principles and strategies of saving and investing include the following:

- Invest with purposeful goals in mind. - Select investments that meet or promote biblical standards. - Seek advice from experts. - Choose investments that don't cause stress. - Be patient. - Don't invest because of greed. - Evaluate risk and return, and if you can't afford to invest, don't. - Understand your risk tolerance. - Learn as much as you can about the investment. - Keep investments simple. - Look at past performance. - Diversify to minimize risk. - Start with low-risk investments and move to riskier investments after you've been successful. - Consider how long you plan to keep your money in the investment. - Continuously reassess your plan. - Keep investment expenses low. - Stick with it.

There are many resources, tools, and services to help with financial planning. Some resources are:

- financial advisors; - articles in financial magazines and the financial section of the newspaper; - full-service stock broker or brokerage firm; - investment books at the library or book store; - online articles about various financial topics (Note: make sure they are written by a reliable source.); - suggestions from analysts; - web sites that provide stock quotes and tables; - representatives at your bank.

PF 4- R, Q 2: Jordan wants to know how long it will take for the money she deposited to double. She has an interest rate of 4 percent. Calculate how long it will take her money to double.

- four years - sixteen years - eighteen years - eighteen months answer: Years to double = 72 / interest rate 72/0.04= 1800 - eighteen years

PF 4- R, Q 6: Choose all that apply. Select all the reasons an individual would save his or her money in a CD.

- high interest rates - matching deposits are available - safe - no fees - advantageous for the U.S. government answer: - high interest rates - safe - no fees

PF 4- R, Q 5: The annual percentage yield (APY) is the _____.

- interest rate on a savings account - amount of interest you are charged on a loan - amount of interest you'll earn in one year from a savings account - a certain type of savings account that yields the most interest answer: - amount of interest you'll earn in one year from a savings account

PF 4- R, Q 8: The amount with which an individual starts an investment is called the _____.

- principal - return - IDA - APY answer: - principal

PF 4- R, Q 7: Anthony wants to be better at saving his money. Name at least five tips you could suggest to help him save.

Writer: 1. Basic Bank Savings Accounts 2. High Yield Savings Accounts 3. Money Market Accounts 4. Online Savings Accounts 5. Credit Union Savings Accounts

Rule of 72

a formula that helps you calculate how long it will take for your savings to double in value

stock broker

a professional who buys and sells stocks and other investments for customers

fund manager

a professional who decides where to invest money in a mutual fund

money market account

a savings account that offers a higher rate of interest when you make large deposits

club account

an account used to save money for a special reason, such as a holiday, a vacation, or college

stock market

an organized way for people to buy and sell stocks and for corporations to raise money, e.g., the New York Stock Exchange and NASDAQ

mature

the condition of a savings product that has been saved for its full term and has reached its full value, becoming payable or due

return

the profit or gain from saving or investing money

Annual Percentage Yield

(APY) the amount of interest you will earn in one year from a savings account

PF 4- R, Q 3: How much would Vincent have in his account after three years if he started with $100 and earns 5 percent, compounding annually?

- $15.16 - $105.00 - $500.00 - $115.76 answer: 100 x 0.05= 5 5 x 3= 15 -$15.16

Here's the formula: A = P(1 + r)n In this formula:

- 'A' is the amount of money accumulated. - 'P' is the principal. - 'r' is the interest rate (1.6%, 5%....). - 'n' is the number of years the amount is in the account.

Savings Why start saving? Here are some important reasons:

- Become a better steward of God's resources. - Save money to put toward your goals. - Money is available for emergencies. - Learn to manage money better.

PF 4- R, Q 10: Choose all that apply. Select all the types of retirement accounts.

- IRA - Mutual fund - IDA - 401(k) - 403(b) - CD answer: - IRA - 401(k) - 403(b)

PF 4- R, Q 9: Using money to try to make more money is called _____.

- saving - investing - trading - diversifying answer: - investing

The Rule of 72

There's another formula that can help you calculate the return on savings or how much money will grow. The Rule of 72 is used to figure out how long money needs to be in a savings account in order to double in value. The formula is: Years to double = 72 / interest rate

CD

certificate of deposit; an account where you leave money for a set period of time without being permitted to make deposits or withdrawals during for the designated period

variable interest rates

different interest rates that are paid for different size balances, with higher balances earning higher rates

IDA

Individual Development Account; a matched savings account into which an organization, such as a foundation, corporation, or the government, agrees to add money in order to match the money you deposit

stock

a certificate representing a share of ownership in a company

PF 4- R, Q 11: A stock broker _____.

- analyzes stock and advises to - buy, hold, or sell buys and sells stock - manages a mutual fund - works on the trading floor at the NYSE answer: - buys and sells stock

Some services are:

- financial advisement; - fund manager; - full-service stock broker or brokerage firm.

mutual funds

a collection of money from a group of investors used to buy different investments, like stocks, bonds, and real estate, which fund is managed by professionals

stock quote

a list of prices for a stock at a particular point during the day

rate of return

a percentage that shows how much gain or loss an investment makes

opportunity costs

the difference between a chosen investment and one that is passed up

liquidity

the ease with which an investment can be turned into cash without losing its value

compound interest

the interest the bank gives on interest that has been already earned

interest thresholds

the minimum balances before the bank begins paying interest

principal

the original amount of money that was invested or was deposited into a savings account

investing

using your money to try to make more money

Follow these tips to help you save:

- If you receive cash as a gift, save at least part of it. - Pay your bills on time in order to avoid late fees and finance charges. - Use direct deposit or set up your account to transfer money automatically and directly into savings. - Save any extra money you receive from your employer as a raise or bonus. - When you get a tax refund, save it. - Save the change you have in your pocket at the end of the day, and deposit it regularly into a bank account. - If your employer offers a retirement plan, join it. - Avoid debt.

PF 4- R, Q 4: An online savings account _____.

- offers lower interest rates because it costs more money to maintain the online site - offers higher interest rates because they don't have the overhead that standard banks have - works nothing like a basic bank savings account - has more restrictions on how often withdrawals can be made and typically require a minimum balance answer: - offers higher interest rates because they don't have the overhead that standard banks have

Some tools are:

- online trading accounts for buying and selling stock from any device that can connect to the internet; - online portfolio to quickly view your investments and their value; - spreadsheet to list your investments; - online calculators to calculate compound interest or the value of a savings bond.

Savings Accounts When selecting a savings account, you should look at the following factors:

- penalties and fees - minimum balance - interest rates - 'interest thresholds' - 'variable interest rates' - the 'annual percentage yield' (APY)

Financial Planning A good financial plan should include a saving and investing plan. This plan will outline how you'll save and invest your money. When selecting investments, you should consider the following:

- risk - 'rate of return' - 'liquidity' - opportunity cost There's a relationship between risk and return. Usually the higher the risk, the greater the chance for a higher return. The following pyramid shows the risk level of the different types of investments.

There are five categories of savings accounts. They are:

1. Basic Bank Savings Accounts offer the lowest interest rates, usually about 2 percent. They have few restrictions on access to your money and usually don't require minimum balances. 2. High Yield Savings Accounts are like basic accounts, but they have more restrictions on how often withdrawals can be made. Typically, they require a minimum balance, but may offer 3 or 4 percent interest. 3. Money Market Accounts are like high-yield accounts. They offer a higher rate of interest, but you must start with a large deposit. Also, there are restrictions on how often you can withdraw money. 4. Online Savings Accounts are a lot like basic bank accounts, but they offer higher interest rates because they operate online and don't have the overhead that standard banks have. 5. Credit Union Savings Accounts tend to offer higher interest rates than basic bank savings accounts.

Compound Interest

Not only does the bank give you interest, they give you interest on the interest you have already earned. This is called 'compound interest'. When a bank compounds the interest in your account, you earn interest on the money in your account and you earn interest on the previously paid interest. There's a formula you can use to calculate the interest.

Kraft Foods Inc. (NYSE: KFT) 29.80 (up) 0.10 (0.34 percent) 9:58AM ET The stock symbol for Kraft Foods Inc. is KFT and it's traded on the NYSE. The value is $29.80. It's up .10, or 10 cents, today. This quote was current at 9:58 a.m. eastern time.

When selecting stock, there are different recommendations. One financial expert, Peter Lynch recommends investing in what you know and do some research. For example, if you know cameras, invest in the company that you think will grow because they sell the best camera. Other financial experts recommend looking at the P/E ratio, the 52-week high, the 52-week low, and the dividend. These statistics may be found on a stock table.

retirement account

a plan for setting aside money to be spent after retirement

claim

a request for payment from an insurance company

529 plan

a savings plan for education designed to help set aside funds to pay for future college costs

savings bond

a savings product; a certificate issued by the U.S. government with values ranging from $50 to $10,000

diversification

investing in a variety of investments in order to limit losses in the event of a sharp decline in a particular type of investment

P/E

price to earnings ratio; the latest closing price divided by the earnings per share