Saving vs. Investing

How much do Insurance companies pay when your cash is lost?

$200

How are CDs similar to savings accounts?

- both are insured, virtually risk free

What are index funds?

- buy a fund that invests in multiple companies

Vanguard

- cheapest - buy lots of stocks and puts them in a fund, then you buy the fund (and own a sliver of a lot of companies) - when you invest in these, it is not totally free, they make a little money off your investment - ex: vanguard gets 0.05%

What is a bond?

- debt investment - investor loans money to an entity (corporate or govt) that then borrows funds for a definite period of time at a fixed interest rate - a bond is a promise to pay back at some point in the future

What is Jeff Bogle's advice?

- diversify - do not put all of your money in one stock, spread out the risk -do not just invest in your own country, go global

What is the smartest way to save? (video)

- drive your car until you have to leave it on the side of the road

What are the potential risks of CDs?

- interest rates may rise, but you're at a fixed interest rate with your CD ..therefore you won't get the higher interest rate back - if you lock in for five years at 1.78% but the value of goods/services increases, your return is not adjusted for inflation so you lose money (deflation is worse than inflation - companies lose money and fire people who can't get jobs and lose money) - Keeping cash at your house is a risk. Be careful to have short term assets in places other than the bank.

What is a CD?

- it puts money into a frozen account - you go to a bank "you buy 1 CD", bank says "one year from now, we'll give you money back plus __% interest (usually 1.06% per year)" -you may be penalized if you pull early - have specific, fixed term ( monthly, 3 months, 6 months, 1-5 years) - they are intended to be held until maturity

What does Warren Buffet say?

- most people should extensively diversify (reduces risks), leads to index fund with low costs - if you are a money manager evaluating business, bring effort and intensity, then don't diversify

What is the zero coupon bond?

- not paying interest until paying off entire loan

What is a risk of a stock?

- you can lose everything if the company falls apart

What happens if you have a bond and the company goes bankrupt?

- you will still get paid -you are not guaranteed everything, but you will get something

Mutual Funds and ETFs

-help you spread out your risks - fund of funds

If you have an individual account how much with the FDIC insure? Joint account?

-individual account - 250,000 -joint account - 500,000

What was the guy's advice in the McDonald's video?

-save one penny each dollar, six months later save two pennies, go up one percent at a time

What is a stock?

-type of security that signifies ownership in a corporation and represents a claim on part of the corporation's assets and earnings - individual ownership in a company - share in performance of the company

When you get a job, how much should you invest in your company's stock for retirement?

1. Just because you work for a company, does not mean they are doing well financially 2. You could be laid off, and then you lose even more than what you put in - if the company bankrupts while you work there... a. you could lose your job and lose income b. you lose your stock (lose investment) 3. Invest in 0-1% because you're investing in one stock for the long run - you don't know how the company will do in the future - labor income, retirement assets, real assets like a house

What are some short term saving options?

1. checking account 2. money market account 3. savings account 4. certificate of deposit (CD)

How do we protect against inflation?

1. the US government issues bonds (lend __ years, government gives back), CDs are not protected so government made bond with interest that would attach to the rate of inflation - this is known as TIPS

If your goal is short term (less than 5 years)...

Do not put your money into a risky asset (like a stock), you will have no guarantee that you will gain and you could lose it all

What are CDs insured by?

FDIC for banks National Credit Union Administration for credit unions

Where should you put your money if it is a short term goal?

Federal Deposit Insurance Corporation (FDIC)

What does an FDIC insure?

This insures that you get a certain amount of money back if a bank falls through

What are TIPS?

Treasury Inflation Protected Securities -if you buy 100 TIP, issued in five years, so in five years you get all back with inflation but if you sell early you have to find a buyer (and you might get less than what you paid for it)

What are some websites that can help you find a good deal?

airgorilla, travelzoo, kayak.com, mobissimo

Where can you get the best rate on your money?

bankrate.com

Why do Germany and Japan have a low interest rate on bonds?

because they do not expect inflation

Who uses bonds?

companies, municipalities, states and foreign government (finance projects and activities)