SAVINGS AND INVESTING
When budgeting money, it is important to set aside money for savings and or investing. When setting money aside for saving and investing, some questions to consider are:
Are you saving money for something you want or need? Describe how you are managing to save money.
Why would you recommend opening a savings account to someone who doesn’t have one yet?
Even though the purpose of the account is to save money, why might it be necessary to withdraw money from a saving account?
If you open a savings account, and start making deposits and withdrawals, who is responsible for keeping track of the account?
Reasons to save and invest money include:
1- In case of an emergency
2- To have the option of taking advantage of unforeseen opportunities
3- To reach financial goals
As you start to earn money you need to PAY YOURSELF FIRST!
Many people ask why, one should set aside money, the answer is to make a habit of saving money so that you can reach your financial goals. What does it take to PAY YOURSELF FIRST? It takes: 1- Commitment
2- Discipline
3- Delayed gratification
Some ways to do start PAYING YOURSELF FIRST are:
1- From each paycheck or allowance, deposit a set amount or percentage into your
savings account before spending money or anything else.
2- At the end of the day, put all your change in a savings container. Once a
month deposit the money in a savings account.
3- Whenever you get unexpected money, put a portion of it into savings.
Remember
1- Amount saved isn’t as important as getting into the habit.
There a number of ways of saving money so that you can reach your financial goal, they include:
Savings accounts, passbook accounts, statement accounts, money-market deposit accounts, and time deposits (certificates of deposit). Let’s consider each one individually.
Savings Accounts
Advantages
1- Simplest way to earn interest on small amount of money for future expenses,
while keeping money readily accessible and earning interest on your money.
Choosing A Savings Account
Factors to consider
Interest Rate
Fees - charges - and penalties
Minimum Balance requirement
Balance calculation method
Individual factors to consider
Your own income
Your budget
Reasons for saving
Truth in Savings Act
Opening A Savings Account
You must be at least 18, or a parent or adult guardian must accompany
the student, who can be a co-signer, meaning, the adult guarding
is willing to share responsibility for the account
Know your Social Security Number
Two forms of ID
Have money to Deposit
Making a Deposit
Fill out a deposit slip – which is a form used to record the details of
the transaction.
Include the following information on the deposit slip:
1- Date
2- Account Number
3- Your Name
4- Your Address
5- Your Signature
6- Amount Deposited in Cash
7- Amount Deposited in Checks
8- Subtotal of Amount Deposited
9- Cash Received if Any
10- Total Amount Deposited
Making a Withdrawal
Fill out a withdrawal slip – with is a form used to record the details of
the transaction.
Include the following information on your withdrawal slip:
1- Date
2- Your Name
3- Account Number
4- Amount, using words
5- Amount, using numbers
6- Your Signature
Using ATMs to Make Savings Deposits and Withdrawals
ATM cards are issued by your financial institution and allow you to
deposit and withdraw money in/from your savings account by using a deposit envelop, located next to the ATM machine or withdrawal transaction
ATM machines are open 24 hours a day
ATM deposits and be in any amount
ATM withdrawals must be in increments of $20
Allows you to choose a personal Identification number (PIN) to access
your account information
Savings Account Register
After all transactions you will need to enter the savings information in
a savings account register. The savings register keeps track of the
date of all transactions, deposits or withdrawals, and the running
balance (current balance/amount of money) in your account.
About the Rule of 72
1- A simple way to estimate how money can grow
2- Divide 72 by the interest rate to find how many years you need
for your money to double.
72 divided by
------= Years to double investment
Interest rate you an get
3- Divide 72 by a number of years to determine the interest rate
needed to double your money in that period of time.
72 divided by
------
Years to double investment = Interest ate required
Simple and Compound Interest
Simple Interest – the same amount of interest is earned on the
original amount deposited
Compound Interest – compound interest grows faster because the
interest is earned on the original amount deposited, then added
to the original year, as well as each year after increasing the
amount that he interest is being paid on each year
Savings vs Investing
1- Difference
a- Degree of risk.
b- Rate and stability of return
c- Availability of funds for use
d- Amount of protection against inflation
Passbook
1- Depositor receives a booklet in which deposits, withdrawals, and interest are
recorded.
2- Average interest rate is lower at banks and savings and loans than at credit
unions.
3- Funds are easily accessible.
Statement accounts
1- Basically the same as a passbook account, except depositor receives monthly
statements instead of a passbook.
2- Accounts are usually accessible through 24-hour automated teller machines
(ATMs).
3- Interest rates are the same as passbook account.
4- Funds are easily accessible.
Interest – Earning Checking Account
1- Combines benefits of checking and savings.
2- Depositor earns interest on any unused money in his/her account.
Money-Market Deposit Account
What they are and how they work – acts like a checking account that pays interest
1- Checking/savings account.
2- Interest rate paid built on a complex structure that varies with size of
balance and current level of market interest rtes.
3- Can access your money from an ATM, a teller, or by writing up to three
checks a month
Benefits
1- Higher interest rates than regular savings accounts.
2- Immediate access to your money.
Trade - offs
1- Limited number of withdrawals each month.
2- Limited number of checks can be written each month.
3- Average yield (rte of return) higher than regular savings accounts.
Time Deposits Certificates of Deposit
What they are and how they work – require you to keep your money in account for
fixed period of time, five or more year. The longer the term, the larger the
deposit, the higher the interest
1- Bank pays a fixed amount of interest for a fixed amount of money during
a fixed amount of time.
Benefits
1- Higher interest rate than regular savings account.
2- No Risk.
3- Simple.
4- No fees.
Trade - offs
1- Withdrawal penalty if cashed before expiration date.
2- Restricted access to your money.
Types of certificates of deposit
1-
2-
3-
4-
5-
How To Calculate Interest
Simple
Dollar Amount X Interest Ate X Length of Time (in years) = Amount Earned
If you had $100 in a savings account that paid 6% simple interest during the first year
you would earn $6 in interest
$100 x 6% (0.06) x 1 = $6
At the end of two years you would have earned $12
The account would continue to grow at a rate of $6 per year, despite the accumulated
interest.
Compound
Interest is paid on original amount of deposit, plus any interest earned.
(Original $ Amount + Earned Interest) X Interest Rate X Length of Time = Amount Earned
If you had $100 in a savings account that paid 6% interest compounded annually, the first
year you would earn $6.36 in interest.
$100 x 6% (0.06) x 1 = $6
$100 + $6 = $106
With compound interest, the second year you would earn $6.36 in interest.
$106 x 6% (0.06) x 1 = $6.36
$106 + 6.36 = $112.36
Some Common Investment Vehicles
Bonds
What they are
A bond is an “IOU”, certifying that you loaned money to a government or corporation and outlining the terms of repayment.
How they work
The buyer may purchase a bond at a discount. The bond has a fixed
interest rate for a fixed period of time. When the time is up, the bond is
said to have “matured” and the buyer may redeem the bond for the full
face value.
Bonds are often purchased as gifts for birthdays, holidays or religious
Events for people who have time on their hands for the bond to mature..
The money from US Savings Bonds, where you lend money to the US
Government, are used to build bridges, school, high ways and fund the
services which keep our government running.
Types
Corporate
1- Sold by private companies to raise money.
2- If a company goes bankrupt, bondholders have first claim to the
assets, before stockholders.
Municipal
1- Issued by any non-federal government.
2- Interest paid comes from taxes or from revenues from special
projects. Earned interest is exempt from federal income tax.
federal
3- The safest investment you can make. Even if U.S. government
goes bankrupt, it is obligated to repay bonds.
Mutual funds
What they are -
Professionally managed portfolios made up of stocks, bonds, and other
Investments, such as real estate or commodities.
How they work
1- Individuals buy shares, and fund uses money to purchase stocks,
bonds, and other investments through a financial advisor or broker.
The financial advisor or broker will manage your investment, in
additional to being responsible for buying and selling stocks. Your
financial advisor or broker will charge you a small percentage of your
investment.
2- Profits and or losses are shared as the entire pool of money rises or
falls in value and returned to shareholders monthly, quarterly, or
semi-annually in the form of dividends.
Advantages
1- Allows small investors to take advantage of professional account
management and diversification normally only available to large
investors.
Types
1- Balanced Fund
2- Global Bond Fund
3- Global Stock Fund
4- Growth Fund
5- Income Fund
6- Industry Fund
7- Municipal Bond Fund
8- Regional Stock Fund
Stocks
What they are
Represents ownership of a corporation. Stockholders own a share of the
company and are entitled to a share of the profits as well as a vote in how
the company is run.
How earnings are made
1- Company profits may be divided among shareholders in the form of
dividends. Dividends are usually paid quarterly.
2- Larger profits can be made through an increase in the value of the
stock on the open market.
Advantages
1- If the market value goes up, the gain can be considerable.
2- Money is easily accessible.
Disadvantages
1- If market value goes down, the loss can be considerable.
2- Selecting and managing stock often requires study and the help of a
good brokerage firm.
You can buy stocks at the stock market – which is where buyers and sellers of stock meet to conduct transactions. There are two types of stock markets in the United Sates, the over-the-counter market (OTC), which is also known as the National Association of Security Dealers Automated Quotes (NASDAQ) and the auction market, which is also known as the New York Stock Exchange (NYSE) and the American Stock Exchange (AMEX).
All stocks have a stock symbol, symbols consisting of 1-3 letters when traded on the NYSE or AMEX and symbols of 4-6 letters traded on the OTC.
To measure how the stock market is going one can refer to the Dow Jones Industrial Average (DJIA), DOW for short. The DOW is used as an indicator or benchmark to let investors know which way the stock marketing is going, either up or down, whether the investors are making or losing money.
The DJIA is comprised of 30 companies that represent different industrial sectors. As each company’s stock are traded throughout the day, every 15 seconds, the stock price changes and the Dow goes up or down.
You can purchase investment programs from which you can purchase shares of stock directly from publish companies called – Direct Investing programs (DRIPS). Such programs are good for students or small investors, because they can own shares of their favorite companies without having to go through a professional broker.
A common way to buy stocks and mutual funds is called Dollar Cost Averaging (DCA). People use DCA to minimize their loss by buying stocks or mutual funds using a payment plan where they purchase the same investment using the same amount of money spread out over time, such as: every week, or every month, thus averaging your “per share cost” .
Real estate
Ways to invest
1- Buy a house, live in it, and sell it later at a profit.
1- Buy income property (such as an apartment house or a commercial
building) and rent it.
3- Buy land and hold it until it rises in value.
Advantages
1- Excellent protection against inflation.
Disadvantages
1- Can be difficult to convert into cash.
2 A specialized type of investment requiring study and knowledge of
business.
Capital gains:
Profits from the sale of a capital asset such as stocks, bonds, or real
estate. These profits are tax-deferred; you do not have to pay the tax on
these profits until the asset is sold. Long - term capital gains occur on
investments held more than 12 months. Short - term capital gains occur on
investments held less than 12 months.
Retirement plans
What they are and how they work
1- Plans that help individuals set aside money to be used after they
retire. Such plans can contributed to by employee’s and employer’s
2- Federal income tax not immediately due on money put into a retirement
account, or on the interest it makes.
3- Grow tax free and, income tax paid when money is withdrawn.
4 Penalty charges apply if money is withdrawn before retirement age,
except under certain circumstances.
5- Income after retirement is usually lower, so tax rate is lower.