Saving and Investing Tools

Carl JohnsonFinancial LiteracyJenks High School

Terms to Know

• Certificate of Deposit• Corporate Bonds• Money Market Mutual Funds• Mutual Fund• Rate of Return• Risk• Savings Account• Savings Bonds• Stocks

Savings Strategies

• Your goals will determine the choices that you will want to make when planning your savings and investments

• Savings is generally used to meet short and medium term goals of seven years or less, while investing is generally used to meet long term goals

•There are several options to consider when planning your savings strategy: savings accounts, certificates of deposit (CD’s), government savings bonds, money market mutual funds and checking accounts

Savings Strategies

Savings Accounts• Interest bearing accounts at banks and credit unions• Usually have low interest rates, are used to deposit small amounts of money and meet short term goals• Great way to establish an emergency fund• Make sure bank has FDIC protection/credit union has NCUA insurance

Savings StrategiesCertificate of Deposit• Also called CD’s• Offered by most banks and credit unions

• Covered by federal insurance• When purchased, you have to wait a certain amount of time until CD matures to get your money

• Ranges in time from 30 days to many years, depending upon what CD you use

• The longer the term of the CD, the higher the rate of interest• Less liquid as a savings account, but usually have a higher interest rate than a savings account

Savings StrategiesGovernment Savings Bonds• Backed by the U.S. government, so there is little or no risk• Default risk is the potential that the bond issuer will not pay the interest or return your money when it matures•Many are designed to be held for a minimum number of years before you can cash them in to get your money and interest• Have a higher rate of return due to the length of maturity, but also are low risk which reduces potential earnings

Savings StrategiesMoney Market Mutual Funds• Designed to provide higher rates of return than savings accounts because money is actually invested in very short term investments with low risk• Available at banks and credit unions, but may be also offered by other financial service providers

• The ones offered by banks and credit unions are covered by federal insurance, while those offered by other financial service providers are not

• To cover the additional risk, those tend to pay higher interest

rates

Savings StrategiesChecking Accounts• Basic purpose is not saving money, but to provide a convenient way to handle personal and business transactions• Many checking accounts earn a very small percentage of interest

Investing Strategies

• When you invest, you are really hoping for a higher rate of return than when you save• Investment options tend to have higher rates of risk than savings options, but also tend to have higher rates of return• As in any investment, there is no guarantee to making money• Most adults tend to focus their investments on retirement benefits

• It is never too early to consider your strategy for long term goals

Investing StrategiesMutual Funds• Provides an opportunity for investors to pool money together to buy shares of a fund that invests in many different products (stocks, bonds and securities)• Is a great way for people with limited money and knowledge about investing to get started• Mutual funds accounts have a professional money manager who monitors the account closely to make sure that it is earning the maximum amount possible

Investing StrategiesMutual Funds• Various economic factors may cause the rate of return to fluctuate, even lose money• Because it is a long term investment, you generally have an opportunity to recover from any loss• Most financial experts recommend mutual funds because the potential gains are greater than the losses

Investing StrategiesStocks• Buying stocks allow to own part of a company• Don’t just buy stocks in one company, you can diversify your portfolio by buying stocks in more than one company

• Experts recommend owing at least ten different stocks in different industries

• Buying and selling stocks can be exciting and profitable, but it is more risky and expensive than owning a mutual fund

Investing StrategiesCorporate Bonds• When you buy a corporate bond, you are making a loan to the company• You allow them to use your money, and they pay you interest• The interest that you receive is the value of your investment• Buying into bond mutual funds is an alternative for investors because it spreads your risk• It is a lower risk option with lower returns than stocks

Rates of Returns

• Risk levels are different for various savings and investment options• The rate of return is the amount of money that you can earn when saving and investing• The higher the average return, the more risk you are taking as an investor• Average returns do not guarantee what you will earn, they will only show what has happened in the past with that type of investment

Average Rates of ReturnSince 1926

Asset Class Rate of Return

Common Stocks 10% - 13%

Stocks of Smaller Companies 14% - 16%

Long Term Corporate Bonds 6.5% - 8%

Long Tern Government Bonds 5% - 7.5%

Short Term U.S. Treasury Bills 3.5% - 5%