Unit 4: Saving and Investing

Savings options?

savings account, money market account, certificate of deposit, bonds

what are the characteristics of all savings options?

Earns interest over a period of time, low risk of losing your money, low rate of interest 

what are the features of a savings account from a bank or credit union?

• Available at any bank or credit union

• Very safe (FDIC)

• Earns interest at a very low rate (.01%)

• Does not take much money to open (usually about $25)

• Very liquid

What is the biggest negative to a savings account 

low return and potential fees 

What are some features of a money market account

• Safe

• Requires a higher initial deposit to open ($100)

• Interest is typically higher for higher balances (.04-.07%)

• Usually requires a minimum balance to avoid a monthly fee

• Liquid - good place for emergency savings

How does a money market account compare to a savings account

Earns interest at a low rate, but higher than savings account

what are the features of a certificate of deposit (CD)

• Guaranteed fixed rate of interest for a specific period of time

• Usually requires at least $1000 to open

• You are charged a penalty if you take the money out early

• The longer you plan to keep the money in, the higher the interest rate

• Example: 11 months + .5% and 17 months = 1.49%

• Safe but not liquid - locked up

What is the advantage of a CD over a savings or money market account

• Higher fixed interest rates - the longer you plan to keep the money in, the higher the interest rate

What is the drawback of a CD versus a savings or money market account

• Lack of liquidity and flexibility - forces you to lock funds away for a set term and pay penalties for early withdraw

what are the features of bonds

• Can be purchased from a company or the government

• Promise to pay you a specific amount of money with interest at a specific time

• Sold to raise larger sums of money to fund a project

What is face value 

amount you will be paid 

what is maturity date

when you will be paid the face value

investing options

stocks, mutual funds, real estate, retirement accounts

what are some general features of investing options

• Usually involves ownership in something (business/property)

• Higher risk of losing money

• Higher potential rate of return

what are stocks 

• You become part owner of a business as a shareholder (value of your shares is your “share” of the business

• High risk up to the full amount of your investment

• High potential return on your investment - not guaranteed

how do you purchase or sell stocks?

• 2 ways to buy and sell:

• 1 - through a broker who buys and sells on the stock (exchanges: NYSE and NASDAQ)

• 2 - do it yourself with an online brokerage account

• Both have commission fees you pay per transaction

• Lower fees for online accounts

What are the two ways to make money from stocks

1. Sell your stock for more than you bought it 

2. Receive dividends

2 types of stock

preferred and common

Preferred stock

costs a little bit more, gets paid first if company goes out of business, may get a fixed dividend rate

common stock

gets paid after preferred shareholders, no guaranteed dividend rate 

what is a mutual fund and what are the advantages to investing in one?

• Pools money from many investors

• Professionally managed fund that invests in a variety of stock, bonds, and other securities

• Risk is diversified - spread across many investments

• easy way to invest in a variety of stocks and bonds

How is real estate an investment

• Property has value

• Over time, that value typically will increase

• Improvements will increase it more quickly (flipping houses)

• Can take a long tome - not liquid!

What is interest

• Money earned from investments

• Rate of interest depends on type of investment

what is the relationship between interest and the level of risk of an investment 

• Low risk investment = low rate of interest

• High risk investment = high potential rate of interest

What are the 2 ways interest can be calculated

simple and compound

what is simple interest

• Interest is calculated one time per year on the principal (original amount) only

What is the simple interest equation

• Interest = principal x rate x time

• P = how much money you’re investing

• R = the interest rate

• T = how long you’re investing for

What is compound interest

• Interest is calculated and paid multiple times a year on the principal PLUS any previously earned interest

Why is compound interest better for the investor

• You are earning interest on your interest

• A much better deal for you!

• Allows money to grow at an accelerating and exponential rate over tome

What is the compound interest equation

• Total = p (1 + r/n) to the power of t(n)

What does the “n” represent in the equation

n = number of times compounded per year