Savings & Investments

Risk

Saving

Investing

VS.

Taxes

RETU

RNS

Time Value of Money – Page 11. The more time you have to save, the more

money you will have at the end of the time period.

2. The more money you have to save, the more money you will have at the end of the time period.

3. The higher the rate of interest you can earn, the more money you will have at the end of the time period.

Time Value of Money – Sample 1Jean has $400 to invest at 5% interest. How much will

the money be worth in two years?N _________I% _________PV _________PMT _________FV _________

Change the number of years to 5. What is the new future value?Change the dollar value to $500. What is the new future value?Change the interest rate to 6%. What is the new future value?

Time Value of Money – Sample 2Your parents will give you $1,000 each year for your

four years of college if you maintain a GPA of 3.0 or higher. How much money will you have at the end of the four years if the money earns 7%?

N _________I% _________PV _________PMT _________FV _________

Change the number of years to 5. What is the new future value?Change the dollar value to $1,500. What is the new future value?Change the interest rate to 8%. What is the new future value?

Dollar Cost Averaging

• Investing roughly equal amounts of money at regular intervals

• Results in you buying most of your shares at a price that is lower than the average price per share.

Month Amount Invested Stock Price Shares Bought1 $25.00 $15.00 1.6662 $25.00 $15.50 1.6123 $25.00 $16.00 1.5624 $25.00 $16.50 1.5155 $25.00 $17.00 1.4706 $25.00 $17.50 1.4287 $25.00 $18.00 1.3888 $25.00 $18.50 1.3519 $25.00 $19.00 1.315

10 $25.00 $19.50 1.28211 $25.00 $20.00 1.25012 $25.00 $20.50 1.219

Total $300.00 $213.00 17.058Average $25.00 $17.75 $17.59

$213 ÷ 12 months = $17.75 average price per share

$300 ÷ 17.058 shares = $17.59 average price per share

EARLY INVESTOR

Value at Age 65: $579,471

Less Investment: 18,000

Net Gain: $561,471

LATE INVESTOR

Value at Age 65: $470,249

Less Investment: 70,000

Net Gain: $400,249

K e y C o n c e p t A l e r t !

Starting your savings and investing early is better than waiting until you are older.

Rule of 721. You can figure out how long it will take an

investment to double by using the Rule of 72.

2. Simply divide 72 by the interest rate.

Example: If an investment is earning 12% interest, the investment will double in 6 years.

72 12 = 6

Inflation and Taxes – Page 31. Inflation occurs when the price of

goods and services rises.

2. Taxes are usually due on saving and investment earnings.

3. When making your financial plan you hope to earn enough money to cover losses due to inflation and taxes.

Retirement Plans and Taxes• Set up by the federal government• Allow you to save money from your paycheck

before taxes are deducted• You do not pay taxes on the deposits or the

investment gain until you withdraw the money

• You cannot withdraw any money from the plan before your age 59½ without paying a 10% tax penalty in addition to regular taxes

Employer-Sponsored Plans• 401(k) plans - medium and large

corporations

• 403(b) plans - non profit organizations like schools and hospitals

• SEP and KEOGH Plans - small companies and the self-employed

Individual Plans• Traditional IRA - allows you to put

untaxed money up to $4,000 a year into the plan; taxes are due when you withdraw the money

• Roth IRA - allows you to invest taxed funds into the plan; no taxes are due when you withdraw the money

Comparison Chart

Investment Taxes on Contribution Taxes on Gains

Taxable Investments Taxed prior to contribution

Every year as they are earned

Employer-Sponsored Retirement Plans

Taxed when money is withdrawn

Taxed when money is withdrawn

Traditional IRA Taxed when money is withdrawn

Taxed when money is withdrawn

Roth IRA Taxed prior to contribution None

Tax-Deferred v. Taxable Plans

Amount InvestedValue

of Taxable Account

Value of Tax-Deferred

Account

$15,000 for 20 years at 10%

interest$54,876 $100,912

$2,000 a year for 20 years at 10% interest

$76,748 $114,549

33% tax bracket

Mutual Funds – page 5A mutual fund is a pool of stock, bonds or other investments managed by an investment company.

Types of Mutual Funds1. Money Market – highly liquid investments

2. Stock – ownership in a company

3. Bond – a special loan in a company

4. Balanced – mixture of stocks and bonds

5. Global – international stocks and/or bonds

6. Sector – particular market sector

7. Indexed – same investments as those in an index

Bonds can be…

• Domestic – U.S. companies

• International – foreign companies

• Municipal – local governments

Stocks

Bonds

Pricing Mutual FundsThe purchase price of a mutual fund is its

net asset value or NAV.

Net Asset Value = Total Value of Investments Number of Shares Sold

The Fidelity Growth Discovery fund has a total value of $968.5 million. The total number of shares outstanding is 66.8 million. What is the net asset value of this fund?

$14.50

Mutual Fund FeesBecause a mutual fund is managed by a professional, you will be charged fund fees. These fees result in you earning a lower return than if you purchased the same investments individually.

Loads: fees charged when you buy or sell shares of the fund.

Expense Ratio: the annual percentage the fund takes as payment for its services.

Ke y Conc e pt A ler t !Mutual funds provide diversification

and professional management, but you pay for these benefits with fees and

lower returns.

Saving vs. Investing – Page 4

• Money you set aside for short-term goals.

• Include savings accounts, CDs, and money markets.

• Relatively safe with a small return.

INVESTING• Money you set aside

for long-term goals.• Include stocks, bonds,

mutual funds, and real estate

• Investments offer no guarantees that your money will grow.

SAVINGS

Investment Return – Page 4The rate of return, or yield, is how fast your money

grows as a percentage of your original investment.You invested $500 in a stock. Your stock paid out $40 this past year. At the end of the year, you sold the stock for $580.

Return = (Sales Price + Dividends) – Purchase Price Purchase Price

= ($580 + $40) - $500 = 24% $500

x 100

x 100