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Deciding to Save

• Economists define savings as the setting aside of income for a period of time so that it can be used later.

– A person receives interest on a savings plan for as long as the funds are in the account.

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Deciding to Save (cont.)

• Saving benefits the economy as a whole:

– It provides funds for others to invest or spend.

– It allows businesses to expand, which provides increased income for consumers and raises the standard of living.


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Deciding to Save (cont.)

• Some savings plans allow immediate access to your funds but pay a low rate of interest.

• Others pay higher interest and allow immediate use of your funds, but require a large minimum balance.


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• Options for saving:

Savings Accounts and Time Deposits (cont.)

– A savings account pays interest, has no maturity date, and allows funds to be withdrawn at any time without penalty.

– Money market deposit account (MMDA) pays relatively high rates of interest, requires a minimum balance of $1,000 to $2,500, and allows immediate access to funds.

View: Savings Basics


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– Time deposits require savers to leave their funds on deposit for certain periods of time, or maturity.


– Time deposits are often called certificates of deposit (CDs), or savings certificates.

View: Savings Choices


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• After the stock market crash of 1929, the Federal Deposit Insurance Corporation (FDIC) was created to protect peoples’ funds.


– The National Credit Union Association (NCUA) is another federal agency that insures most banks and savings institutions.


A. A

B. B

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Which type of account will pay you more in the long run?

A. A regular savingsaccount

B. A CD

A B

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Section 2

Stocks and Bonds (cont.)

• Corporations are formed or can expand business by selling shares of stock.

– The person who buys this stock, becomes a stockholder, and is entitled to part of the future profits and assets of the corporation.


Section 2


• Stockholders benefit from stock in two ways:

– Earn dividends or a return based on theamount of stock invested.

– Can sell stock for more than they paid for it.


Section 2


• Profits made on the sale of stock is referred to as a capital gain.

• A decrease in value on the sale of the stock is referred to as a capital loss.


Section 2


• Similar to stock, a bond is a certificate issued by a company or the government in exchange for borrowed funds.

– Bonds promise to pay a stated rate of interest over a stated period of time, in addition to repaying the borrowed amount in full at the maturity date.

– A bond does not make a bondholder part owner of the company.


Section 2


• Tax-exempt bonds are sold by local and state governments: interest paid on the bond is not taxed by the federal government.

– Interest that you earn on bonds your own city or state issues is also exempt from city and state income taxes.

View: Differences Between Stocks and Bonds


Section 2


• Savings bonds are issued by the federal government as a way of borrowing money. Are purchased at half the face value and increase every 6 months until full face value is reached

– These are safe.

– Interest earned is not taxed until the bond is turned in for cash.


Section 2


• The Treasury Department of the US Government sells several types of larger investments. They include:

– Treasury bills (T-bills) certificates $1,000 and maturing in a few days up to 26 weeks

– Treasury notes (T-notes) certificates $1,000 and maturing in 2 to 10 years

– Treasury bonds (T-bonds) certificates $1,000 and maturing in 30 years


A. A

B. B

Section 2

Is the following description of a stock or a bond?These represent ownership, do not have a fixed dividend rate, and do not have a maturity date.

A. Stock

B. Bond

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Section 2

Stock and Bond Markets (cont.)

• Stocks are bought and sold through brokers or through Internet brokerage firms.

• Brokerage houses communicate with the busy floors of the stock exchanges.

– The largest stock exchange, or stock market, is the New York Stock Exchange (NYSE). Others include the Chicago Exchange, London Exchange and Tokyo Exchange.


Section 2


• Stocks can also be sold on the over-the-counter market, an electronic marketplace.

• The largest volume of these smaller company stocks are quoted on the National Association of Securities Dealers Automated Quotations (NASDAQ) national market system.


Section 2


• Nearly every weekday, news is given about the activity to the stock market indexes.

– Dow Jones Industrial Average or “The Dow” is the most well known index.

• The New York Exchange Bond Market and the American Exchange Bond Market are the two largest bond exchanges.


Section 2


• Many people invest in the stock market by placing savings in a mutual fund.

– Mutual fund is investment company that pools the funds of many individuals to buy stocks, bonds, or other investments

– The long-run return from index funds is higher than can be expected from almost any other investment.


Section 2


• Money market fund is one type of mutual fund that uses investors’ funds to make short-term loans to businesses and banks.

– The investor can write checks (above some minimum amount) against their account.


Section 2


• Banks and savings and loan associations offer money market deposit accounts (MMDA).

• The advantage to MMDAs is that the federal government insures them against loss.


Section 2

Government Regulations (cont.)

• The Securities and Exchange Commission (SEC) is responsible for administering all federal securities laws.

• It also investigates any dealings among corporations.


Section 2


• Congress passed the Securities and Exchange Act after the stock market crash of 1929.

• The SEC requires any institution issuing stocks or bonds:

– To file a registration statement with the federal government

– Give a prospectus (brief description) to each potential buyer of stocks or bonds


Section 2


• States also have securities laws which protect small investors.


Section 3

Investing for Retirement (cont.)

• It is important for a person to save for and invest in his or her own retirement.

• Retirement savings plans can include:– A pension plan is a company supported

retirement plan like a 401(k) that is not taxed until used.

– A Keogh plan is a retirement plan for self-employed individuals.

– Save a maximum of 15% of their income (tax deductible)


Section 3


– An individual retirement account (IRA) is a private retirement plan for individuals or married couples.

• Contributions tax deductible

• Taxed when taken out.


Section 3


– A Roth IRA is a private plan for individuals.

• Taxes income before it is saved.

• Does not tax interest on that income when funds are used upon retirement.

View: Retirement Plan Options


Section 3


• Buying real estate, such as land and buildings, is another form of long term investing.


Section 3

How Much to Save and Invest? (cont.)

• The higher the promised return on an investment, the greater the risk.

View: Savings Considerations


Section 3

How Much to Save and Invest? (cont.)

• When you have very little income, you should probably put your savings lower risk accounts.

• It is important to practice diversification to lower your overall risk.

• Diversification – spreading investments out to lower risk

View: Risk and Return


VS 1

Saving some of your income allows you to earn interest and put away funds for future purchases.


VS 2

After you have accumulated savings funds, you may want to invest some of it to try to earn greater returns.


VS 3

It is important to diversify your saving and investing, especially when looking toward retirement. In general, the greater the risk involved in any venture, the greater the potential return.


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Documents

savings bonds

bonds cont

savings accounts

savings certificates

time deposits

savings choicessection

savings basicssection

savings plans