Saving just 35 cents a day will result in more than $125 in a year. Small amounts saved and invested can easily grow into larger sums. However, a person must start to save. Various savings plans are available to consumers. These include regular savings accounts, money market accounts, and certificates of deposit (CD). Investing takes saving one step further. Bonds, stocks, mutual funds, are covered in the section.
1 Learning Objectives
- List and explain some of the advantages of saving money
- Understand the concept of “pay yourself first” and list some ways to encourage this habit
- List and explain the differences among the most common saving methods
- Understand the advantages and disadvantages of popular investment vehicles
- Compare and contrast the short- and long-term consequences of investment decisions
- How simple and compound interest are calculated
- How many years will it take to double my money? Rule of 72
2 The Pros and Cons of Saving and Investing Video
3 Saving Concepts and Strategies
3.1 Pay Yourself First (a little can add up)
|Save this each week||at % interest||in 10 years you’ll have|
- You can buy … two fast food meals or one movie ticket
(and a candy bar) or save $7.00 this week.
- You can buy … two small cheese pizzas or one large pepperoni pizza,
delivered or one new CD or save $14.00 this week.
- What can you give up to save for your financial goals?
3.2 Types of Savings Accounts
|Account Type||what they are and how they work||Benefits||Trade-offs|
|money-market deposit accounts||Checking/savings account.||Immediate access to your money||Usually requires a minimum balance of $1,000 to $2,500.|
|certificates of deposit (CDs)||Bank pays a fixed amount of interest for a fixed amount of money during a fixed amount of time.||
3.3 How Simple and Compound Interest are Calculated
simple interest calculation
– 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 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 calculation
(Original $ Amount + Earned Interest) x Interest Rate x Length of Time = Amount Earned
$100 x 0.06 x 1 = $6
$100 + $6 = $106
$106 x 0.06 x 1 = $6.36
$106 + 6.36 = $112.36
3.4 The Rule of 72
How many years will take you to double your money?
72 divided by interest equals to years to double a sum of money
At what interest rate will my money double in a set of number of years?
72 divided by years to double investment equals interest rate required
4 Investing Concepts and Strategies
4.1 Investment Principal
Warren Buffett is widely considered one of the greatest investors of all time, but if you were to ask him whom he thinks is the greatest investor, he would probably mention one man: his teacher, Benjamin Graham. Graham was an investor and investing mentor who is generally considered the father of security analysis and value investing.
We’ll condense Graham’s main investing principles and give you a head start on understanding his winning philosophy.
Principle #1: Always Invest with a Margin of Safety
In simple terms, Graham’s goal was to buy assets worth $1 for 50 cents. He did this very, very well.
Principle #2: Expect Volatility and Profit from It
The market will fluctuate – sometimes wildly – but rather than fearing volatility, use it to your advantage to get bargains in the market or to sell out when your holdings become way overvalued.
Principle #3: Know What Kind of Investor You Are
To determine what type of investor you are, think about your personal limitations, as well as your strengths and weaknesses.
4.2 Investment Types
|Account Type||what they are and how they work|
|Bond||what they areA bond is an “IOU,” certifying that you loaned money to a government or corporation and outlining the terms of repayment.How they workBuyer may purchase 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.AdvantageAs debt securities, bonds offer the advantage of steady interest income and payment of face value at maturity.DisadvantageSome types of bonds bear the risk that the borrower will default – that is, fail to make its payments.|
|Mutual Fund||What they areProfessionally managed portfolios made up of stocks, bonds, and other investments.How they work
Allows small investors to take advantage of professional account management and diversification normally only available to large investors.
Mutual fund managers charge fees that can reduce the profitability of investing in mutual funds or amplify the losses.
|Stock||What they areStock 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