Saving and InvestingChapter 6

Deciding to Save

✤ Learning to save successfully requires a thought out plan

✤ Consider what you are saving for?

✤ How you will save (what kind of account/mattress)

✤ How much and how frequently

✤ The length of time you are willing to forego using that income

Account Types

✤ Savings account - is an interest earning account that has no “maturity date” meaning that you can put money into the account and it will produce a return infinitely. There are no penalties for withdrawals.

✤ Current rates are around .03%

✤ Money market deposit account - generally pays higher interest rates on your deposit. You do have immediate access to funds. However, there is a minimum amount of deposit required; usually at least 1,000 but often much higher.

✤ Current rates are around .40 - .56% (varies by deposit amount)

Account Types

✤ Time Deposits - often referred to as CDs or certificate of deposits, are savings plans that require funds to be left alone in an account for a set period of time. Timed deposits give the bank more investment flexibility and therefore they generally offer higher rates of return. The longer the time period, the better the rate, as banks can make more money on your deposit.

✤ Current rates around .24% to .64%

✤ Savings Bonds - is essentially a note given by the government (Fed., State and Local) that collects money from a citizen in the present and requires a repayment upon bond maturity. You are required to pay taxes on the interest earned, however, the initial invest is only half the bond’s mature value. Ex: a $1000 bond note requires only a $500 investment.

Account Types

✤ Stock - is a share or investment in a publicly traded company that can provide tremendous earnings potential depending on the growth and profits of the company. Stock values are determined by the market and therefore can experience dramatic growth and decline.

✤ Speculation - when an investor buys a stock with the belief the stock will eventually pay off (dividend)

✤ Dividend - the return on investment (see Amazon/Borders chart)

Account Types

✤ Mutual Funds - is a pool of invested money run by a professional or group of professionals who take the time to investigate and attempt to maximize the investments.

✤ As a potential investor, you would buy shares of the fund. Mutual funds generally have a variety of of stocks and bonds to minimize a catastrophic loss if stocks plummet.

✤ The risk is less with a mutual fund than a stock although there are additional costs due to the fund being professionally managed.

FDIC and risk

✤ Less risky

✤ Savings accounts, Insured Money Market Accounts, CDs

✤ All provide FDIC insurance up to $100,000 per account. Even if your financial institution went bankrupt, your money would be insured by the federal government.

✤ Small to moderate risk

✤ Bonds and mutual funds

✤ Neither are insured by FDIC protection. However, bondholders are compensated before stockholders if a company declares bankruptcy. Also, reviewing the credit rating of a company (or gov’t body) prior to buying a bond mitigates most risk.

FDIC and risk

✤ Highest risk

✤ Stocks provide the highest rate of return and consequentially the highest potential for loss. In general, over the past 100 years, the stock market has been a secure long-term investment. Approaching it with a ‘get rich quick’ mentality is dangerous, however, and fortunes have been lost as quickly as they were gained.

✤ It is recommended that you consult with a financial advisor as well as build a long-term diverse portfolio that includes and combination of stocks, mutual funds and bonds.

Retirement Account Types

✤ Rule of 72 -

✤ A basic ‘rule of thumb’ to help you as an investor gauge the total growth of your retirement fund.

✤ Consider the following, an investment of 10,000 at a 9 percent rate of return.

✤ Based on the rule of 72 (72 divided by 9 equals 8 years; the length in time it takes for your investment to double in value).

✤ So....10,000 at 9 percent looks like this

Mr. Wellington’s retirement....in 40 years

✤ 1 year = 10,000

✤ 8 years = 20,000

✤ 16 years = 40,000

✤ 24 years = 80,000

✤ 32 years = 160,000

✤ 40 years = 320,000

Based on this at age 69 (current +40) I’d have 320,000k from a basic 10k investment at 9% growth

Now consider the idea that at age 21 I was smart enough to invest (instead of starting now)

How much more is my 10k investment worth at age 69?

Retirement Account Types

✤ Pension plan - a company (or gov’t) sponsored plan that provides retirement income. A true company/gov’t sponsored pension provides benefits until the death of both the primary recipient as well as the recipient's spouse.

✤ 401k - is a newer form of a pension, however it does in theory run out. A 401k is a good investment as you can put money into it tax free (until you withdraw funds) AND companies will match up to a certain amount your contributions. ALWAYS put at least as much as the company will match - its free money.

✤ Also consider that with the money being removed from your check prior to taxes, that your financial impact is minimal.

Retirement Account Types

✤ Also consider that with the money being removed from your check prior to taxes, that your financial impact is minimal.

✤ Consider the following:

✤ 3000 check pre-tax

✤ Invest 10% to 401k (plus company matches 5%) you put 450 away per month and your paycheck is taxed not on 3000 but on the 2700

✤ 3000 x 25% tax rate = 750 lost to taxes = 2250

✤ 2700 x 25% tax rate = 675 lost to taxes = 2025

Retirement Account Types

✤ IRA or Individual Retirement Accounts - can be started by anyone. They can also be invested in pre-tax which is a plus. IRA contribution limits are $5,500 if your under age 50 (IRS.gov) at $6500 over the age of 50.

✤ IRAs do not receive employer contributions so they are solely dependent on individual contribution.

✤ Traditional IRAs tax your money at age 59.5 (when you withdraw the funds)

✤ Roth IRAs tax your money up front (can’t deduct contributions from taxes). However, the money earned is tax free.....Forever

✤ Lowering your taxable income is always a good thing. You want to keep as much of your money as possible. Don’t be so willing to give it away to gov’t!

Real Estate as an Investment

✤ Should you consider buying a house?

✤ 1. Don’t buy if you plan to move within 5-7 years

✤ Housing costs are expensive and most homeowners do not recoup the benefits of purchasing a house until at least year 5 or 6.

✤ Also consider the costs associated with moving, selling (realtor fees are usually 6% of sale price) plus taxes associated with income made on house

✤ 2. Don’t view buying a home as a quick investment. Buying a house should be viewed as a long term investment but also as a way to build a life within the community.

Real Estate as an Investment

✤ How much house can you afford?

✤ Standard amounts vary by region but payment-to-income ratios should be no higher than 28%-33%

✤ So a total combined monthly income of $9,000 dollars would allow for a housing payment of $3,000

✤ Also, standard down payments are 20%. However, in areas with high home prices, less than 20% is possible, although, a PMI or mortgage insurance will most likely be charged.

Real Estate as an Investment

✤ Location, location, location!

✤ Home prices vary based on property demand.

✤ While housing supply is certain a reason for increased home prices, more often than not, it is the location of the property.

✤ Consider buying the ‘ugly’ house on the street. Buying the cheap house on a nicely maintained block will provide the biggest financial turnover. Just be careful not to buy the ‘money pit’

✤ Consider all components to the community before buying. Safety, schools, politics, walkable streets, etc.

✤ San Francisco, California

Listing price: $1,250,000Bedrooms: 3 Bathrooms: 2 full Size of home: 1567 square feet

$1 million+ marketHomes for sale: 2,697Median size: 3,180Median time on market: 51 days

✤ New York, New York

Listing price: $1,225,000Bedrooms: 2 Bathrooms: 2 Size of home/lot: approx. 1000 sqft$1 million+ marketHomes for sale: 16,803Median size: 3,308Median time on market: 63 days

✤ Honolulu, Hawaii

Listing price: $1,085,000Bedrooms: 4 Bathrooms: 3 Size of home/lot: 2148/7155 square feet $1 million+ marketHomes for sale: 654Median size: 2,880 square feetMedian time on market: 61 days

✤ Portland, Oregon

Listing price: $1,195,000 Bedrooms: 6 Bathrooms: 4.1 Size of home/lot: 5,771 square feet/ .83 acres$1 million+ marketHomes for sale: 478Median size: 4,805 square feetMedian time on market: 71 days

✤ Phoenix, Arizona

Listing price: $1,249,000Bedrooms: 5 Bathrooms: 6 Size of home/lot: 5,843/ 39,413$1 million+ marketHomes for sale: 1996Median size: 5,425 square feet Median time on market: 78 days

✤ St. Louis, Missouri

Listing price: $1,150,000Bedrooms: 4 Bathrooms: 3 Size of home/lot: 4,000 square feet/ approx .5 acre$1 million+ marketHomes for sale: 472Median size: 5,003 square feet Median time on market: 77 days

✤ Seattle, Washington

Listing price: $999,000Bedrooms: 3 Bathrooms: 4 full, 1 halfSize of home: 3,790 square feet $1 million+ marketHomes for sale: 1,401Median size: 4,284 square feet Median time on market: 78 days

✤ Las Vegas, Nevada

Listing price: $1,245,000 Bedrooms: 5 Bathrooms: 5 full, 2 halfSize of home/lot: 5,702/ 13,068 square feet$1 million+ marketHomes for sale: 568Median size: 6,401Median time on market: 78 days

✤ Omaha, Nebraska

Listing price: $1,045,000 Bedrooms: 4 Bathrooms: 5 Size of home/lot: 5184 square feet $1 million+ marketHomes for sale: 81Median size: 6,135 square feetMedian time on market: 56

✤ Anchorage, Alaska

Listing price: $998,000Bedrooms: 6 Bathrooms: 3 full, 1 halfSize of home/lot: 5,818/22,609 square feet$1 million+ marketHomes for sale: 106Median size: 6,190 square feetMedian time on market: 87.5 days

✤ Dallas, Texas

Listing price: $1,195,000Bedrooms: 5 Bathrooms: 5.1 Size of home/lot: 5,686 square feet/ .36 acre $1 million+ marketHomes for sale: 1,814Median size: 5,869 square feetMedian time on market: 80 days