UNIT 5: SAVING AND INVESTING

Personal FinanceHolmen High School

Objectives Understand various types of investments

Understand advantages/disadvantages of each type of investment

Analyze appropriate investments for different life decisions

Understanding Risk Risk is the potential of loss.

Explain the relationship between personal risk and financial risk.

Meet Daphne Daphne’s

grandmother just passed away.

Daphne received $10,000 as an inheritance.

Daphne Needs to Think About

Goals

Time Frame

Risk Tolerance

Daphne’s Options

Lending Investments Ownership Investments

Checking Account

Certificate of Deposit

Bonds

Real Estate

Stocks

Mutual Funds/ETF’s

Daphne Opens a Checking Account Daphne puts $10,000 into a checking account

Advantages of Checking Account No Risk

FDIC Insurance on $250,000 Liquidity

Easy access to your money Convenience

Online Bill Pay, Direct Deposit, ATM

Building RelationshipEasier to get loans (Homes,

Cars, Business)

Disadvantages of Checking Accounts Lousy Interest Rate

Under 1% Inflation

Typically 3% Fees

Debit Card, Overdraft Not a Long Term

Investment

Daphne’s $10,000 After 5 Years Initial Investment $10,000 Interest Rate

.25% Term 5 Years

Return After 5 Years $10,125

Certificates of Deposit Lend Money to Bank Specific Term

3 Months6 Months1 Year2 Years5 Years

Guaranteed Rate of Return1%-3%

Current CD Rates

Certificate of Deposit

Advantages Disadvantages

Set Payoff Date

Guaranteed Interest

Short Term Goals

Inflation

Penalty for Early Withdrawal

Not Long Term Investment

Daphne’s $10,000 After 5 Years Initial Investment $10,000 Interest Rate

1.68% Term 5 Years

Investment After 5 Years $10,868

Bonds Issued by

corporations or governments when they need to borrow money

Interest Payments every six months

Set Payoff Date

Coca-Cola Issues Bonds Coca-Cola needs

to borrow money to build a new plant

Agrees to issue bonds paying 6%

Will pay back money in 5 years

Coca-Cola Issues Bonds Investors Loan

Money

Paid Interest Twice a Year

Money is Repaid At End of Term

Daphne’s $10,000 Investment

Lends $10,000 to Coke

Receives $300 Every January

Receives $300 Every July

After 5 Years, Daphne gets her $10,000 Back

Daphne’s $10,000 After 5 Years Initial Investment $10,000 Interest Rate

6% Term 5 Years

Investment After 5 Years $10,000 Interest Paid Over 5 Years $3,000

(6% a Year)

Advantages Disadvantages

A Bond would be good for her if…

A Bond would not be good for her if…

Wanted Steady Income Elderly

Doesn’t need the Money

Enjoys Safety AAA Rating (Gov’t)

Company Goes Broke Blockbuster, Best Buy

Inflation 3% per year

Needs the Money Illiquid

Stocks Ownership in a

Company

Profit When Company Does Well

Lose Money When Company Performs Poorly

Advantages Disadvantages

Stocks would be good for her if…

Stocks would not be good for her if…

Highest Return

Long Investment Timeframe

Okay with Risks

Company Goes Broke Blockbuster, Best Buy

Volatile Market +20% -50%

Daphne’s $10,000 After 5 Years Bull Market (Good Market) Initial Investment $10,000 Rate of Return 20% Term 5 Years

Investment After 5 Years $24,883

Nothing Else Comes Close!

Daphne’s $10,000 After 5 Years Average Market Initial Investment $10,000 Rate of Return 10% Term 5 Years

Investment After 5 Years $16,105

That’s Average!

Daphne’s $10,000 After 5 Years Bear Market (Bad Market) Initial Investment $10,000 Rate of Return -10% Term 5 Years

Investment After 5 Years $5,905

SUBSTANTIAL RISK!!!

Reward

Ris

k

CD’s Bonds

Real Estate Mutual Funds

Stocks

Checking Account

Assessment Scratch Sheet of Paper

Will Be Turned In

Will NOT Be Graded

Number 1-5

Question #1 1. Patrick is a senior in high school who

is working part time to save up for college. He has $4,000 saved up to pay for his first semester next year. He knows he will not need the money for another 12 months and does not want to lose it. Which investment is right for Patrick?

Question #2 2. Jennifer and Tim just recently got

married. As a wedding present, they received $5,000 from Tim’s parents. They would like to invest the money over the long term and will not need it for another 30 years. Which investment is best for them?

Question #3 3. Dorris is a retired grandmother with

three children. She has $25,000 that is not for anything specific. She wouldn’t mind receiving a little extra income to help her pay for her prescriptions. What investment would be right for her?

Question #4 4. Kevin is saving up money to buy his

dream car. He wants to wait for the “perfect opportunity” to buy his dream car. He does not know if/when his it will be for sale. He has $15,000 saved up. Which investment is right for Kevin?

Question #5 5. Explain the relationship of

Risk/Reward. Explain why the relationship is this way.

Climbing a Radio Tower