Principles of Business and Personal Finance

NC Competency 009: Explain the theory of savings and investments in our economy.

NC Objective 9.03: Summarize other types of investments.

I. Investing Through Insurance

A. Life Insurance: protection against the death of an individual in the form of payment to a beneficiary, usually a family member, business, or institution. In exchange for a series of premium payments or a single premium payment, upon the death of an insured, the face value (and any additional coverage attached to the policy), minus outstanding policy loans and interest, is paid to the beneficiary.

1. Living Benefits: may be available for the insured in the form of surrender values or income payments.

II. Investing in your Future

A. Pension: retirement program to provide employees (and often spouses) with a monthly income payment for the rest of their lives.

1. The Employee Retirement Income Security Act of 1974 (ERISA) requires pension plans to provide an income for the rest of a retired employee’s life, and at least 50% of that amount to the surviving spouse of a retired employee for the rest of their life, unless the spouse waives this right in writing.

2. Death and disability payments are also provided by most pension plans.

3. Series of regular payments made to a retired worker under an organized plan.

B. Individual Retirement Account (IRA): fund under the Tax Reform Act of 1986 into which any individual employee can contribute up to $2000. However, income level and eligibility for an employee pension plan determine whether or not the employee’s contribution or a percentage is tax deductible.

1. Types if IRA’s:

a. 401k or 403b contributions are tax deductible and funds are taxed as regular income when they are withdrawn after age 59 ½.

b. Roth IRA contributions are not tax deductible, but investment gains and all funds on which taxes are prepaid are tax free when they are withdrawn after age 59 ½.

C. Annuity: contract sold by insurance companies that pays a monthly (or quarterly, semiannual, or annual) income benefit for the life of a person (the annuitant), for the lives of two or more persons, or for a specified period of time. The annuitant can never outlive the income from the annuity. While the basic purpose of life insurance is to provide an income for a beneficiary at the death of the insured, the annuity is intended to provide an income for life for the annuitant.

III. Investing Through Other Sources

A. Real Estate: piece of land and all physical property related to it, including houses, fences, landscaping, and all rights to the air above and earth below the property.

1. Assets not directly associated with the land are considered personal property.

2. Mortgage: debt instrument by which the borrower (mortgagor) gives the lender (mortgagee) a lien on property as security for the repayment of a loan. The borrower has use of the property, and the lien is removed when the obligation is fully paid.

3. Home Equity: Difference between the price at which you could currently sell your house and the amount owed on the mortgage.

4. Appreciation: general increase in value of a property.

5. Depreciation: general decrease in value of a property.

6. Investing Through Other Types of Property:

a. Undeveloped Property (Land): unused land intended only for investment purposes.

b. Commercial Property: land and buildings that produce lease or rental income.

c. Real Estate Investment Trusts (REIT’s): works like a mutual fund and combines funds to invest in real estate.

B. Collectibles: rare object collected by investors.

Examples: stamps, coins, oriental rugs, antiques, baseball cards, photographs.

1. Collectibles typically rise sharply in value during inflationary periods, when people are trying to move their assets from paper currency as an inflation hedge, then drop in value during low inflation.

2. Collectible trading for profit can be quite difficult, because of the limited number of buyers and sellers.

C. Commodities: bulk goods such as grains, metals, livestock, currency, financial instruments, and foods traded on a commodities exchange or on the Spot Market.

1. Futures: Commodity contract purchased in anticipation of higher market prices for the commodity in the near future.

IV. Investing with Others

A. Investment Clubs: group of people who pool their assets in order to make joint investment decisions. Each member of the club contributes a certain amount of capital, with additional money to be invested every month or quarter. Decisions on which stocks or bonds to buy are made by a vote of the clubs members.

B. Mutual Funds: fund operated by an investment company that raises money from shareholders and invest it in stocks, bonds, options, futures, currencies, or money market securities. These funds offer investors the advantages of diversification and professional management. A management fee is charged for these services, typically between 0.5% and 2% of assets per year.

1. Limit risk by diversifying investment.

2. Speculative investment

3. Speculator: one that has an unusually high risk.