INDIANA DEPARTMENT OF FINANCIAL INSTITUTIONS
CONSUMER CREDIT EDUCATION
CONSUMER FINANCE
UNIT 2
Investment Choices
INTRODUCTION
Most people have to work for their money. And once they have earned it, they have an important choice to make:
· spend it all, or
· set aside some money so it can work for them.
Whether your income is small or large, setting aside some of it for investments requires self-discipline. You decide to postpone buying certain things you'd like to have now in order to enjoy the longer term benefits of having your money work for you through savings and investments.
The current savings rate of households in the United States on average is less than four percent of income after taxes. Teenagers and adults who begin the savings habit early are more likely to have money available for things they want in the future.
Making your money work for you is what saving and investing is all about. You can measure your investment success by keeping track of how well you make your money work. Is your net worth increasing over time? Is inflation robbing you of the buying power of your savings dollars or are your investment earnings staying ahead of the inflation rate?
KEY CONCEPTS
Investment Choices: A Teaching Guide contains learning objectives that focus on:
· Reasons to save and places to accumulate savings.
· Common investment options.
· Factors to consider when selecting savings and investments.
· The "time value of money" concept and its usefulness for investors.
Each unit contains learning objectives, background information for teachers and students, suggested activities, overhead transparency masters, student handouts and worksheets, additional resources, and student exercise/s. The appendix includes sources of additional information and a glossary of terms.
Hundreds of classroom teachers have used earlier editions of this guide. We hope you and your students find it a useful educational tool.
UNIT OBJECTIVES
· Discuss reasons to save and places to accumulate savings.
· Identify and describe common investment options.
· List factors to consider when selecting savings and investments.
Describe the "time value of money" concept and demonstrate its usefulness for investors.
TOPIC 1 ¾ Why People Save and Invest
OBJECTIVE
¿ Students will learn why they should save.
¿ Students will learn why you want to invest your savings.
MATERIALS NEEDED
Pretest Exercise
Reading 1 ¾ "Overview of Savings"
Transparency 1 ¾ "Benefits of Saving”
Reading 2 ¾ " Savings Tips"
Transparency 2 ¾ " Savings Tips”
DIRECTIONS
1. Have students take the Pretest Exercise. Review results to find student’s weak areas.
2. Distribute Reading 1, "Overview of Savings" and discuss the benefits of saving. Show Transparency 1, “Benefits of Saving.” Have students list their saving goals.
3. Distribute Reading 2, “Savings Tips” and review savings tips with students. Show Transparency 2, “Savings Tips.”
4. See SEC Tips for Teaching Students about Savings and Investments.
TOPIC 2 ¾ Types of Savings and Investments
OBJECTIVE
¿ Students will learn the types of savings and investments.
¿ Students will compare different types of investments.
MATERIALS NEEDED
Reading 3 ¾ "Places to Accumulate Savings"
Transparency 3 ¾ "Savings Options”
Worksheet 1 ¾ “Comparing Savings Plans”
Transparency 4 ¾ "Investment Options”
Transparency 5 ¾ "Pyramid of Investment Risks”
Worksheet 2 ¾ “Comparing Mutual Funds”
Student Exercise 1
DIRECTIONS
1. Distribute Reading 3, "Places to Accumulate Savings," show Transparency 3,
“Savings Options” and discuss:
· Yield range
· Financial risk
· Inflation hedge
· Liquidity
Invite a local banker to explain factors to consider when selecting a regular savings account, CDs, and money market funds.
2. Give students Worksheet 1, “Comparing Savings Plans.” Have students compare
savings plans within one local financial institution and among two or more financial
institutions. Consider:
· Annual interest rate
· Effective yield
· Safety
· Minimum initial deposit
· Date to maturity
· Penalty for early withdrawal
· Service charges, fees
· Convenience
· Courteous service
3. Show Transparency 4, "Investment Options.” Discuss reasons why a person might
choose higher risk investments over lower risk savings options. Compare:
· Yield range
· Financial risk
· Inflation hedge
· Liquidity among investment options
4. Show Transparency 5, “Pyramid of Investment Risks.” Discuss the components of a
financial foundation. As a general rule, investments located near the top of the pyramid
have greater risk and greater potential return. Example questions:
1. Why are U.S. EE savings bonds less risky than junk bonds?
2. Why would anyone ever invest in high-risk investments?
5. Handout Worksheet 2, “Comparing Mutual Funds.” Have students compare three
or more mutual funds by:
· Type of fund
· Objective of fund
· Current rate of return
· Yield range (three to five years)
· Fees
· Operating expenses
· Level of risk
This information can be found in the fund prospectus. Financial magazines such as Money, Kiplinger's Personal Finance Magazine, Worth, and SmartMoney routinely provide this sort of information.
6. Have students take the Students Exercise 1 and discuss the answers. [See “Answer
Key.” ]
Internet Exercise
The SEC's paperless filing system EDGAR (Electronic Data Gathering, Analysis and Retrieval system ) of corporate reports can be accessed through the internet web site at: http://www.sec.gov/edgar.shtml.
For more specific information on mutual funds, refer to the Investment Company Institute web site at: http://www.ici.org.
TOPIC 3 ¾ Selecting Savings and Investments
OBJECTIVE
¿ Students will learn factors to consider when considering savings and investments.
¿ Students will learn the difference between tax deferred savings and taxable savings.
MATERIALS NEEDED
Reading 4 ¾ "Selecting Savings and Investments"
Worksheet 3 ¾ "Readings on Investments”
Reading 5 ¾ "Taxes”
Transparency 6 ¾ "Yields on Taxable and Tax-Exempt Investments”
Transparency 7 ¾ "Tax Deferred Savings Grow Faster Than Taxable Savings”
Reading 6 ¾ "Life Stages”
DIRECTIONS
1. Have students read “Selecting Savings and Investments,” Reading 4. Discuss
the factors.
2. Give students Worksheet 3, “Readings on Investments.” Have students read and
report on current newspaper and magazine articles on investment market conditions.
Topics could include:
· Interest rates
· Business failures
· Price of investments
· Political decisions and investment risk
· Investment fraud
· Diversification
3. Have Students study Reading 5, “Taxes.” Show Transparency 6, “Yields on
Taxable and Tax-Exempt Investments.” Examples of questions to ask:
a. If an investor in the 15 percent tax bracket invests in a tax-exempt bond paying 6 percent, what yield would be required on a taxable investment in order to earn the same income? (7%)
b. If the investor were in the 33 percent tax bracket, what yield would be required? (9%)
Examples of tax-deferred savings are U.S. Series EE savings bonds and Individual Retirement Accounts (IRAs).
4. Show Transparency 7, "Tax Deferred Savings Grow Faster Than Taxable Savings.”
5. Assign Reading 6, “Life Stages.” Suggest that students interview adults about good
or bad investment experiences at various stages in the life cycle. Discuss the learning
that can be gained from each experience. Illustrate the advantage of beginning an
investment plan early in life.
Internet Exercise
Use the Internet to see how your class fares in personal finances.
http://moneycentral.msn.com/investor/home.asp
Financial Calculators:
http://www.financenter.com/consumertools/calculators/
http://www.choosetosave.org/tools/fincalcs.htm
http://www.bankrate.com/overkeyword/
http://msfinancialsavvy.com/calculators/
TOPIC 4 ¾ How Long Will It Take To Double
Your Money?
OBJECTIVE
¿ Students will learn how time effects the value of money.
¿ Students will learn how to arrive at future values and compounding of interest.
MATERIALS NEEDED
Handout 1 ¾ "How Time Effects the Value of Money”
Reading 7 ¾ "How Time Effects the Value of Money”
Worksheet 4 ¾ "Time Value of Money”
Transparency 8 ¾ "Future Value of $1,000 single deposit”
Transparency 9 ¾ "Future Value of $25.00 deposited monthly”
Transparency 10 ¾ "Future Value of $100.00 deposited monthly”
Transparency 11 ¾ "Monthly Deposits for Future Goals”
Worksheet 5 ¾ "Doubling Your Money, Rule of 72”
Student Exercise 2
Student Exercise 3
Hidden Word Puzzle
Additional Resources
Brochure
DIRECTIONS
1. Have students study Reading 7, "How Time Effects the Value of Money” and
give them Handout 1. The following is an example of why it is important to start
saving early:
Investor A invests $2,000 a year for 10 years, beginning at age 25.
Investor B waits 10 years, then invests $2,000 a year for 31 years.
At retirement age 65, Investor A has earned $234,000 more than Investor B.
2. Handout Worksheet4, “Time Value of Money” and have students answer the
questions. [See “Answer Key.”]
3. Show Transparencies 8-11 and review.
4. Handout Worksheet 5, “Double Your Money” and have students fill in the time need
to double the money in the examples. [See “Answer Key.”]
5. Have students take Student Exercises 2 & 3. [See “Answer Key.”] Review weak
subjects.
6. Hand out Savings Basics Brochure and discuss.
7. Handout Hidden Word Puzzles and have students find the words.
8. Review Additional Resources to help in the class.
ANSWER KEY
2-11
2-11
PRETEXT EXERCISE
1. TRUE
2. FALSE
3. TRUE
4. FALSE
5. TRUE
6. FALSE
7. TRUE
8. TRUE
9. TRUE
STUDENT EXERCISE 1
1. passbook account
2. $21
3. All of the above
4. All of the above
5. corporate bond
6. corporate stocks
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WORKSHEET 4
2-11
1. $20,000
2. $33,846
3. $62,000
4. $545,844
5. $352,427
6. $525,344
7. $290,427
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8. The time value of money is the growth of money over time as a result of investment
earnings. As shown in this example, investments made early in life have a greater
pay-off than those made later in life.
STUDENT EXERCISE 2
2-11
1. H tax-exempt
2. G securities
3. K mutual fund
4. D stock
5 . C liquid
6. A diversification
7. E prospectus
8. F the return
9. J appreciation
10. I bond
11. L no-load
2-11
STUDENT EXERCISE 3
1. TRUE
2. TRUE
3. FALSE
4. TRUE
5. FALSE
6. FALSE
7. TRUE
8. FALSE
9. FALSE
2-11
2-11
VOCABULARY
2-14
2-14
Annual Percentage Yield (APY) ¾ APY is the amount of interest you will earn on a yearly basis expressed as a percentage. The APY includes the effect of compounding. When comparing different accounts, you should compare the APYs of the savings products, not the interest rates. The higher the APY, the higher the interest you will receive.
Bonds ¾ When you purchase a bond, you are essentially loaning money to a corporation or to the government for a certain period of time, called a term. The bond certificate promises the corporation or government will repay you on a specific date with a fixed rate of interest.
Certificates of Deposit (CDs) ¾ CDs are accounts where you leave your money for a set period of time, such as six months, one, two, or five years, called a term. You usually earn a higher rate of interest than in a regular savings account. The longer you promise to keep your money in a CD, the higher the interest rate. Be sure to think about y our cash needs before opening a CD because you will pay a penalty if you withdraw your money early.
Club Account ¾ A club account is a type of savings account you “join” to save money for a special reason, such as holidays or family vacations. Club accounts usually require you to make regular deposits.
Diversification ¾ Diversification means you spread the risk of loss in a variety of savings and investment options. It is the concept of “don’t put all your eggs in one basket.”
401(k) and 403(b) Retirement Plans ¾ 401(k) plans are retirement plans that some private corporations offer their employees. a 403(b) plan is similar to a 401(k), but is offered to employees of some nonprofit organizations.
In both types of plans, you choose to deduct part of your paycheck and place it into the investment strategy you design. The plans allow you to choose different types of investments, depending on how much risk you want to take. The money you place into the account lowers your taxable income. The employer usually matches a portion of your contribution, sometimes up to 50 percent. The funds grow tax-free until the money is withdrawn during retirement.
Equity ¾ When referring to a home, equity is the difference between how much the house is worth and how much you owe on the house.
Investment ¾ A savings option purchased for future income or financial benefit.
Individual Retirement Account (IRA) ¾ An IRA is a retirement account that lets you save and invest money tax-free until you withdraw it when you retire. There are different types of IRAs including traditional and Roth IRAs.
Liquidity ¾ Liquidity refers to the ease with which an asset (a thing of value) can be turned into cash without losing its value. For example, cash is the most liquid; a certificate of deposit (CD) may be liquidated, but you pay an early withdrawal penalty; a house might be your least liquid asset because it takes time to sell.
Money Market Accounts ¾ A money market account is one that usually pays a higher rate of interest than a regular savings account. Money market accounts usually require a higher minimum balance to earn interest, but they also pay higher rates for higher balances.
Mutual Funds ¾ A mutual fund is a professionally managed collection of money from a group of investors. A mutual fund manager invests your money in some combination of various stocks, bonds, and other products. The fund manager determines the best time to buy and sell the products in the fund. By combining your resources with other investors in a mutual fund, you can diversify even a small investment, which should reduce risk.
Passbook Savings Accounts ¾ Passbook savings are similar to statement savings accounts. The difference is the record keeping. Instead of receiving a quarterly statement, all transactions are recorded in a passbook. You have to take your passbook to the bank when making transactions. The teller will update your account information when you go to the bank.
Risk versus Return ¾ This means that the more risk you take in your investment, the higher the expected return on that investment. However, there is also a higher risk that you might lose the entire amount you invested.
Statement Savings Account ¾ A statement savings account is an account that earns interest. If you have a statement savings account, you will usually receive a quarterly statement that lists all of your transactions (withdrawals, deposits, fees, and interest earned).
U.S. Treasury Securities ¾ U.S. Treasury securities are debt instrument. When you purchase a Treasury security, you are loaning money to the government. Treasury securities are backed by the full faith and credit of the U.S. government which means the govern-ment guarantees interest and principal payments will be paid on time. Treasury securities include: