Title: Unit 4: Saving & Investing (Teacher Only)
Course: Kentucky Sample Personal Finance Curriculum > Section: Unit 4: Saving & Investing

Description
Saving is the decision to set aside part of income for future usage. Students investigate the opportunity costs of choosing to save or spend. They also learn the benefits of compound interest and the impact interest rates have on spending or saving.

Financial investing includes buying financial assets with the aim of increasing wealth in the future. Students learn how financial investing can help meet long-term financial goals. They learn about the relationship between risk and reward in investing. By evaluating investment options, they also learn how to reduce risk through diversification.

Talking Points
1. People’s income is saved, spent on goods and services, or used to pay taxes. People choose between immediate spending and saving for future consumption. Because some people are less patient than others, they choose immediate spending over saving.

2. Setting a savings goal can serve as an incentive to encourage people to save. And having a savings plan helps people reach their savings goals.

3. People may choose to save money in many places. For example, they can save at home, at a commercial bank, a credit union, or a savings and loan.

4. Banks and other financial institutions often pay interest on deposits. People also deposit money in banks because banks are a safe place to keep money.

5. Banks and other financial institutions loan money they receive from depositors (deposits) to borrowers. Banks charge borrowers interest for the loans. Part of the money received as interest from these loans is used to pay interest to depositors for the use of their money.

6. An interest rate is usually expressed as an annual percentage of the amount saved. The interest rate paid on savings and charged on loans, like all prices, is determined in a market. When interest rates increase, people earn more on their savings and their savings grow more quickly. Principal is the initial amount of money deposited on which interest is paid.

7. Compound interest is the interest that is earned on the principal and the interest already earned.

8. The value of a person’s savings in the future is determined by the amount saved and the interest rate. The earlier people begin to save, the more savings they will be able to accumulate (all other things equal) as a result of compound interest.

9. People save money for different reasons, including higher education, retirement, unexpected events, and large purchases such as cars and homes.

10. To assure savers that their deposits are safe from bank failures, federal agencies guarantee depositors’ savings in most commercial banks, credit unions, and savings associations up to a set limit.

11. The interest rate that banks quote is the nominal, or stated, interest rate. The real interest rate expresses the rate of return on savings, adjusted for inflation; that is, the real interest rate is the nominal interest rate minus the rate of inflation. Inflation reduces the value of money, including savings.

12. Usually real interest rates are positive because people expect to be compensated for deferring the use of savings from the present to the future—that is, they expect to be paid interest for letting someone else use their money now instead of using it themselves now.

13. The nominal interest rate tells savers and investors how the dollar value of their savings or investments will grow. The real interest rate tells savers and investors how the purchasing power of their savings or investments will grow.

14. Discounting the future value of a sum of money based on an interest rate allows you to compare money received (or paid) in the future with money held today.

15. Government policies can create incentives and disincentives for people to save. Employer benefit programs also create incentives and disincentives for saving.

16. After people save enough of their income to cover emergencies, they must make choices about investing their savings so that it might grow at a higher rate of return.

17. A financial investment involves the purchase of a financial asset. Financial assets include a variety of financial instruments, such as bank deposits, stocks, bonds, and mutual funds. Real estate and commodities are also often viewed as financial assets. Depositors receive interest on money deposited in bank accounts. Investors also receive interest when they own a corporate or government bond or make a loan.

18. When people buy corporate stock, they are purchasing ownership shares in a business. If the business is profitable, share owners expect to receive income in the form of dividends and/or an increase in the stock’s value. An increase in the value of an asset such as a stock is called a capital gain. If the business is not profitable, share owners could lose the money they have invested.

19. As with other goods and services, buyers and sellers in financial markets determine the price of financial assets and thus influence the rates of return on those assets. The prices of financial assets reflect what is known about the assets. These prices adjust to new financial news/information. The prices of financial assets are also affected by interest rates, changes in domestic and international economic conditions, monetary policy, and fiscal policy.

20. The rate of return on financial investments includes interest payments, dividends, and capital appreciation expressed as a percentage of the amount invested.

21. Risk is the chance of loss or harm. In the case of financial investments, there is financial risk, with a range of possible outcomes including loss of the investment. Higher-risk investments have a wider range of possible returns. The rate of return earned from investments varies with the amount of risk. In general, the higher the expected rate of return, the higher the risk of loss and vice versa. Some people are more willing to take risk than others. How much risk people are willing to take depends on factors such as personality, income, and family situation.

22. The real return on a financial investment is the nominal (stated) interest rate minus the rate of inflation.

23. Any expenses associated with buying, selling, or holding financial assets decrease the rate of return from an investment. Federal, state, and local tax rates vary on different types of investments and affect the after-tax rate of return on the investment.

24. In general, an investment with relatively high risk will have a lower market price and therefore a higher rate of return than an investment with relatively low risk.

25. Short-term investments generally have lower rates of return than longer-term investments.

26. Diversification involves investing in different types of financial assets in order to lower investment risk.

27. People planning to invest should be aware of the following common poor choices based on faulty logic:

- Selling assets at a loss based on the belief that losses weigh more heavily than gains and

- Investing only in assets that are more familiar (i.e., employer’s stock or domestic stocks).

28. People planning to invest should recognize that “If it sounds too good to be true, it is.”

29. There is a role for government when individuals do not have access to competitive financial markets or do not have complete information about alternative investments. The Securities and Exchange Commission (SEC), the Federal Reserve, and other government agencies regulate financial markets.

Standard and Benchmarks

Kentucky Academic Studies for Career Studies- Financial Literacy Standards

FL.H.14 Examine implications of the time value of money:

1. Examine the opportunity cots of saving versus spending.
2. Analyze inflation and its effect on purchasing power.
3. Calculate compound interest and explain the benefits of investing early.

Fl.H.15 Evaluate investment alternatives:

1. Differentiate between insured deposits and uninsured investments.
2. Compare traditional and Roth Individual Retirement Accounts (IRA).
3. Examine various types of employer-sponsored retirement opportunities.
4. Describe mutual funds, Exchange Traded Funds, stocks and bonds.

Fl.H.16Explain the components of a prudent investment strategy compatible with personal financial goals:

- Risk versus reward
- Risk tolerance
- Diversification
- Rebalancing