This video in the Tools for Enhancing the Stock Market Game™: Invest it Forward™ series shows how saving early, then investing, can help young people attain longer term goals such as education, employment, entrepreneurship, buying a home, and retirement.
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The Tools for Enhancing The Stock Market Game™: Invest it Forward™ video series is brought to you by the Federal Reserve Bank of St. Louis in cooperation with the SIFMA Foundation. These videos are designed to help students better understand stocks, bonds, primary and secondary capital markets, saving and investing, the role and benefits of the capital markets and more.
You could be the scientist who cures the common cold or the farmer with the perfect green thumb who can grow crops in harsh environments to feed the hungry. You could work in a large company with thousands of employees all over the world. You could own your own small business that supports your local economy by providing jobs in your community and goods and services for your neighbors.
Whatever you dream about doing, you will need to find a way to pay for it and savings is the way to start. Opening a savings account, where your money earns interest every month, is a great place to begin. Putting money into your savings account regularly will help you earn even more. If you are confident that you have enough money saved to cover emergencies, you can open a money market or CD account. These types of accounts offer higher interest rates than most accounts but they also have rules about how much money you must put aside and how long your money is held. When it comes to saving, higher interest rates means that your money increases more quickly.
Investing through the capital markets is another way your money can earn more. Capital markets help people with ideas become entrepreneurs and help small businesses grow into big companies, while giving investors the opportunity to earn more interest (returns). The stock market and the bond market are a part of the capital markets. Investing can earn you more money (or returns) than savings accounts or CDs, but it also increases the risk that you might lose your money. When it comes to investing, it’s quite simple — higher risk offers higher possible returns and lower risk offers lower possible returns.
Throughout your life you will have different financial goals from saving for education to investing in a business idea to buying a car or a home to retiring. There are different tools and resources available through the capital markets to help you. For example, when Elena was a sophomore in high school she knew she wanted to become a dentist. Knowing college and dental school would be expensive, she saved as much of her earnings from her part-time job as she could. During summers, she worked full time and put even more into her savings account.
In addition to a savings account, Elena also had a 2-year CD account. It earned more interest than her savings account, but she couldn’t withdraw the money for two years! By the time she graduated from high school, she had saved enough to reduce her need for student loans and grants.
Jessica has finished college and owns a small successful restaurant. She was lucky to receive a small business loan with a low interest rate. She repaid the loan and plans on expanding her business in five years. While paying back her loan, Jessica also saved some of her restaurant’s profits in a savings account. Because she doesn’t plan on spending any of this money for at least five years, she has decided to invest some of it into stocks and mutual funds. These investments are riskier than keeping the money in a savings account, but they may provide higher returns. Jessica plans to continue depositing part of her income—the profit from her business—into her savings account and investing part of her income into stocks and mutual funds.
When Jessica’s friend, Oscar, was born, his parents started a 529 Plan. A 529 Plan is an investment plan that helps individuals and families save for educational expenses. Some plans are “prepaid” tuition plans and others are savings plans. A prepaid tuition plan allows a family to pay today, at today’s prices, for future school tuition. A savings plan allows a family to invest its money for future educational expenses and earn interest that is not charged tax. Contributions to a 529 Plan are typically invested in stocks, bonds and mutual funds. Oscar’s parents invested $5,000 in his 529 plan and the investment earned $800. Oscar had $5,800 to help pay for college and no tax was charged for the $800 in earnings. Oscar’s parents were also able to deduct contributions from their state income taxes. Because his parents started early, when Oscar was ready to start college, he did not depend as much on student loans and financial aid to help him.
Oscar completed and paid for college and is ready to become a new homeowner. He dreams of owning a home with a little backyard where he can plant a garden like his grandfather’s. He has fond memories of helping his grandfather plant tomatoes in his garden as a little boy. Oscar needs a loan for this, called a “mortgage,” because he isn’t able to pay for a house all at once.
A mortgage is a loan from a bank that you use to buy a house. Oscar has only recently graduated from college and is just starting his marketing career at a social media company. He hasn’t saved enough for a 20 percent down payment on a house. He is saving part of each paycheck for a down payment. He is also saving for retirement by putting his money into his company’s 401(k) plan. He knows that at some point in his future he will want to stop working, but he will still need a way to pay for his regular expenses like food, clothing, car repairs and more.
A 401(k) plan is an investment plan set up by an employer to help employees pay for expenses after they retire. Most 401(k)s include investments in different stocks, bonds, and mutual funds. Employees decide how much they want to contribute to their 401(k) each paycheck. There is a limit on how much Oscar can deposit, but his company matches every dollar that he saves, up to $1,200 a year. If Oscar contributes $1,200 this year, he’ll end up with $2,400 at the end of the year! That’s going to help him retire comfortably.
Jessica and Oscar both saved and invested to reach their dreams. The capital markets enabled them in many ways to get there. As you think about your future, what are your dreams? How will the capital markets help you?
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