• Saving and Investing


    What is Saving?


    Savings refers to the money that a person has left over after they subtract consumer spending from their disposable income over a given time period. Savings, therefore, represent a net surplus of funds for an individual or household after all expenses and obligations have been paid.

    Savings are kept in the form of cash or cash equivalents (e.g. as bank deposits), which are exposed to no risk of loss but also come with correspondingly minimal returns. Savings can be grown through investing, which requires that the money be put at risk, however.

    • Savings is the amount of money left over after spending and other obligations are deducted from earnings.

    • Savings represent money that is otherwise idle and not being put at risk with investments or spent on consumption.

    • Savings accounts are very safe but tend to offer very low rates of return as a result.

    • Saving can be contrasted with investing, in that the latter involves seeking to grow wealth by putting money at risk.

    • Negative savings is indicative of household debt or negative net worth.


    Source: https://www.investopedia.com/terms/s/savings.asp


    Conversation Starters About Saving


    • Once your teen has a steady job, help him set up a savings program so that at least 10 percent of earnings goes directly into his savings account.

    • Help your teen track what he actually spends in a month. Talk about how to estimate three months’ worth of expenses, and how much to save from each paycheck to build up his savings.

    • Talk about how to keep money in a safe place, like a federally insured bank or credit union.

    • Explain that, if possible, it’s better to have more savings—like six to nine months’ worth of living expenses, instead of only three. 

    • Discuss how much your child can save. What will she gain? What will she have to give up? Is it worth it?

    • Explain to your child that once she starts a job, she may be offered an account at work called a 401(k). Some employers provide matching contributions as an incentive to save, so it’s smart to save at least enough for the maximum matching contribution.

    Video Resource: Ways to Save


    What is Investing?


    Investing is the act of allocating resources, usually money, with the expectation of generating an income or profit. You can invest in endeavors, such as using money to start a business, or in assets, such as purchasing real estate in hopes of reselling it later at a higher price.

    Key Takeaways

    • In investing, risk and return are two sides of the same coin; low risk generally means low expected returns, while higher returns are usually accompanied by higher risk.

    • Risk and return expectations can vary widely within the same asset class; a blue-chip that trades on the NYSE and a micro-cap that trades over-the-counter will have very different risk-return profiles.

    • The type of returns generated depends on the asset; many stocks pay quarterly dividends, while bonds pay interest every quarter.

    • Investors can take the do-it-yourself approach or employ the services of a professional money manager.

    • Whether buying a security qualifies as investing or speculation depends on three factors - the amount of risk taken, the holding period, and the source of returns.



    Video Resource: Investing for Teenagers


    Compound Interest and the Time Value of Money

    Compounding interest is the concept of the time value of money, which states that the value of money changes, depending upon when it is received. Having $100 today is preferable to receiving it a few years from now because you can invest it to generate dividends and interest income. Compounding allows that money to grow. If you waited two years to receive that $100, you'd miss out on two years of opportunity to earn compound interest. This is known as opportunity cost.

    Opportunity cost is the loss of possible gains if an action is not chosen. In this case, the opportunity cost is equal to the amount of money you do not get in interest if you don't invest in that money.

    In our earlier example, if you don't invest the $500 in an account with 10% annual interest, you'll lose the opportunity to earn $50 or more per year in interest. In 10 years, your $500 could be $1,296.87. But if you don't invest it, it'll still be $500 10 years later.

    Source: https://www.thebalance.com/the-power-of-compound-interest-358054 


    Video Resource: The Power of Compounding Interest

    ***Disclaimer: these resources and links are for informational purposes only and are not meant to replace advice of a financial professional