Learning Module 6: Savings and Investing

Saving and investing is one of the smartest financial habits you can build. It helps you afford major life goals without sacrificing your future financial security. Here are some key reasons:

• Big Purchases — Big purchases, such as buying a home, a new car or any other expensive item,
  requires you to set goals and save money for down payments, when you can.
• Education — Paying for a college education can be challenging, but these tips can help lighten the load.
  • Federal and state financial aid is available to help with education expenses and students should complete the FAFSA (Free Application for Federal Student Aid) every year they need money for college.
  • Families should also explore the Oklahoma 529 college savings plan, a state-sponsored investment plan designed to help them save for future education expenses. It offers tax advantages and flexibility, allowing for tax-deferred growth and tax-free withdrawals for qualified education expenses.
• Emergencies — An emergency fund is a cash reserve meant for unexpected expenses like job loss, medical emergencies, car or home repairs, sudden family needs, and more.

A. Costs and benefits of various savings options

• Bank Savings Accounts — A bank savings account is a type of bank account designed to hold and grow your money over time. They are safe and easy to access, but usually have lower interest rates. These types of accounts are best for short-term savings and emergencies.
• Certificates of Deposit (CDs) — CDs are a type of savings account where you agree to keep your money deposited for a fixed period of time and in exchange, the bank pays you a higher interest rate than a regular savings account. CDs are good for medium-term savings.
• Money Market Mutual Funds — Money market mutual funds are a type of investment that gathers money from you and other investors, to buy short-term, low-risk debt securities such as Treasury bills. They are considered a relatively safe place to keep money for a short period, offering slightly higher returns than traditional savings accounts or CDs, while remaining highly liquid.

B. Risk, Return and Liquidity of Various Investment Options

• Stocks — Stocks represent partial ownership in a company. When you buy stock, you become a part-owner of that company, with a claim on its assets and earnings. Stocks are medium to high risk with potential for high return. Their liquidity is high as stocks are traded daily. They’re great for long-term growth, but you need to be okay with taking risks.
• Bonds — Bonds are loans that you, as an investor, make to corporations or organizations. In return for lending your money, investors receive periodic interest payments and the promise of repayment of the original amount loaned on a future date, known as the maturity date. Bonds are a lower risk than stocks, with moderate returns and good access to your money; ideal for balanced portfolios.
• Mutual Funds — A mutual fund is a pool of money collected from you and others, as investors. The money is then invested by professional managers in assets like stocks, bonds or securities. Mutual funds reduce risk and offer moderate to high returns.
• Precious Metals — Precious metals, such as gold, silver or platinum, are considered valuable investments due to their scarcity and historical role as a show of wealth. They can be used as protection against inflation and economic instability.

Diversification is a technique that attempts to reduce your losses by allocating your investments among several various financial avenues. The primary goal of diversification is to reduce your risk and volatility. Spreading out your investments helps manage risk by not putting all your money in one place.

C. Financial Investments and Life Stages

Financial investments follow a path that adapts to your changing financial needs and goals across the different stages of your life. Here’s a breakdown of how financial investments typically work throughout your lifetime:

• Young Adults (20s – early 30s) — Focus on growth investments like stocks and mutual funds. They are long-term investments, allowing for a higher risk tolerance due to your age. Higher risks can mean higher returns. If you’re starting a career, take advantage of an employer 401(k), which is a retirement savings plan that enables you to begin saving before taxes are deducted. Additionally, some employers may contribute to or match your contributions.
• Mid-Life (30s – 40s) — Try to achieve a balance between growth and income through bonds or real estate investments, such as purchasing a home. Consider investments that carry medium-term risks, as you are in a position to manage a moderate level of risk at this stage of life. This is also a good time to increase your retirement savings, prepare for your children's education and build your financial stability.
• Pre-Retirement (50s – 60s) — Your focus should now shift toward safeguarding the income you’ve built up while ensuring you have enough to be comfortable in retirement. You may also want to find investments with lower-risk options and prepare for a possible increase in your healthcare costs.
• Retirement (60s – 70s) — While accumulating income is your primary goal before retirement, in retirement your focus will switch to having income to cover expenses and preserving your capital for the long term. Focus on income and security with low-risk investments like bonds, fixed annuities and savings accounts.

Inflation can have a significant impact on both income growth and investments throughout the different stages of life. It can reduce the purchasing power of money over time, so it’s wise to invest early in assets that compound and grow at a rate that outpaces inflation.

D. Simple vs. Compound Interest

Interest is a percentage of your savings or money that the bank pays you as a reward for keeping your money with them. There are two types of interest, simple and compound.

• Simple interest is calculated only on the initial principal amount. That means with simple interest, you earn the same amount of interest each period.
• Compound interest is calculated on both the principal and the accumulated interest. With compound interest, your interest earns interest, leading to faster growth over time.

E. The Power of Compound Interest

Compound interest has a huge impact over time, especially when you begin saving and investing at an early age. The longer your money is invested, the more time it has to compound and grow exponentially. Starting this process early, even with small amounts, can result in significant wealth accumulation.

By understanding these saving and investing strategies, you can make better decisions, match your financial actions with your goals, and achieve long-term financial stability and success.