Investments & Retirement

Question 1

Saving

Answer 1

Saving means putting money aside for future use. For example, you might save money by keeping it in a bank account, where it remains safe and earns a little bit of interest.

Some common reasons to save include having money for emergencies, short-term goals like a new phone, or even long-term goals like buying a car or going to college.

Question 2

Investing

Answer 2

Investing, on the other hand, means putting your money into assets that can grow in value over time. Examples of investment options include real estate, stocks, bonds, and mutual funds.

By investing, you hope that the money you put in will grow and be worth more in the future. Investing can help you achieve long-term goals, like home ownership or retirement.

Question 3

Saving & Investing options

Answer 3

• Bank accounts
• COD (Certificate of Deposit)
• Stocks
• Bonds
• Mutual funds

Question 4

Liquidity

Answer 4

Liquidity refers to how easily you can access your money. Savings accounts have high liquidity, as you can withdraw your money anytime. Investments, however, might not be as easy to sell and convert to cash.

Question 5

Risk

Answer 5

Risk is the potential for your money to lose value. Saving in a bank account is generally low risk, while investing in stocks or bonds has a higher risk, as their value can go up and down.

Question 6

Return

Answer 6

Return is the amount of money you gain or lose on your investment. Savings accounts typically have low returns, while investments like stocks and bonds have the potential for higher returns.

Question 7

Time horizon

Answer 7

Time horizon is how long you plan to keep your money invested or saved. Generally, if you need your money soon, saving is the better option. If you have a long time before you need the money, investing can help your money grow more.

Question 8

Tips to balance saving and investing

Answer 8

1. Create a budget
2. Establish an emergency fund
3. Set clear goals
4. Diversify your investments
5. Review and adjust: Check your progress regularly, and adjust your saving and investing strategies as needed.

Question 9

Financial institutions

Answer 9

There are special organizations that help us save, invest, and manage our money. These organizations are called financial institutions.

They include banks, credit unions, insurance companies, and brokerage firms.

Financial institutions play a big role in our lives, helping us do things like save for college, buy a car, or even start a business.

Question 10

Financial markets

Answer 10

Imagine you want to buy or sell things like stocks, bonds, or other financial assets. To do this, you need a place where buyers and sellers can come together to trade these assets. That place is called a financial market.

There are different types of financial markets, such as stock markets, bond markets, and money markets.

These markets are essential for the smooth functioning of our economy and play a key role in helping businesses and governments raise money.

Question 11

Why do we need financial institutions and markets?

Answer 11

Financial institutions, like banks and credit unions, can be really helpful. They help you manage your money, build your credit, and get more money over time.

• Bank accounts are less risky & inconvenient than cash
• You earn interest
• Investing can potentially provide higher returns than just saving money in a bank account.
• Even if the bank gets robbed or if the bank goes out of business, your money is insured up to ‍$250,000 by the Federal Deposit Insurance Corporation (FDIC).
• More access to loans when you have a credit report and score

Question 12

Banks

Answer 12

Banks are a popular choice for people who want to save money in a secure place and earn interest. They also provide loans and credit cards to help people finance large purchases, like homes and cars. Banks may also offer investment products and services, such as stocks and mutual funds.

In reality, your bank might be a one-stop-shop, where you can take care of all your financial needs.

Question 13

Lenders

Answer 13

Lenders are institutions that lend money to people and businesses. While most banks and credit unions do this, there are some companies who only lend money and do not provide any other services, like checking or savings account. They charge interest on the borrowed amount, which is their main source of income.

Question 14

Credit unions

Answer 14

Credit unions are similar to banks, but they are member-owned and you typically have to qualify to become a member. For example, there are teacher credit unions, or town credit unions (you have to live in a certain town to be a member). Credit unions usually offer better interest rates on savings and lower interest rates on loans. They also provide a range of financial services, just like banks.

Question 15

Brokerage firms and investment companies

Answer 15

These companies help people invest their money in stocks, bonds, and other financial assets. They often charge fees or commissions for their services. For example, you might open an account with a brokerage firm to invest ‍$1,000 in a stock or mutual fund.

Question 16

Insurance companies

Answer 16

Insurance companies provide protection against financial losses due to accidents, natural disasters, and other unexpected events. They collect premiums from policyholders and use the money to pay out claims when needed. For example, you might buy homeowners insurance to protect your house from damage due to a fire.

Question 17

Financial advisors

Answer 17

Some financial institutions, like financial advisers and wealth managers, provide advice to help people make informed decisions about saving, investing, and managing their money. They may charge fees for their services, or earn commissions based on the products they recommend.

Question 18

Stock markets

Answer 18

Stock markets are places where people can invest in shares of companies, like Apple or Amazon. They allow investors to buy and sell stocks, which represent ownership in the company, and potentially earn profits as the company grows.

Question 19

Bond markets

Answer 19

Bond markets are where people can invest in bonds, which are loans made to companies or governments. Investors who buy bonds receive regular interest payments and get their principal amount back when the bond matures.

Question 20

Money markets

Answer 20

Money markets are a type of financial market where people can invest in short-term debt securities, like Treasury bills and certificates of deposit.

Question 21

Risk in investments

Answer 21

The chance your investment may not make as much money as you hoped, or you could even lose some or all of your investment.

Question 22

Return in investments

Answer 22

Return, on the other hand, is the gain or loss from an investment over a period of time. It tells you how much money you made, or lost, on your investment. If you have a positive return, that means your investment has made money. If your return is negative, then you have lost money.

Question 23

How are risk and return related?

Answer 23

Risk and return are related because generally, the more risk you take with an investment, the higher the potential return. But, taking more risk also means more potential for loss.

Question 24

Factors that influence risk

Answer 24

• Type, quality, and duration of investment
• Market conditions
• Investors behavior

Question 25

Low-risk, low-return investments:

Answer 25

Treasury bills are an example of this type of investment. They are issued by the government and are considered very low-risk, but they also offer lower returns compared to other investments.

Question 26

High-risk, high-return investments:

Answer 26

Penny stocks are an example of this type of investment. These are stocks of small companies that trade at very low prices. They can offer huge returns if the company does well, but they also carry a higher risk of loss.

Question 27

Moderate-risk, moderate-return investments:

Answer 27

Index funds are an example of this type of investment. These are funds that aim to match the performance of a specific market index. They offer diversification and generally have a lower risk than individual stocks, but they can still offer decent returns.

Question 28

ROI

Answer 28

Return on investment.

ROI helps you figure out how much money you’ve made from an investment compared to how much you put in. So, if you invested your ‍$100 and it turned into ‍$150, your ROI would be 50%. That means you made ‍50% more money than you started with.

Question 29

How to calculate ROI

Answer 29

Current value of investement – Initial investment
___________________________________________________ x 100

                          Initial investment

Question 30

Rule of 72 using the ROI

Answer 30

It helps us estimate how long it will take for our money to double when we invest it. All we have to do is divide the number ‍72 by the interest rate or ROI. The answer we get tells us approximately how many years it’ll take for our money to double.

E.g.
For example, if we invest our money and earn an interest rate of ‍6%, we would do this: ‍
72 / 6 = 12 years. So, it would take about ‍12 years for our money to double.

Question 31

Stocks

Answer 31

When you buy a stock, you’re actually buying a small piece of ownership in a company. For example, if you buy a share of Plum, you become a part-owner of the Plum company. Stocks offer the potential for capital appreciation (when the value of the stock increases) and dividend income (when the company shares its profits with stockholders).

However, stocks can be riskier and more volatile than other investments because they depend on the company’s profitability and growth.

With stocks, you can make money in two ways: by selling them at a higher price than you bought them, and/or by receiving dividends. For example, if you bought a share of Plum at $100 and later sold it for ‍$150, you would make a ‍$50 profit.

Another way to make money with stocks is through dividends, which are payments companies make to their shareholders from their profits. Not all companies issue dividends and the amount you receive may vary. So, in addition to the ‍$50 profit from the sale, you may also receive dividend income from your Plum shares, increasing your total return on investment.

Question 32

Bonds

Answer 32

Bonds are a type of investment where you lend your money to a government or a corporation. In return, the issuer of the bond promises to pay you fixed interest payments and repay the principal at the end of the bond’s term. Bonds typically offer lower risk and return compared to stocks, but they depend on the issuer’s creditworthiness and interest rate changes.

You make money with bonds by receiving interest payments and getting your principal back at the end of the bond’s term. For example, if you buy a ‍$1,000 bond with a ‍5% annual interest rate, you would receive ‍$50 in interest payments each year, and get your ‍$1,000 back when the bond matures.

Question 33

Principal

Answer 33

the original amount you lent

Question 34

When a bond matures

Answer 34

when a bond matures means that it has reached the end of its term. The person who bought the bond can now get their original investment back

Question 35

Mutual funds

Answer 35

A mutual fund is a type of investment where a lot of people pool their money together in order to buy a bunch of different stocks, bonds, or other investments. By doing this, they’re able to reduce their risk because if one of the investments doesn’t do well, they still have all of the other investments to fall back on.
Mutual funds are managed by professionals, so you don’t have to worry about picking the right stocks or bonds yourself.

You make money with mutual funds in three ways: by receiving dividends or interest from the fund’s investments, by selling your shares in the fund at a higher price than you bought them, and by receiving capital gains distribution.

Question 36

Diversification

Answer 36

If there is one phrase to perfectly describe diversification, then it is: don’t put all your eggs in one basket. Diversification is a strategy to reduce risk and increase return by having a mix of different types of investments that are not highly correlated. In other words, when some investments in your portfolio are doing poorly, others might be doing well, which can help balance out your overall returns.

To diversify your portfolio, you can:
- invest in a mix of stocks, bonds, and mutual funds.
- choose investments from different industries and sectors.
- include both domestic and international investments.

And consider:
- Risk tolerance
- Time horizon
- Financial goals

Question 37

Risk tolerance

Answer 37

Figure out how much risk you’re willing to accept with your investments. If you prefer less risk, you might want to allocate a larger part of your portfolio to safer assets like bonds or dividend-paying stocks. On the other hand, if you’re okay with more risk, you may choose to invest more in growth-focused stocks or other high-risk opportunities.

Question 38

What to think about when planning or retirement

Answer 38

• Longer life expectancy:
  People are living longer, which means you might need more money to cover your expenses for a longer period of time. As mentioned earlier, it is important to plan on being retired for just as many years as you were working.
• Rising care costs:
  As you get older, you might need more medical or long term care, and these costs can add up. You should plan on seeing a doctor more often, and potentially needing more regular medications.
• Inflation:
  The cost of living usually goes up over time, so it’s important to plan for how inflation might affect your retirement expenses. Your grocery bill today won’t be the same when you retire - it will likely cost more money to buy the same items.
• Market fluctuations:
  The value of your investments can go up and down, which can impact your retirement savings. If the investment market goes down close to your retirement, you may end up with less money than you had planned.
• Changes in social policies and programs:
  Government programs, like Social Security, might change over time, so it’s important to stay informed and plan accordingly. Sadly, cuts and restructuring of these programs happen often and that can impact your retirement.

Question 39

Planning VS. not-planning for retirement

Answer 39

Advantages:
- Having enough income and savings: If you plan well, you’ll have enough money to cover your expenses and to do the things you want to in retirement.
- Maintaining your standard of living: By planning, you can make sure you have enough money to continue living the way you want to.

Disadvantages:
- Retirement savings gap: You may not have enough money saved to cover your expenses, which could lead to a lower standard of living, or having to go back to work.
- Financial stress: Not having enough money saved can cause stress and worry during your retirement years.

Question 40

Estimating retirement expenses in detail

Answer 40

• Housing
  Mortgage
  Property tax
  Home maintenance cost
  Utilities
  Homeowner’s/renter’s insurance
• Food
  Groceries
  Dining out
  Snacks
  Drinks
• Transportation
  car expenses (such as fuel, maintenance, insurance, and registration)
  public transportation fares
  travel expenses for vacations or visiting family
• Health care
  insurance premiums (for Medicare or supplemental policies)
  out-of-pocket costs for medical services
  prescription medications
  and over-the-counter drugs
• Entertainment
  hobbies
  trips
  recreational activities.
• Insurance and taxes
  There are many different taxes and insurance that you still have to pay

Question 41

The budgeting approach for calculating retirement budget

Answer 41

The budgeting approach involves creating a detailed budget for your retirement expenses, considering the following:
- Food
- Insurance and taxes
- Health care
- Entertainment
- Housing
- Transportation

Question 41

replacement ratio for calculating retirement needs

Answer 41

The replacement ratio is calculated by estimating what percentage of your pre-retirement income you’ll need during retirement (usually around 70% to ‍80%)

Basically, multiply your income by 70% or 80% depending on how much you estimate you’re going to need in retirement per month, because you probably won’t need 100% of your current income in retirement, usually 20%-30% less.

Question 42

The online approach for calculating retirement needs

Answer 42

Online calculators can help you estimate your expenses based on factors like your age, income, and savings.

Question 43

How to reduce retirement expenses and increase income

Answer 43

• Downsize: Consider moving to a smaller home or getting rid of things you don’t need to lower your costs.
• Relocate: Moving to a less expensive area can help you save money on housing, taxes, and other expenses.
• Work part-time: If you’re able and willing, you can work part-time during retirement to earn extra income.
• Delay retirement: If you wait a few more years before retiring, you can save more money and increase your Social Security benefits.
• Remember that it’s NEVER TO EARLY to plan for retirement

Question 44

Social security

Answer 44

Social security is a government program that provides a monthly payment to retirees. It is funded by taxes that are taken out of everyone’s paycheck. Paying into social security is mandatory for every employee and their employer.

When you work, you pay into the social security system. When you retire, you can apply to receive monthly payments from the system. The amount you receive is based on how much you earned while you were working and how early you retire.

While social security is an important part of retirement, it is typically not enough to live off of. The average monthly social security payment is around ‍$1,600. This is not enough for most people to live comfortably, so it is important to save for retirement in other ways as well.

Question 45

Employer-sponsored plans

Answer 45

Most people save for retirement with the help of their employer through retirement plans like 401(k), 403(b), 457, or pension. These plans are called employer-sponsored plans because your employer is the one who sets up a retirement account for you, and both you and your employer can contribute money to it.

Sometimes, employers even match your contributions, meaning they’ll add extra money to your account. This is called a matching contribution.

For example, your employer might match ‍%50 of your contributions, up to a certain percentage of your income. So if you contribute ‍$100 to the retirement plan, your employer would add an extra ‍$50.

Employer-sponsored plans are usually voluntary, which means you don’t have to participate if you don’t want to. But if your employer offers matching contributions, it can be a good idea to take advantage of it in order to get some free money added to your retirement savings.

When you retire, you will be able to access the money in your retirement plan. Depending on the type of plan, you might be able to receive a lump-sum payment, periodic payments, or a combination of both.

Question 46

Lump-sum payment

Answer 46

all-in-one payment, rather than breaking the sum into smaller parts.

Question 47

Individual savings

Answer 47

Individual savings for retirement differ from Social Security and employer-sponsored retirement plans in that they are completely under your control. With individual savings, you are the one who decides how much you want to save, where you want to save it, and what types of investments you want to make.

One of the main benefits of individual savings for retirement is that they give you more control over your retirement income. You can choose to save as much as you want, and invest in a variety of different accounts and assets. For example, you might choose to open an Individual Retirement Account (IRA) and make regular contributions to it. Or, you might invest in stocks, bonds, or mutual funds. You might even choose to purchase real estate as an investment.

When you decide to retire, you can access your individual savings in a variety of ways, depending on the type of account or asset you have. For example, with an IRA, you might choose to take withdrawals as needed. With stocks, bonds, or mutual funds, you can sell them to get some money. If you own real estate, you might choose to sell the property or rent it out for additional income.

Question 48

401(k)

Answer 48

401(k) is a type of retirement plan only available through your employer