Investing is placing money into assets that will appreciate (grow) in value over the long run for a specific future purpose. Investing is taking saved money and earning more money.

Now, before we even consider investing, let's review some principles of financial planning that we've (hopefully) already learned:

• Know your needs and wants - we've said this from the beginning and it cannot be repeated often enough.
• Earn a steady income from employment and work several jobs if possible!
• Plan your education or training and how you will pay for it. Education is the surest path to financial security - take it!
• Establish a working budget. Eliminate wasteful spending - use that pocket diary once and a while to see where your money is going!
• Establish an emergency fund (three to five months of expenses).
• Be insured with auto, health, and perhaps, life insurance (whether from parents, a spouse's job, your employer or the government.) Nothing can ruin you faster financially than huge costs associated with accidents or illness.
• Be a wise consumer of every item that you purchase - buy quality goods at fair prices.

O.K. - So, if and when you have all that covered, and you're able to set aside (and potentially lose) some money - you're ready to invest and you should!

Why should you invest? Well the federal government keeps track of changes in consumer prices. Some prices rise, others stay the same, and some prices fall. The government developed a "basket of goods" which the "typical American" is likely to consume. The government pays "pretend consumers" to survey the monthly prices of different goods and services. The results of their research is calculated monthly and it is known as the Consumer Price Index or CPI. The CPI helps the Federal Reserve determine the discount rate and lenders and borrowers make economic decisions about the present and future based on the CPI. Employers base employee wage increases according to the CPI, and retailers use the CPI to assist with pricing strategies. Visit this internet site to answer the following:

1. Let's say my parents bought me a crib in 1961 that cost $50.00. How much would that same crib cost in 2008 due to inflation (the general increase in prices over time)? What is the difference in price?

So if you want to stay ahead of inflation, ask yourself the following questions:

• What is a fair wage increase? Are my wages keeping up with inflation?
• What is a good rate of return on savings and investments to meet, or beat, inflation?
• Am I getting a good auto/home loan interest rate?

When should you invest? As soon as you are able. If a 20 year-old person saves $100 for 50 years, that will almost certainly earn more money on their investment that a 50 year-old person who invests $100 for 20 years.

2. Visit this internet site. Using the above example, if you saved $100 for 50 years at a modest interest rate of 5%, how much would you have earned because of compound interest (once annually)? How much would you earn after just 20 years (same rate)? What's the difference in the amount earned?

If you learn anything from this class, learn this: Compound interest is a good thing! Why? Because when you save, you save a principal amount which earns interest. In our example the principle amount was $100. Compound interest is interest you earn on the principal plus the interest as it builds up, or is added to, your original principle!

Investing or saving to stay ahead of inflation is a basic, but ask yourself why else are you investing? Having goals is a key principle of investing. Are you saving to pay for someone's education? Your own retirement? A first, or even second home? Just saying, "I wanna make as much money as I can" isn't very smart. First of all, "Who doesn't it?," but, more importantly, that type of reasoning would have you signing up for any investment that comes along! There are three all-important things to consider when investing:

• How much money do you (really) have to invest? There's a reason the rich keep getting richer: They've got money to invest and are willing to pay people to do so wisely. But have you got all the basics (above) covered? Are you really ready to invest?
• How long do you have to invest? Do you have a short horizon or a long horizon? Are you trying to pay for college just a few years from now, or are you building for a retirement several decades away?
• How much risk are you willing to take? Are you willing to bet on the horse no one thinks will win in hopes of making a huge profit, or would you rather bet on the favorite and get back just a little more than you bet in the first place?

3. In a few sentences please explain to me if, or when, you might be ready to invest and why.

4. Now please explain to me what your investment goals might include.

5. Can you think of how a short or long horizon might impact your investment strategy?

Some financial advisors urge investors to "max-out" (put as much as they can in) any tax-deferred investments available to them before seeking other investments. Tax-deffered investments include IRA's and 401k (or 403b) retirement plans which are offered through some employers. Because this money is pre-tax, it means a person's tax bill will be lower. Let's say you're a single person making between $38,000 and $72,000 a year. The current tax rate is 25%. So, if your making $40,000, that means the government gets 25% or $10,000 - meaning your net is more like $30,000! But, depending on your age and the current year, you could put approximately $5,000 in an IRA or $15,000 in a 401k. So, if you put the max $15,000 in a 401k, you'd only pay tax on $25,000 or about $6,250. You just got paid $3,750 to put $15,000 in a savings account and you only took home $5,000 less than you would have otherwise! I know - you might want to read that over a few times. And, here's another thing to consider: Sometimes, you can actually put yourself into a lower tax bracket by contributing to IRA's and 401k's - resulting in even greater savings. It's why the government gives you until tax season to make contributions to such funds. Things to remember:

• These investment vehicles are tied to stock, bonds, and the economy in general. There is no guarantee of return, but then again, where is there?
• Money contributed to such funds is money you don't plan to touch until retirement (at least 59 1/2). Trying to cash in, or borrow against, these vehicles is very expensive - you pay penalties and the tax you should have when the money was earned.
• You will pay tax on the money as income as you receive it in retirement. But, due to the magic of compound interest, you should still come out ahead.
• There are all types of IRA and 401k investment fund options. Some are risky offering possible large returns while others are safer, but almost guarantee smaller rates of return. Do your homework.

6. Using your words in just a couple of sentences, what are the key advantage(s) and disadvantage(s) of IRA and 401k retirement investment plans?

There are other basic savings plans for retirement and old age: Social Security and Pension Plans.

Through Social Security both workers and employers contribute 7.65% of pay which is then distributed to the social security trust fund. Workers reaching age 62 or 65 collect money based on a complicated formula. Disabled workers, widowed spouses, and orphaned minor children may also collect social security if they qualify. The trust fund may have financial challenges for persons currently under age 40. Taxes will need to be raised or benefits will need to be reduced long term (over the next 30 years). If a person chooses to work for cash only, they will not be earning future social security payments.

Pensions are retirement plans from an employer based on years of service. Fewer employers are offering pension plans for their workers than a generation ago. Labor unions historically have been big backers of employer sponsored pension plans. Most government workers have a defined pension plan.

7. Given the shaky status of Social Security, and the fact fewer employers even offer pension plans, what advice do you have for someone embarking on a career?

So, you have all the basics covered, you're even planning for retirement, and you still have money to invest? Wow, I want to be your friend! (And so does my insurance salesman, my financial planner, etc.)

Well investing money in stocks (the market) has been a successful way for millions of Americans to accumulate wealth.

• Stock or shares represent ownership of a business.
• Stock can be obtained by buying it on a stock exchange or through a stock broker.
• Making money involves selling shares at a higher price than purchased.
• Many companies pay dividends, which is profit paid to shareholders. Dividend pay outs vary.
• Many people join investment clubs to learn more about stock investing. Others read internet sites dedicated to investing.
• Many companies are "private" and do not have shares traded on a public exchange.

Please read "Stock Basics" available here or in our course readings section..

8. In what two ways can shareholders earn money through their stock?

9. In what ways might investing in stocks be better than investing in a retirement fund (IRA, 401k)?

Bonds are almost always mentioned in the same breath as stocks, but what are they?

• Bonds are issued to raise money for a national, state or local government or a private business.
• Bonds represent debt, where stock is ownership.
• Bond holders are paid interest, based upon the risk and type of bond issued.
• Bonds can range from one to thirty years in maturity.
• Common bond names include: savings bonds, I-bonds, corporate bonds, junk bonds, and muni bonds.
• Bonds are bought and sold on bond trading markets, just like stocks.
• Most Americans who own bonds, own them in a mutual fund.

Please read "Bond Basics" available here or from our course readings.

10. What are the differences and advantages of buying bonds compared to stocks?

11. What type of an investor might have a portfolio that included more bonds than stock?

Mutual Funds have become very attractive to the casual investor. Please read "An Introduction to Mutual Funds" available here or from our course readings.

12. In just a few short sentences using your own words, explain the advantages and disadvantages of mutual funds compared to the other investment options.

There are many other types of investments: real estate, collectibles, antiques, coins, art, limited partnerships and the futures and options markets. We will not be covering these topics, but always conduct a thorough research before investing any money.

Almost there!