Saving And Investing For Students

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Saving and InvestingforStudentsU.S. SECURITIES AND EXCHANGE COMMISSION 1


Dear StudentWhile money doesn’t grow on trees, it can grow whenyou save and invest wisely.Knowing how to secure your financial well-being is oneof the most important things you’ll ever need in life. Youdon’t have to be a genius to do it. You just need to knowa few basics, form a plan, and be ready to stick to it. Nomatter how much or little money you have, the importantthing is to educate yourself about your opportunities. Inthis brochure, we’ll cover the basics on saving and investing.At the SEC, we enforce the laws that determine how investments are offered and sold to you. These laws protect investors, but you need to do your part, too. Part of this brochure tells you how to check out investments to ensure youdo not fall victim to fraud or costly mistakes.No one can guarantee that you’ll make money frominvestments you make. But if you get the facts about saving and investing and follow through with an intelligentplan, you should be able to gain financial security overthe years and enjoy the benefits of managing your money.Please feel free to contact us with any of your questions or concerns about investing. It always pays to learnbefore you invest. And congratulations on taking yourfirst step on the road to financial security!U.S. Securities and Exchange CommissionOffice of Investor Education and Advocacy100 F Street, N.E.Washington, D.C. 20549-0213Toll-free: (800) SEC-0330Website: Investor.govU.S. SECURITIES AND EXCHANGE COMMISSION 1


Don’t Wait to Get StartedYOU CAN DO IT!IT’S EASIER THAN YOU THINK.No one is born knowing how to save or to invest. Every successful investor starts with the basics—the information in thisbrochure.A few people may stumble into financial security—a wealthyrelative may die, or a business may take off. But for most people, the only way to attain financial security is to save and invest over a long period of time.As a student, you might think that saving and investing issomething you don’t need to consider right now. But there’s acost to waiting, and even saving a little now can add up overtime and help you pay for your short and long-term goals.KEYS TO FINANCIAL SUCCESS1. Make a financial plan.2. Create a budget.3. Start saving and investing as soon as you’ve paid off your debts.U.S. SECURITIES AND EXCHANGE COMMISSION 3

Your First Step—Making aFinancial PlanWhat are the things you want to save and invest for? a caran educationa comfortable social lifeemergenciesperiods of unemploymentyour future goalsMake your own list and then think about which goals are themost important to you. List your most important goals first.Decide how many years you have to meet each specific goal,because when you save or invest you’ll need to find a savings orinvestment option that fits your time frame for meeting each goal.Many tools exist to help you put your financial plan together.YOUR FINANCIAL GOALSIf you don’t know where you are going, you may end up somewhere you don’t wantto be. To end up where you want to be, you’ll need a roadmap, a financial plan.What do you want to save or invest for?By when? SAVING AND INVESTING

You’ll find a wealth of information, including calculators andlinks to non-commercial resources at YOUR CURRENT FINANCIAL SITUATIONSit down and take an honest look at your entire financial situation. You can never take a journey without knowing whereyou’re starting from, and a journey to financial comfort is nodifferent. You’ll need to figure out on paper your current situation—what you own and what you owe. You’ll be creating a“net worth statement.” On one side of the page, list what youown. These are your “assets.” And on the other side list whatyou owe other people, your “liabilities” or debts.YOUR NET WORTH STATEMENTAssetsCurrent Value LiabilitiesAmountCashCredit cardsChecking accountsBank loansSavingsCar loansOther investmentsStudent loansPersonal propertyOtherTOTALTOTALSubtract your liabilities from your assets. If your assets are largerthan your liabilities, you have a “positive” net worth. If your liabilities are greater than your assets, you have a “negative” net worth.You’ll want to update your “net worth statement” every yearto keep track of how you are doing. Don’t be discouraged ifyou have a negative net worth. If you follow a plan to get intoa positive position, you’re doing the right thing.U.S. SECURITIES AND EXCHANGE COMMISSION 5

KNOW YOUR INCOME AND EXPENSESThe next step is to keep track of your income and your expenses for every month. Write down what you earn, and thenyour monthly expenses.PAY YOURSELF FIRSTInclude a category for savings and investing. What are you paying yourself every month? Many people get into the habit ofsaving and investing by following this advice: always pay yourself first. Many people find it easier to pay themselves first ifthey allow their bank to automatically remove money fromtheir paycheck and deposit it into a savings or investmentaccount.If you work, you may be eligible to participate in an employer-sponsored retirement plan such as a 401(k), 403(b), or457(b). That automatically deducts money from your paycheck,and may reduce the taxes you are paying. Additionally, in manyplans the employer matches some or all of your contribution.When your employer does that, it’s offering “free money.”Any time you have automatic deductions made from yourpaycheck or bank account, you’ll increase the chances of beingable to stick to your plan and to realize your goals.FINDING MONEY TO SAVE OR INVESTIf you are spending all your income, and never have money tosave or invest, you’ll need to look for ways to cut back on yourexpenses. When you watch where you spend your money, youwill be surprised how small everyday expenses that you can dowithout add up over a year.6 SAVING AND INVESTING


Small Savings Add Upto Big MoneyHow much does a bottle of soda cost you?If you buy a bottle of soda every day for 2.00, that adds up to 730.00 a year. If you saved that 730.00 for just one year, and putit into a savings account or investment that earns 5% a year, it wouldgrow to 931.69 after 5 years, and grow to 3,155.02 after 30 years.That’s the power of “compounding.” With compound interest, you earn interest on the money you save and on the interest that money earns. Over time, even a small amount savedcan add up to big money.If you are willing to watch what you spend and look forlittle ways to save on a regular schedule, you can make moneygrow. You just did it with one bottle of soda.If a bottle of soda can make such a huge difference, startlooking at how you could make your money grow if you decided to spend less on other things and save those extra dollars.If you buy on impulse, make a rule that you’ll always wait24 hours to buy anything. You may lose your desire to buy itafter a day. And try emptying your pockets and wallet of sparechange at the end of each day and put that money aside. You’llbe surprised how quickly those nickels and dimes add up!PAY OFF CREDIT CARD OR OTHER HIGH INTERESTDEBTSpeaking of things adding up, few investment strategies pay off aswell as, or with less risk than, merely paying off all high interestdebt you may have.Many people have credit cards, some of which they’ve “maxedout” (meaning they’ve spent up to their credit limit). Credit cards8 SAVING AND INVESTING

can make it seem easy to buy expensive things when you don’thave the cash in your pocket—or in the bank. But credit cardsaren’t free money.Most credit cards charge high interest rates—as much as 18percent or more—if you don’t pay off your balance in full eachmonth. If you owe money on your credit cards, the wisest thingyou can do is pay off the balance in full as quickly as possible.Virtually no investment will give you the high returns you’ll need tokeep pace with an 18 percent interest charge. That’s why you’rebetter off eliminating all credit card debt before investing savings.Once you’ve paid off your credit cards, you can budget yourmoney and begin to save and invest. Here are some tips foravoiding credit card debt:Put Away the Plastic on’t use a credit card unless your debt is at a manageable level andDyou know you’ll have the money to pay the bill when it arrives.Know What You OweI t’s easy to forget how much you’ve charged on your creditcard. Every time you use a credit card, write down how muchyou have spent and figure out how much you’ll have to paythat month. Keep track of your accounts online. If you knowyou won’t be able to pay your balance in full, try to figure outhow much you can pay each month and how long it’ll take topay the balance in full.Pay Off the Card with the Highest RateI f you’ve got unpaid balances on several credit cards, you shouldfirst pay down the card that charges the highest rate. Pay as muchas you can toward that debt each month until your balance is onceagain zero, while still paying the minimum on your other cards.Now, once you have paid off those credit cards and begun toset aside some money to save and invest, what are your choices?U.S. SECURITIES AND EXCHANGE COMMISSION 9

Making Money GrowTHE TWO WAYS TO MAKE MONEYThere are basically two ways to make money.1. You work for money. Someone pays you to work for them or you have your ownbusiness.2. Your money works for you.You take your money and you save or invest it.YOUR MONEY CAN WORK FOR YOU IN TWO WAYSYour money earns money. When your money goes to work,it may earn a steady paycheck. Someone pays you to use yourmoney for a period of time. When you get your money back,you get it back plus “interest.” Or, if you buy stock in a company that pays “dividends” to shareholders, the company may payyou a portion of its earnings on a regular basis.Your money canmake an “income,” just like you. You can make more moneywhen you and your money work.You buy something with your money that could increase in value. You become an owner of something that youhope increases in value over time. When you need your moneyback, you sell it, hoping someone else will pay you more for it.For instance, you collect comic books thinking they will increasein value over time. You expect to sell them in five, ten, or eventwenty years when someone will buy them from you for a lotmore money than you paid.And sometimes, your money can do both at the same time—earn a steady paycheck and increase in value.10 SAVING AND INVESTING

THE DIFFERENCES BETWEEN SAVING AND INVESTINGSavingYour “savings” are usually put into the safest places, or products, that allow you access to your money at any time. Savings products include savings accounts, checking accounts, andcertificates of deposit. Some deposits in these products may beinsured by the Federal Deposit Insurance Corporation or theNational Credit Union Administration. But there’s a tradeofffor security and ready availability. Your money is paid a lowwage as it works for you.After paying off credit cards or other high interest debt,most smart investors put enough money in a savings product tocover an emergency, like sudden unemployment. Some makesure they have up to six months of their income in savings sothat they know it will absolutely be there for them when theyneed it.But how “safe” is a savings account if you leave all of yourmoney there for a long time, and the interest it earns doesn’tkeep up with inflation? What if you save a dollar when it canbuy a loaf of bread. But years later when you withdraw thatdollar plus the interest you earned on it, it can only buy halfa loaf? This is why many people put some of their money insavings, but look to investing so they can earn more over longperiods of time, say three years or longer.InvestingWhen you “invest,” you have a greater chance of losing yourmoney than when you “save.” The money you invest in securities, mutual funds, and other similar investments typicallyis not federally insured. You could lose your “principal”—theamount you’ve invested. But you also have the opportunity toearn more money.U.S. SECURITIES AND EXCHANGE COMMISSION 11

THE BASIC TYPES OF PRODUCTSSavingsInvestmentsSavings accountsBondsCertificates of depositStocksChecking accountsMutual funds, Exchange-traded fundsReal estateCommodities (gold, silver, etc.)What about risk?All investments involve taking on risk. It’s important that yougo into any investment in stocks, bonds or mutual funds with afull understanding that you could lose some or all of your moneyin any one investment.While over the long term the stock markethas historically provided around 10% annual returns (closer to 6%or 7% “real” returns when you subtract for the effects of inflation),the long term does sometimes take a rather long, long time to playout. Those who invested all of their money in the stock market atits peak in 1929 (before the stock market crash) would wait over20 years to see the stock market return to the same level.However, those that kept adding money to the marketthroughout that time would have done very well for themselves, as the lower cost of stocks in the 1930s made for somehefty gains for those who bought and held over the course ofthe next twenty years or more.It is often said that the greater the risk, the greater the potential reward in investing, but taking on unnecessary risk isoften avoidable. Investors best protect themselves against riskby spreading their money among various investments, hoping that if one investment loses money, the other investmentswill more than make up for those losses. This strategy, called12 SAVING AND INVESTING

“ diversification,” can be neatly summed up as, “Don’t put allyour eggs in one basket.” Investors also protect themselves fromthe risk of investing all their money at the wrong time (think1929) by following a consistent pattern of adding new moneyto their investments over long periods of time.Once you’ve saved money for investing, consider carefully allyour options and think about what diversification strategy makessense for you. While the SEC cannot recommend any particularinvestment product, you should know that a vast array of investment products exists—including stocks and stock mutual funds,corporate and municipal bonds, bond mutual funds, certificatesof deposit, money market funds, and U.S. Treasury securities.Diversification can’t guarantee that your investments won’tsuffer if the market drops. But it can improve the chances thatyou won’t lose money, or that if you do, it won’t be as much asif you weren’t diversified.What are the best investments for me?The answer depends on when you will need the money,your goals, and if you will be able to sleep at night if you purchase a risky investment where you could lose your principal.For instance, if you are saving for a long-term goal, such asa college fund for a child, you may want to consider riskierinvestment products, knowing that if you stick to only the “savings” products or to less risky investment products, your moneywill grow too slowly—or, given inflation and taxes, you maylose the purchasing power of your money. A frequent mistakepeople make is putting money they will not need for a verylong time in investments that pay a low amount of interest.On the other hand, if you are saving for a short-term goal, fiveyears or less, such as a car, you don’t want to choose risky investments, because when it’s time to sell, you may have to take a loss.Since investments often move up and down in value rapidly, youwant to make sure that you can wait and sell at the best possible time.U.S. SECURITIES AND EXCHANGE COMMISSION 13

What are investments all about?When you make an investment, you are giving your moneyto a company or enterprise, hoping that it will be successfuland pay you back with even more money.Stocks and BondsMany companies offer investors the opportunity to buy eitherstocks or bonds. The example below shows you how stocks andbonds differ.Let’s say you believe that a company that makes computersmay be a good investment. Everyone you know is buying oneof their computers, and your friends report that the company’slaptops rarely break down and run well for years. You eitherhave an investment professional investigate the company andread as much as possible about it, or you do it yourself.After your research, you’re convinced it’s a solid companythat will sell many more computers in the years ahead.The computer company offers both stocks and bonds. With thebonds, the company agrees to pay you back your initial investmentin ten years, plus pay you interest twice a year at the rate of 4% a year.If you buy the stock, you take on the risk of potentially losing a portion or all of your initial investment if the companydoes poorly or the stock market drops in value. But you alsomay see the stock increase in value beyond what you couldearn from the bonds. If you buy the stock, you become an“owner” of the company.You wrestle with the decision. If you buy the bonds, youwill get your money back plus the 4% interest a year. And youthink the company will be able to honor its promise to you onthe bonds because it has been in business for many years anddoesn’t look like it could go bankrupt. The company has a longhistory of making computers and you know that its stock hasgone up in price by an average of 6% a year, plus it has typicallypaid stockholders a dividend of 3% from its profits each year.14 SAVING AND INVESTING

THE MAIN DIFFERENCES BETWEENSTOCKS AND BONDSStocksBondsIf the company profits or is perceived ashaving strong potential, its stock may goup in value and pay dividends. You maymake more money than from the bonds.The company promises to return moneyplus interest.Risk: The company may do poorly, andyou’ll lose a portion or all of your investment.Risk: If the company goes bankrupt,your money may be lost. But if there isany money left, you will be paid beforestockholders.You take your time and make a careful decision. Only timewill tell if you made the right choice. You’ll keep a close eye onthe company and keep the investment as long as the companykeeps selling a quality computer that consumers want to use, andit can make an acceptable profit from its sales.WHY SOME INVESTMENTS MAKE MONEYAND OTHERS DON’TYou can potentially make money in an investment in a company if: The company performs better than its competitors. Other investors recognize it’s a good company, so thatwhen it comes time to sell your investment, others want tobuy it. The company makes profits, meaning they make enoughmoney to pay you interest for your bond, or maybe dividends on your stock.You can lose money if: Consumers don’t want to buy the company’s products orservices.U.S. SECURITIES AND EXCHANGE COMMISSION 15

The company’s officers mismanage the business, they spend toomuch money, and their expenses are larger than their profits. Other investors that you would need to sell to think thecompany’s stock is too expensive given its performance andfuture outlook. The people running the company are ensnared in fraud. For whatever reason, you have to sell your investmentwhen the market is down.MUTUAL FUNDS AND EXCHANGE-TRADEDFUNDS (ETFs)Because it is sometimes hard for investors to become expertson various businesses—for example, what are the best telecommunications, pharmaceutical, or computer companies—investors often depend on professionals who are trained to investigate companies and recommend companies that are likely tosucceed. Since it takes work to pick the stocks or bonds of thecompanies that have the best chance to do well in the future,many investors choose to invest in mutual funds and ETFs.What are mutual funds and ETFs?A mutual fund or ETF is a pool of money run by a professional or group of professionals called the “investment adviser.”In a managed fund, after investigating the prospects of manycompanies, the fund’s investment adviser will pick the stocks orbonds of companies and put them into a fund.Investors can buy shares of the fund, and their shares rise orfall in value as the values of the stocks and bonds in the fundrise and fall. Investors may typically pay a fee when they buy orsell their shares in the fund, and those fees in part pay the salaries and expenses of the professionals who manage the fund.16 SAVING AND INVESTING

Even small fees can and do add up and eat into a significantchunk of the returns a fund is likely to produce, so you need tolook carefully at how much a fund costs and think about howmuch it will cost you over the amount of time you plan to ownits shares. If two funds are similar in every way except that onecharges a higher fee than the other, you’ll make more money bychoosing the fund with the lower annual costs.For more information about mutual funds and ETFs, be sure toread our brochure “Mutual Funds and ETFs—A Guide for Investors,” which you can read online at FUNDS AND ETFS WITHOUT ACTIVEMANAGEMENTOne way that investors can obtain for themselves nearly thefull returns of the market is to invest in an “index fund.” This isa fund that does not attempt to pick and choose stocks of individual companies based upon the research of the fund managers. An index fund seeks to equal the returns of a major stockmarket index, such as the Standard & Poor’s 500, the Wilshire5000, or the Russell 3000. Through computer programmedbuying and selling, an index fund tracks the holdings of a chosen index, and so shows the same returns as an index minus, ofcourse, the annual fees involved in running the fund. The feesfor index mutual funds and ETFs generally are much lowerthan the fees for managed funds.Historical data shows that index funds have, primarily because of their lower fees, enjoyed higher returns than the average managed fund. But, like any investment, index funds involve risk.U.S. SECURITIES AND EXCHANGE COMMISSION 17

WATCH “TURNOVER” TO AVOID PAYING EXCESS TAXESTo maximize your fund returns, or any investment returns,know the effect that taxes can have on what actually ends upin your pocket. Funds that trade quickly in and out of stockswill have what is known as “high turnover.” While selling astock that has moved up in price does lock in a profit for thefund, this is a profit for which taxes have to be paid. Turnoverin a fund creates taxable capital gains, which are paid by thefund shareholders. All funds are now mandated by the SEC toshow both their before- and after-tax returns. The differencesbetween what a fund is reportedly earning, and what a fund isearning after taxes are paid on the dividends and capital gains,can be quite striking. If you plan to hold funds in a taxable account, be sure to check out these historical returns in thefund prospectus to see what kind of taxes you might be likelyto incur.18 SAVING AND INVESTING

How Can I Protect Myself ?ASK QUESTIONS!Many people hire an investment professional to assist in selecting investments. You can never ask a dumb question aboutyour investments and the people who help you choose them,especially when it comes to how much you will be paying forany investment, both in upfront costs and ongoing management fees.Here are some questions you should ask when choosing aninvestment professional or someone to help you: What training and experience do you have? How longhave you been in business? What is your investment philosophy? Do you take a lot of risksor are you more concerned about the safety of my money? Describe your typical client. Can you provide me with references, the names of people who have invested with youfor a long time? How do you get paid? By commission? Based on a percentage of assets you manage? Another method? Do youget paid more for selling your own firm’s products? How much will it cost me in total to do business with you?Your investment professional should understand your investment goals, whether you’re saving to buy a car, or to pay foryour education.Your investment professional should also understand yourtolerance for risk. That is, how much money can you affordto lose if the value of one of your investments declines? Aninvestment professional has a duty to make sure that he orU.S. SECURITIES AND EXCHANGE COMMISSION 19

she only recommends investments that are suitable for you.That is, that the investment makes sense for you based on yourother securities holdings, your financial situation, your means,and any other information that your investment professionalthinks is important. The best investment professional is onewho fully understands your objectives and matches investmentrecommendations to your goals. You’ll want someone you canunderstand, because your investment professional should teachyou about investing and the investment products.How Should I Monitor My Investments?Investing makes it possible for your money to work for you.In a sense, your money has become your employee, and thatmakes you the boss. You’ll want to keep a close watch on howyour employee, your money, is doing.Some people like to look at the stock quotations every dayto see how their investments have done. That’s probably toooften. You may get too caught up in the ups and downs of the“trading” value of your investment, and sell when its valuegoes down temporarily—even though the performance of thecompany is still stellar. Remember, you’re in for the long haul.Some people prefer to see how they’re doing once a year.That’s probably not often enough. What’s best for you willmost likely be somewhere in between, based on your goals andyour investments.But it’s not enough to simply check an investment’s performance. You should compare that performance against an indexof similar investments over the same period of time to see if youare getting the proper returns for the amount of risk that youare assuming.You should also compare the fees and commissionsthat you’re paying to what other investment professionals charge.While you should monitor performance regularly, you shouldpay close attention every time you send your money somewhereelse to work.20 SAVING AND INVESTING

Every time you buy or sell an investment you will receive aconfirmation slip from your broker. Make sure each trade wascompleted according to your instructions. Make sure the buying or selling price was what your broker quoted. And makesure the commissions or fees are what your broker said theywould be.Watch out for unauthorized trades in your account. If youget a confirmation slip for a transaction that you didn’t approvebeforehand, call your broker. It may have been a mistake. Ifyour broker refuses to correct it, put your complaint in writingand send it to the firm’s compliance officer. Serious complaintsshould always be made in writing.Remember, too, that if you rely on your investment professional for advice, he or she has an obligation to recommendinvestments that match your investment goals and tolerancefor risk. Your investment professional should not be recommending trades simply to generate commissions. That’s called“churning,” and it’s illegal.How Can I Avoid Problems?Choosing someone to help you with your investments is oneof the most important investment decisions you will ever make.While most investment professionals are honest and hardworking, you must watch out for those few unscrupulous individuals. They can make your life’s savings disappear in an instant.Securities regulators and law enforcement officials can anddo catch these criminals. But putting them in jail doesn’t alwaysget your money back. Too often, the money is gone. The goodnews is you can avoid potential problems by protecting yourself.Make sure the investment professional and her firm are licensed and registered using the free database on can find additional information by visiting the websiteof the North American Securities Administrators Association(NASAA) at or by calling (202) 737-0900.U.S. SECURITIES AND EXCHANGE COMMISSION 21

IMPORTANT CONTACTSSECNASAA100 F Street, N.E.750 First Street, N.E., Suite 1140Washington, D.C. 20549-0213Washington, D.C. 20002Toll-free: (800) 732-0330Phone: (202) 737-0900Website: Investor.govWebsite: www.nasaa.orgYou should also find out as much as you can about any investments that your investment professional recommends.First, make sure the investments are registered. Keep in mind,however, the mere fact that a company has registered and filesreports with the SEC doesn’t guarantee that the company willbe a good investment.Be wary of promises of quick profits, offers to share “insideinformation,” and pressure to invest before you have an opportunity to investigate. These are all warning signs of fraud. Askyour investment professional for written materials and prospectuses, and read them before you invest. If you have questions, now is the time to ask. How will the investment make money? How is this investment consistent with my investment goals? What must happen for the investment to increase in value? What are the risks? Where can I get more information?Finally, it’s always a good idea to write down everything yourinvestment professional tells you. Accurate notes will come inhandy if ever there’s a problem.22 SAVING AND INVESTING

Some investments make money. Others lose money. That’snatural, and that’s why you need a diversified portfolio to minimize your risk. But if you lose money because you’ve beencheated, that’s not natural, that’s a problem.Call or write to us and let us know about the problem. Investor complaints are very important to the SEC. You may thinkyou’re the only one experiencing a problem, but typically, you’renot alone