LeftNavContentLevel 3 (Grade 6 - Grade 8) Level 3 Common Core State Standards Level 3 National Standards Lesson 1: Organizing Money: Personal Finance Planning Personal Purpose Statement and Financial Goals Net Worth Statement Goodwill Valuation Guide Personal Spending Diary Monthly Budget Lesson 2: Respecting Money: Being a Wise Consumer Credit Crossword Shopping and You Smart Consumer True-False Quiz Lesson 2 answer sheet Lesson 3: Protecting Money: Insurance and Estate Planning Rules Help Manage Risk Insurance Match-ups Personal Property Inventory Lesson 3 Answer Sheet Lesson 4: Making Money: The World of Work Successful Job-Seeking Practices Interview Tips Interview Checklist Will You be a Good Employee? Lesson 5: Building Money: Investments Write Checks Right The Investment Roller Coaster Read a Stock Table Are Non-Traditional Investments Profitable? Do Investment Research Investments Vocabulary Quiz Lesson 5 Answer Sheet Level 3 Resources Certificate of Completion (color) Certificate of Completion (black/white) Page ContentLesson 5 Building Money: Investments Lesson Goal: Lesson 5 covers: 1) safe and/or liquid investments; 2) stocks, bonds, mutual funds and other types of investments; 3) making wise investment decisions. Lesson Objectives: The students will: Name saving-related investments and the risks associated with them. Use the Rule of 72 to calculate the time needed to double one's money. Define the time value of money and, using an online calculator, compare returns of various amounts of savings and interest rates. Explain how stocks are traded. Tell ways investors make money on various investments. Contrast investing in mutual funds with investing in individual stocks and bonds. Describe steps an investor can take to prepare to invest money wisely. Tell ways savers and investors are supported and protected by governments. Differentiate between a money market deposit account and a money market fund. Content Standards Addressed: Common Core State Standards National Standards Vocabulary: Bond (fixed-income) - investment indicating government or business debt to an investor. Capital gain/loss - an increase or decrease in an investment's value, considered when the investment is sold. Diversification - a strategy of broad investing so as to reduce one's financial risk. Dividend - portion of business earnings that is distributed to shareholders. Invest - lay away money in order to grow it for future use. IRA (Individual Retirement Account) - a special type of account intended to help fund an individual's retirement. Liquid - easily converted into cash. Mutual Fund - collection of stocks, bonds and other securities purchased by pools of individual investors. Prospectus - a document providing detailed information about a business or a mutual fund. Save - lay away money to secure it from theft, loss or destruction. Stocks (equities) - investments indicating partial ownership of businesses. Review: To review Lesson 4, review these points: Jobs that build on an individual's interests and strengths are often the most fulfilling. There are many methods of determining suitable jobs. Successful job-hunting practices include completing job applications accurately, dressing appropriately, preparing well for interviews and writing thank-you letters. Middle school students can best prepare for their working future by doing their best in school, volunteering, job shadowing and participating in extracurricular activities. Part 1: Safety First You may wish to begin this lesson by briefly reviewing Part 1 of Lesson 1. Invite volunteers to share their life goals or read their personal purpose statements. Remind the group that wise financial planning helps people reach their life goals and fulfill their purposes. There is a difference between saving and investing money. Saving money means securing it, keeping it safe from the possibility of theft, destruction or loss. Investing money is laying it away, intending to grow it for future use. Both saving and investing can be a part of everyone's financial plans. This section reviews safer options. Checking Accounts. A majority of consumers now pay at least one bill over the Internet, but many continue to pay bills in the traditional way, in person, with cash, or by writing checks. A check is a standard form requesting a bank pay money to an individual, group or business. The consumer completes a check indicating the amount to be paid and to whom and signs his or her name. The check amount is then subtracted from the consumer's checking account. Savings Accounts. Traditional savings accounts are convenient places to stash cash that may be needed in the immediate future. They require a low minimum balance. For more information about savings accounts, see Level 2, Lesson 3, "Growing What I Have." Money Market Deposit Accounts. These accounts are combination savings/checking accounts. They may pay a little more interest, but often require a higher balance. Withdrawals are restricted to a few each month. Checking, savings and money market deposit accounts are considered to be very safe because many are insured, up to a certain amount, by the FDIC (Federal Deposit Insurance Corporation). They are also liquid, that is, easily converted into cash. Though these accounts typically don't earn much interest, consumers need safe, liquid places to keep money so it's available for regular expenses and emergencies. Certificates Of Deposit (CDs) are also FDIC-insured and may pay a higher interest rate than savings accounts. The interest rate is "locked in" when the CD is issued. Short-Term Treasury Securities. When people buy Treasury Bills (with maturity rates from a few days to 52 weeks) or longer-term U.S. savings bonds and Treasury bonds and notes, they are basically loaning money to the federal government, so Treasury securities are considered very safe. Their interest rates can change over time and may be exempt from some types of taxes. Reproducible: Write Checks Right Make copies of the reproducible Write Checks Right for every student. Discuss the correct way to write a check to avoid bank error or fraud. Discuss the correct way to write a check to avoid bank error or fraud. The answers are here. Here are other check-related tips to share with students: Keep your checkbook and blank checks in a safe place. Always use a pen to write checks so no one can erase or change the information. It's easy to learn how to balance a checkbook. Look for a safe, reliable website with a URL in the .org or .gov domains. When you receive a check, cash it without delay, and don't endorse (sign your name on the back of) the check until you're at a financial institution. If an endorsed check is lost or stolen, anyone can cash it. As individuals practice the wise habit of regular saving, they build up a reserve of money. To make the best use of these reserves, experts recommend taking these first steps: 1. Save three to six months' worth of living expenses for emergencies or in case of unexpected illness, injury or disability. For most people, this figure equals a minimum of several thousand dollars. 2. Pay down high-interest (credit card) debt. Very few investments earn a 20 percent return, yet many people pay this interest rate on their outstanding credit card debt. 3. Open an account to begin saving for retirement. Starting early in life is smart because the longer money is held earning interest, the larger the account balance at retirement. Though short-term investments, also called cash equivalents (meaning they can be converted to cash immediately or within 90 days), are considered risk-free, they actually carry different kinds of risk, including: Inflation Risk. Most experts estimate a healthy economy's prices rise by about 2 to 3 percent a year. Over time, inflation reduces the amount and types of goods and services a consumer is able to afford with the same amount of money. (For more on inflation, see Level 2, Lesson 5, "Knowing About the Economy.") Because cash equivalents do not earn much interest, they carry inflation risk. Inflation risk is loss of an investment's value due to inflation. The stated interest rate (or nominal rate) of a savings or other account does not include the rate of inflation. The inflation-adjusted rate (or real rate) is a lower figure. In fact, a consumer may even be losing a portion of his savings/investment each year due to inflation. Interest Rate Risk. Because interest rates do change over time, CDs carry interest rate risk. The CD's locked-in rate may be higher than the interest earned in a savings account. But if other interest rates rise, the saver may not earn the maximum he or she could be earning on the money. CDs also carry inflation risk because their interest rates may not beat the rate of inflation. Financial Risk. Those who decide to redeem CDs and bonds before their maturity dates (when the money is due to be paid back) may lose some or all of the earned interest. This is called financial risk. Safe and/or liquid investments are not considered to be the best places to save large amounts of money that are not needed immediately. This is because the money held in them tends to grow very slowly. How slowly? An easy method for determining an investment's long-term growth is the Rule of 72. Simply divide 72 by the investment's interest rate to discover when it will double in value. For example, if a savings account earns 1 percent annual interest, the savings will double in 72 years (72 divided by 1 = 72). If the money invested in an IRA earns 4 percent interest, it will double in 18 years (72 divided by 4 = 18). (These results assume no additional money is invested or withdrawn during the time periods, which of course would change the savings.) Online Activity: The Time Value Of Money Your students can investigate the time value of money, that is, how the value of an investment changes over time, using Modern Woodmen's Goal Savings Planner here then click on Financial Planning, Calculators and Goal Savings Planner. By changing the Annual Return (interest rate), they'll see how various investment amounts grow over time. Invite them to compare saving in a traditional savings account at 1-2 percent interest with saving in an IRA at 4 percent interest. Experts estimate that stocks historically have earned an average 10-12 percent interest, bonds an average 5 percent. After learning about stocks and bonds in the next section, have them compare the returns they might receive by holding these types of investments for a long period of time, say, until retirement, 50 years from now. Wise consumers know no- or low-risk investments must be a part of everyone's financial plans, but know how much to save in them, and what to do with the remaining money, is important. The next section highlights investments that offer more, both in terms of return and risk. Part 2: Risky Business Discuss: Do you enjoy riding roller coasters? If so, which roller coaster is your favorite and why? Name various types of coasters. What are advantages of each, in terms of thrills? (Possible answers: wooden, inverted, spinning, vertical drop, flying, hyper) If you're not a fan of roller coasters, why not? What are the dangers associated with roller coasters? (Possible answers include: mechanical problems, falls and safety failures.) Why are people willing to take risks in order to ride roller coasters? (Answers will vary.) Risk-taking isn't for everyone. By playing it safe, individuals protect themselves from danger, but miss out on certain opportunities. Those who take risks experience more, but also leave themselves open to possible harm. So it is with finances. There are many relatively risk-free options for saving money, but after considering life goals and related financial goals, a person may decide to invest where they can potentially earn much higher rates of return that can beat the rate of inflation. This section focuses on stocks, bonds and mutual funds, investments that are not insured and carry capital risk, the possibility an investor could lose some or all of his or her invested money. Stocks (Equities) When an investor buys stock in a business, he or she becomes part-owner of that business. Another word for ownership is "equity," so stocks can also be referred to an "equities." As part owner, the investor has a say in how the company is run, and is risking his or her own money, hoping the business be profitable. The more shares of stock owned, the greater the potential financial gain. But more ownership also equals more risk and a greater potential for loss if the company struggles or worse yet, goes bankrupt. (Fortunately, shareholders aren't held responsible for a business' money woes.) Why do companies issue stock? When a business wants to update or grow, it needs money. It can borrow money from a bank by taking out a business loan. Another option is to publicly issue stock to an interested group of investors. This is called an Initial Public Offering or IPO. The money invested goes to the company for its expansion. Later, these shareholders may decide to sell some or all their shares of stock to other investors, and so begins the trading on the stock. The New York Stock Exchange (NYSE) is more than 200 years old and is where the stocks of many of America's largest companies are traded. Though computer-automated trading is becoming increasingly common, the NYSE also features face-to-face trading done, not by the investors themselves, but by local brokers who are paid by investors to represent them. (Brokers make specific recommendations about securities and charge investors commissions when they buy and sell.) Buy and sell orders are transmitted to other brokers who actually work at the exchange. Those who want to sell certain stocks are matched with buyers, and a trade is made at an agreed-upon price through auction-type bidding. In contrast, the National Association of Securities Dealers Automated Quotations (NASDAQ) is a completely virtual stock exchange where sellers and buyers of stocks "meet" via computer. How are the prices of stocks determined? Like the prices of goods and services, stock prices are based on supply and demand. If there is a great demand for a stock, and few shareholders are willing to sell, the price will rise. If there is little demand and many shareholders want to sell, the stock's price will fall. The demand for a stock is based on a company's current profitability, as well as how it is expected to perform in the future. How do shareholders make money? If a company has been profitable, it may distribute a dividend, a portion of the business earnings, to shareholders, one dividend per share of stock. If the company is growing, it may choose not to issue a dividend and instead reinvest this money in the business. Another way shareholders make money is through capital gains. Capital can mean "assets," so capital gains are an increase in an investor's assets, or wealth, as a result of owning stock. A capital gain (or capital loss) is not taken into account until an investment is sold. At that time, the shareholder will either realize a profit, selling the shares for more than he or she paid for them, or a loss, selling them for less. If the investor has made a profit, the capital gain will be subject to taxes. Unlike other kinds of investments, stocks make no promises of return. Companies that issue stock do not guarantee investors' money will grow or that they will even get back any of their investment. By investing, shareholders are counting on the success of the business and that their investment will earn a good return - a better return than they'd receive if they'd invested their money elsewhere. Reproducible: The Investment Roller Coaster Make copies of the reproducible. If you have students with limited math skills, have students complete this worksheet as a whole-group activity. The answers are found here. Regarding the question, "Would you have held the stock the entire 20-year period? Why or why not?" point out that the stock price took a significant dip in price during 2007-2008, but recovered somewhat in 2009. Reproducible: Read a Stock Table Make copies of the reproducible. After reviewing the table and heading definitions, ask the following questions. The answers follow. 1. Based on this very short table, would you guess this was a good day for the markets? (Yes.) Why? (All the stocks were up.) 2. Which stock experienced the greatest growth in price? (BMX Unlimited.) Which stock experienced the greatest percentage of growth? (Games, Games & More Games.) Why are the answers different? (Because GGMG's gain was greater in proportion to the price of its stock.) 3. How many shares of IFFI stock were traded yesterday? Be careful! (5,942,800.) 4. Which stock's closing price was closest to its 52-week High? (Idlewood Fast Foods.) Which stock closed closest to its 52-week Low? (Sunshine Blue Jeans.) 5. Which stock offers the largest dividend? (White Valley Soft Drink Company.) Which stock has the highest rate of return? (Sunshine Blue Jeans.) Why are the answers different? (SBJ's dividend of $0.72 is larger, in proportion to its $15.48 stock price, than WVSD's $1.93 dividend, at $62.06 a share.) Fixed-income (Bonds) Bonds are issued for the same reason as stocks: to raise money. Federal, state and local governments issue federal or municipal bonds to raise money for special programs; to build schools, civic centers and other buildings; and for repairs, improvements and other uses. Companies issue corporate bonds to expand their businesses, buy buildings or new equipment, and for other uses. When an investor buys a corporate or government bond, he or she makes a loan of money and in return is promised regular interest payments as well as the eventual repayment of the loan, called the principal. The date of repayment is called the bond's maturity date, and can range from days to months and years. Since the interest rate (the bond's coupon) and the interest payments do not change over time, bonds are also known as fixed-income investments. There are advantages to investing in bonds: Since bonds pay interest and also guarantee the return of principal, they are considered safer investments than stocks. Bond interest is usually higher than interest earned through ordinary savings accounts. Bonds are available in various denominations, from small to very large amounts, so bond investors have flexibility in investing. Bond interest is taxable, but interest from municipal bonds - bonds issued by states, cities and counties - is often exempt from some types of taxes. The degree of risk a bondholder takes relates to the bond's rating. Bonds are rated on a letter scale, from AAA to C and D. AAA bonds are considered most safe; C and D bonds are issed by struggling or bankrupt companies and are considered least safe. Though bonds are often viewed as safe investments, lower-rated ("junk") bonds can in fact be more risky than some kinds of stocks. Other bond risks include: Default risk, the risk that a company may not be able to make interest payments or repay its debt. (If a business goes bankrupt, however, bondholders will be repaid the money due them before stock shareholders.) Inflation risk. A bond's coupon (interest rate) is set at purchase and, over time, may not keep up with the rate of inflation. (Stock earnings sometimes do.) Inflation risk is more likely with longer-term bonds. Downgrade risk, the risk that a bond's rating will be lowered. Since bond ratings indicate the degree of risk, a bond's price may fall if it's downgraded. Liquidity risk. Highly rated bonds are sold more easily than bonds with lower ratings. Interest rate risk. If a bond is held until maturity, the bondholder will receive its face value (the worth as stated on the bond) in addition to any earned interest. Bonds can be sold, however, before they mature. The bond's price is determined by the market's interest rate. If the rate goes up and the bond is not earning a competitive rate, its price may drop. If the interest rate goes down and the bond is earning higher interest, its price may rise. Prepayment risk. If interest rates drop, a bond issuer will sometimes unexpectedly call a bond. This means the bondholder must surrender it and receive the principal and interest earned. After a bond is called, it may be difficult for the bondholder to find another bond that pays a similar level of interest. As mentioned earlier, investment gains directly relate to risk. Less-risky bonds have limited earnings potential. Bondholders are promised regular interest payments and repayment of principal at maturity, nothing more. Stock shareholders risk more, but their investment earnings are potentially unlimited. Mutual Funds Discuss: What does the expression, "Don't put all your eggs in one basket" mean? Can you give a real-life example that illustrates this expression? (Possible answers include not spending an entire allowance or paycheck on a single luxury item, or applying to several colleges instead of counting on getting into one's favorite.) Even the safest investments carry some kinds of risk, so wise investors reduce their risk by dividing their money among various types of investments. Through diversification, they try to ensure the gains of some investments will balance out or make up for the losses in others. To diversify on their own, investors would need to spend time researching and comparing companies. Some experts suggest picking 20-30 securities from at least a half-dozen business categories. They would also need to spend time tracking gains and losses, and deciding the best times to buy and sell. If an investor lacks confidence in decision making or feels confused, he or she may choose instead to hire a broker who has already done research and will recommend how best to diversify. Another, easier way to diversify is to invest in mutual funds. Mutual funds are collections of stocks, bonds and/or other securities that are purchased by pools of individual investors. Mutual funds are run by professional money managers who are registered with the Securities and Exchange Commission (SEC). They have done extensive research and selected securities as well as the percentage of each that is included in the fund's portfolio. Since portfolios are often made up of 100 or more securities, those who invest in mutual funds achieve a level of diversification that would be hard to match if they bought and sold these securities themselves. Mutual funds also carry some degree of capital risk and are subject to fees and other charges. Other unique disadvantages for investors are: No control over what is bought or sold, or the proportion of various investments that is included in the fund's portfolio. Difficulty in judging the value of mutual fund shares. The estimated value of one share of a mutual fund is called the NAV, or net asset value, and is calculated daily after the major stock exchanges close. Mutual funds, however, do have advantages over investing in individual stocks, bonds, and other securities: Convenience. Mutual funds are easy to buy and sell, and shareholders can often move portions of investments from one fund to another related fund at no charge. Less stressful. Because fund managers do the research and carry out transactions, mutual fund investors are free from making buying and selling decisions they are not prepared to make. Budget friendly. While diversifying on one's own can be very expensive, mutual funds require less of an investment, often as little as $200-$300. Investors may regularly add to their accounts as well. Wide variety. There are many choices of mutual funds, including equity funds (mostly stocks), fixed-income funds (mostly bonds or CDs), and sector funds (securities within a certain business, like health care or alternative energy). Special note: Money-market funds are mutual funds of safer, more liquid investments like CDs and Treasury securities. They are sometimes confused with money market deposit accounts, a type of savings account, but they are not the same. Money-market funds, like all mutual funds, are not FDIC-insured, and it's possible to lose the principal (the money invested). Other types of investments include: Real estate. Real estate is land and anything that is permanently attached to it, like a building. Investors in real estate must often spend time overseeing and maintaining properties. Real estate should be considered a long-term investment and is often subject to tax benefits. Collectibles. Collectibles include coins, sports trading cards, art, antique toys and show cars. Collecting is fun, educational and occasionally can be profitable. Since the value of these investments varies over time, the investor should invest in what he or she enjoys. Precious metals. Gold, silver and other precious metals have been used as money for thousands of years. Today, investors hold precious metals to protect themselves from inflation. Some of these investments carry liquidity risk. They may not easily convert to cash because their sale depends on demand. If there is little demand, an investor may not be able to sell or may have to sell at a loss. Liquidity risk can be especially troublesome if money is needed on short notice. These types of assets do not earn interest or dividends like traditional investments, though they may grow in value and result in capital gains if sold. Since they are subject to loss, damage or theft, they must be properly cared for, and insuring them is wise. Reproducible: Are Non-Traditional Investments Profitable? Make copies of the reproducible. Review the "then" and "now" prices. Ask students to guess what made these investments more or less valuable. Have students independently unscramble the words in the sentences. Then discuss the answers. The correct answers may be found here. Part 3: Making Wise Investment Decisions Investment decision-making is a personal matter. A tolerance for financial risk may well relate to age. Because they have time on their side and are many years from retirement, younger investors may choose to take more financial risks and invest mostly in stocks or stock funds. Older people, who are retired or nearing retirement, usually choose to take less financial risk and select highly-rated bonds, fixed-income or money-market funds, CDs or Treasury securities. Risk tolerance may also tie to goal setting. People with short-term goals like a car or college education may choose less risky investments since they'll need the money sooner. Those with long-term goals like starting a business, buying a house, or saving for a comfortable retirement have more time to ride out the ups and downs of the investments market, so they may consider taking more risk. Since people's needs and goals change over time, investments should be rebalanced occasionally to reflect these changes. Trained financial professionals, like Modern Woodmen representatives, can help. They consider an individual's finances, short- and long-term goals, and other life details and suggest ways to reach these goals. Questions for first-time investors to consider include: What is my net worth? (The students can determine their net worth by completing Lesson 1's Net Worth Statement worksheet.) Have I already saved three to six months' worth of living expenses? Do I earn a steady income? Have I developed a set of life goals and related financial goals? Do I have high-interest debt? Am I tolerant of risk, or does risk-taking make me anxious? Am I confident in my ability to make investment decisions? Will I need a broker or other professional's help to invest? Am I willing to pay a fee for this service? Do I have the self-control to only invest money I don't need for daily living or emergency expenses, and keep my hands off my retirement fund(s) and savings? Investors should always take time to find out as much as possible about businesses before making investment decisions. A company must register with the SEC or the individual state(s) and publish a prospectus, which contains vital information about the business, its goals, risks and finances. A mutual fund's prospectus tells about the fund manager, fees and expenses, and past performance, compared with similar investments. A potential investor should read the fund's most recent prospectus carefully, taking note of how long a company has been in business and noting its earnings over the last 5-10 years. (Though a history of profitability is not guarantee of future success, profitable, well-run companies are less-risky investments.) Investors should monitor businesses in which they're invested or plan to invest in, being especially aware of company successes, as well as product recalls, failures and scandals. Investors can find out more about businesses through EDGAR, the Electronic Data Gathering, Analysis, and Retrieval system, at the SEC's website. Annual reports are user-friendly sources of information. Using a search engine is also a fast way to find them easily. Reproducible: Do Investment Research Make copies of the reproducible to provide students with practice researching online financial reports. The online prospectus is an in-depth financial document; remind students they'll quickly find key phrases like "risk factors" and "use of proceeds" by using a shortcut key, like Ctrl+F. Questions before making a specific investment decision include: How risky is this investment? Have I weighed the possible gains against the risks? Am I willing to assume the risks? Would I be OK with losing all or part of my investment? How likely am I to need this money in the near future? Will I be able to sell the investment quickly if I need money on short notice? Investors are protected in some ways through the SEC, which was created after the stock market crash of 1929 to renew the confidence of investors. Those who sell securities must have a license and agree to be fair, honest and truthful in their business dealings. Investment disclosures help investors make sound financial decisions by providing information about the features and benefits of investments, as well as the risks, and revealing fees, charges and other expenses. For example, some mutual fund fees (called the load) are charged when investing (a front-end load), some when selling or transferring funds (a back-end load). Since brokers and other financial professionals often charge for their services and/or receive commissions from investors' transactions, it's important to locate reputable professionals. The SEC, FINRA (Financial Industry Regulatory Authority) and NASAA (North American Securities Administrators Association) websites provide information about financial professionals, the companies they work for and whether they have ever been disciplined by a state or federal agency, or have been reported by an unhappy investor. The Securities Investor Protection Corporation, or SIPC, which was established in 1970, also supports and helps investors. Investors should ensure an investment firm is a member of SIPC. The SIPC does not replace money lost through the normal ups and downs of investing, but it does restore investments lost when an SIPC member fails as a business. Online Activity: Investment Games Young investors should always seek the advice of parents and/or other trusted family members before investing their money. Learning and practicing investment skills is fun, easy and risk-free with online trading simulations. Many reputable websites offer free stock market games. Look for sites associated with well-known, trusted companies or organizations. Please note students must register with sites to participate. Reproducible: Investments Vocabulary Quiz Make copies of the reproducible, which reviews Lesson 5 vocabulary. The answers can be found here.* Special Note: Wrap up this unit of learning by distributing the Teens' Guide to Being Wise About Money slide guide, provided by Modern Woodmen. The front of the guide touches on important topics like credit and debt, budgeting, and more. The reverse side shows that saving money regularly adds up over time. The students will appreciate the handy, fun format.