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WalletPrep worksheet · Investing

What is investing?

Name ____________________ Date __________

Key ideas

  1. Save for soon, invest for years away. Money needed within a few years stays in insured savings. Money for goals 10 or more years away can be invested.
  2. Stocks are ownership, bonds are loans, funds are baskets. A stock is a small piece of a company. A bond is a loan you make. A fund holds many of both.
  3. Returns are never promised and can be negative. In the example, a 20% drop turns Leo's $5,000 into $4,000. An assumed 7% a year is a guess, not a promise.

Vocabulary

Stock
A small piece of ownership in a company. Its price rises and falls with how investors value the business.
Bond
A loan you make to a government or company. It pays you interest and returns your money on a set date, called the maturity date.
Credit union
A not-for-profit financial cooperative owned by its members, offering checking, savings and loans much like a bank.
Expense ratio
The yearly fee a fund charges, shown as a percentage of what you have invested in it. It comes out of the fund automatically.
Index fund
A mutual fund or ETF that tries to match a market index by holding the investments in it, rather than picking winners.
Time horizon
How long you plan to keep money invested before you need to spend it.

Work it out

Leo, 27, has $5,000 saved for a car he will buy next year. He also wants to invest $100 a month for retirement for 30 years. All returns here are assumptions.

  1. Car money, if invested
  2. Assumed 20% drop
  3. Left when the car is due
  4. Assumed yearly return
  5. You put in: 360 × $100
  6. Assumed growth over 30 years
  7. Balance after 30 years

Check yourself

  1. What do you own when you buy a share of stock?

    • A. A loan to the company
    • B. A small piece of the company
    • C. A savings account at the company
    • D. A promise of a fixed return

  2. You invest $2,000 and its value falls 15%. What is it worth now?

    • A. $1,700
    • B. $1,850
    • C. $300
    • D. $2,300

  3. Which money is the best fit for investing?

    • A. Next month's rent
    • B. A wedding fund for next year
    • C. Retirement savings for 30 years from now
    • D. Your emergency fund

Your turn

Make two lists: money you will need within the next few years, and money you won't touch for 10 years or more. Only the second list is a fit for investing. Check that the first list sits in insured savings.

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Answer key

What is investing?

Work it out

  1. Car money, if invested$5,000
  2. Assumed 20% drop− $1,000
  3. Left when the car is due= $4,000
  4. Assumed yearly return7%
  5. You put in: 360 × $100$36,000
  6. Assumed growth over 30 years$85,997
  7. Balance after 30 years= $121,997
  1. If the car money were invested and prices fell 20%, $5,000 × 20% = $1,000 would be gone. Leo would have $4,000 when he needs $5,000. So it stays in savings.
  2. For retirement, 30 years × 12 = 360 deposits of $100, or $36,000.
  3. At an assumed 7% a year, compounded monthly, that could grow to about $121,997. Real returns vary, and some years are negative.

Check yourself

  1. B. A small piece of the company A share is a tiny piece of ownership in a company. A loan to a company is a bond.
  2. A. $1,700 $2,000 × 15% = $300 lost, and $2,000 − $300 = $1,700.
  3. C. Retirement savings for 30 years from now Only the retirement money has decades to ride out drops. The others are needed soon and belong in insured savings.