Agriculture Law and Management


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Saving & Investing

As we progress through our careers, we will reach a time when our income exceeds our expenses and we have an opportunity to accumulate cash and invest. This page introduces several fundamental concepts about saving and investing.


Occasionally, one has cash left over; hopefully that happens more frequently and in greater amounts as one proceeds through their careers.  Where should a young professional begin when they have extra dollars?  This is the opportunity to invest, whether the money will be held for a relatively short time until it is needed for a larger project, or it will be held for a longer time, perhaps even to retirement.


Set goals – what do you want to accomplish with your savings?  Begin by considering when you might need the cash?  Soon (e.g., to make a downpayment to buy a house within five years) or in the longer term (e.g., perhaps hold onto some of this cash for retirement 40 years from now)?  Goals are the "targets" which you want to achieve.  More importantly, goals are your decision criteria; for example, if my goal is to achieve Objective A, I will ask myself, "from among my alternatives, which alternative will help me achieve Objective A."  You will then identify and pursue that alternative.  Without goals, you are NOT ready to make decisions. 

You must have goals to make decisions.


Savings account – a deposit of cash with a financial institution, such as a bank; the account earns a minimal rate of interest/income, but will not lose value and is readily available if needed.


Certificate of deposit – a deposit with a bank that you cannot liquidate for a set period of time, perhaps 6 months, 1 year, 2 years or even longer.  You are likely to earn greater income/interest than a savings account, but you cannot readily access the money if you need it (except at the end of the period).  Withdrawing early (before maturity) will force you to pay a penalty (you forfeit a portion of the interest income you have earned).


Is life insurance an investment?  Term life insurance – no.  Whole life – it can be but the interest rate or return may not be much.  How about "managing risk” with insurance, especially health and life insurance? (discussed subsequently).


Is owning a house an investment?  It can be, but home ownership is primarily a housing cost.


Stocks -- By purchasing stock, you are buying a small (extremely small) portion of the company; maybe 10 shares in the company that has 5,000,000 shares.  You are now a partial owner, a very small partial owner, in the company.  The return for owing a portion of the company is to share in the company's profit, that a dividend.  Another benefit from owning a portion of the company is if the value of the company increases; this increase in value is reflected in the value of your stock or shares.  If the value of the company increases (appreciates) 5%, you can expect the value of your shares to increase (appreciate) 5%.

Dividends (based on business’ annual profit) versus appreciation or increase in value of the company.  Stocks mean you are investing in a corporation.  You will earn dividends as the company profits and decides to pay some of the profit to owners (shareholders). An investor can gain wealth if the business increases in value during to profitable operation; investors could lose wealth if the business loses its value. 

Owning corporate stock can be risky.  The business can also lose money and thus lose value, which means there will be little or no dividend, and the value of the stock or shares declines.


Bonds – Buying a bond is a way to loan money to government or corporations.  The rate of return is set (i.e., the interest rate is set).  The bond (the loan principal) will be paid back when the bond matures (perhaps several years into the future).  The interest rate reflects the financial stability of the company or the government entity (most government bonds are considered relatively low risk and thus generate a relatively low rate of return). 

A bond can be sold to another investor if you need the cash before the bond matures, but the value of the bond at time of sale will reflect if the overall market interest rate at time of sale is greater than or less than the interest rate being earned on the bond.  If the market interest rate has gone up, the value of bond will drop.  If the market interest rate has gone down, the value of the bond will have gone up.


How Much Risk Should I Assume?

The greater the perceived risk, the higher the expected interest rate by an investor who purchases a bond, or the greater the dividend expected by an investor who purchases risky stock.


Your attitude towards risk and your financial capacity to bear risk are factors to consider in setting and pursuing your investment goals.


Mutual funds – A mutual fund is an opportunity to buy a little bit of stock or bonds in many companies or units of government.  Most individual investors do not have enough cash to invest in numerous investments as a means of diversifying to manage risk.  Instead, a firm will accept investment money from numerous investors and then have enough money to invest in a variety of opportunities on behalf of those who invested in the mutual fund.  Mutual funds are a way to reduce risk by diversifying but also reduce risk be relying professional managers of the investment fund to manage the dollars for you and all others who have invested in that mutual fund. 

In selecting a mutual fund, ask what the goals are of the fund manager – domestic/U.S. companies, international companies, bonds, stocks, aggressive (i.e., takes some risk), conservative (i.e., shy away from risk), seek companies that will likely pay dividends with their earnings, seek companies that will likely invest the company’s earnings into expanding the company, the type of products or services the companies produce (i.e., are they products and services that you think consumers will be buying in the future).  Then select to invest in a mutual fund that has goals similar to your investment goals.


401k – a retirement plan whereby an employer establishes an account that the employee and employer can contribute to build a retirement fund for the employee.  Employees do not pay income tax on the income that employee directs to the account during the year the employee earns the income, but the income is subject to income tax during retirement when the retired employee withdraws from the retirement account.  This account and similar accounts defer income taxes to a later time when the money is actually being received and used.


Employer contribution – some employers offer to contribute to an employee’s retirement if the employee also is contributing to a retirement fund, such as “the employer will contribute $.50 to the employee’s retirement account for every dollar the employee contributes to their own retirement account up to a maximum employer’s contribution of $800 annually.”


Vesting – a point in time when the employer’s contribution belongs to the employee.  Prior to vesting, an employer can take back the employer’s contribution if the employee leaves that job or employment.  For example, an employer may “vest” the employer’s contributions to the employee’s retirement account after the employee has been on the job with the employer for four years.


Rollover – moving a retirement account from one investment to another, especially as one changes employer.  Income tax consequences of a rollover can be a consideration because the employee may need to pay income tax and a penalty for withdrawing from a retirement account before reaching a specified age.  Accordingly, the employee will want to make sure that any rollover is done in a way to NOT trigger income tax consequences. 


Individual Retirement Account (IRA) – a retirement investment that allows the contributor to deduct the amount of contribution from taxable income the year the contribution is made; that, income tax is saved when the investment is made.  However, future withdrawals (during retirement) are taxable.


IRA Contributions. The limit on annual contributions to an Individual Retirement Arrangement (IRA) is $5,500 for 2015.


Roth IRA – an IRA that is generally exempt from income taxation when withdrawn, but there is no income tax deduction the year the contribution is made.


Occasionally prepare a balance sheet as a written record of your investments and your debts.  Like a business, the difference between the value of your investments/assets and amount of your debt is your equity or net worth.  A series of balance sheets will reveal how your equity is changing (hopefully, increasing) over time.  The balance sheet can also indicate (inventory) the assets you own and the debts you owe in case someone else has to tend to your financial affairs if you are unable to do so yourself.  For example, I prepare a quarterly balance sheet for my wife and me.





This document does not address the critical topic of housing, such as housing rental (whether in a multiple-unit dwelling or a single-unit dwelling), or home ownership (whether a single-unit dwelling or in a multiple-unit dwelling).  Related topics could include selecting a home to purchase or rent, financing the purchase of a home, and the ongoing expenses of owning or renting a home (e.g., renter or homeowner insurance, debt repayment or rental payment, maintenance, property taxes).


Closing Thought

Planning how to invest money that remains after paying all your expenses is a privilege and responsibility as one proceeds through their career and lifetime.  A basic understanding of investment alternatives and associated risks is a first step towards building an estate and wealth.



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