Money TreeSometimes the order in which you do things is very important it can make or break the process. You wouldn't apply to be the head chef of a gourmet restaurant before you had learned to cook noodles, right? The same is true of saving and investing money: there are lots of good ideas out there, but if you try to do them in the wrong order you might find yourself in over your head (or worse, out of money for groceries!). In this lesson you'll learn about the five stages of saving and investing, what happens at each stage, and why it's important for investors to make use of them in a specific order. Then you'll use that information to provide advice to prospective investors at different points along the way in their financial journeys. Happy investing!


What are the five stages of saving and investing? What happens at each stage? How do you know when you're ready to move on to a new stage? Why is it so important to follow the stages in order? First, read the attached fact sheet on the five stages of investing. Then you'll complete an activity to help you remember the information. Finally, you'll use this handout as you pose as a financial adviser and give advice to people who come to you for answers about what they should do next with their finances.


Learn about the five stages. Read the attached description of the stages of saving and investing. Your teacher will tell you either to print it, take notes on it, or refer to it online. Click on the following link for the printable version.

The Five Stages of Saving and Investing

  1. Step One: Put-and-take account
    This is the first savings instrument you should establish when you begin making money. For most people, the put-and-take account is a checking account. A checking account holds the money that you're going to need immediately (or soon) plus a little extra for emergencies. You can take money out of this account by writing checks for car payments, clothes, etc. Experts recommend that you set aside three to six months' net pay in your checking account. So if you're making $50 a week working at the movie theater, your goal for the put-and-take account should be $600 to $1,200. This first stage is very low-risk; that's a good thing, because you don't want to gamble with the money you're counting on to pay the electric bill!
  2. Step Two: Beginning to invest
    After you're established a stable put-and-take account (meaning that you're NOT running out of money in your checking account each pay period), you can move on to beginning investments. These first investments should be low-risk instruments that you're not very likely to lose money on bonds or mutual funds, for example you probably will earn a relatively low rate of return on these investments, but giving up the potential of higher returns for more security is worth it at this stage. Most people begin this stage in their twenties or thirties, when their budgets and spending are stable and they begin to have excess cash. Getting an early start is important. If you start early, your money will have more time to earn more money for you! That's why it's important to get your put-and-take account established as soon as you can. If you are a 17 year-old and have your put-and-take account under control, you can get a head start on the next stages and and a head start on other investors!
  3. Step Three: Systematic investing
    When you have established your beginning investments, you can move on to investing on a REGULAR and PLANNED basis. For most people, this is a commitment to invest a set dollar amount every pay period, usually in stocks, mutual funds, or annuities. Goals for this stage are long-range; you're going to see the best return from this kind of investment if you continue with it for 20+ years. Typically, people enter this stage in their thirties and forties, when their earning potential is the highest. Here again, starting early is important. The 17 year-old who has a stable put-and-take account and begins investing early might be ready to jump into systematic investing at age 20.
  4. Step Four: Strategic investingMan with Money
    The fourth stage is for investors who have set up a stable put-and-take account, dabbled in safe beginning investments, and established a systematic investing plan. When you have extra money above and beyond those your money for those commitments, you can begin strategic investing, which is managing your portfolio (your collection of assets) with an eye on balancing out losses and gains in different investment instruments. The key here is diversification: making sure you're not keeping all your eggs in one basket. Since stocks and bonds often respond in opposite ways market conditions, many people invest in both to balance out potential losses. Goals in this stage are medium-term: five to 10 years.
  5. Step Five: Speculative investing
    The fifth and final step is speculative investing in penny stocks, junk bonds, or collectibles, for example. Speculative investing involves high levels of risk, but it also has the potential to yield high returns. (You've probably noticed the relationship between risk and potential return in the world of economics the greater the risk you take, the greater your potential return.) Some people never do engage in speculative investment, preferring to avoid the heightened level of risk that is involves.

    Activity 2: Take a quiz over the five stages as a quick check for understanding


Piggy BankAs you start to earn money it's important to remember that there's a smart way to invest that money and a smart order to follow. Of course, you don't want to gamble with money you can't stand to lose, and you also don't want to jump into complicated investments when you don't have any experience as an investor. It's important to start investing in low-risk choices not only to protect that money but also to help you learn about what investing is all about. The best way to make your money grow and have enough money to do what you want to follow the five stages of saving and investing.


You are now an expert financial advisor. The following people have e-mailed you asking for advice on their next step. They're at different stages of saving and investing, and they don't know where to go from here. Using what you've just learned about the stages of saving and investing, give them sound financial advice. Take this interactive quiz to review and make sure you are ready to help these people invest their money.
Now that you have completed the quiz you ready to help people with their finances. Help the five people below solve their financial problems.


You're going to make a hypothetical time-line of your life from now until you're 80 years old. Mark milestones on the time-line like getting your first 'real' job, marriage, having kids, buying a house, kids going to college, retirement, etc. When you get done, mark the stages of saving and investing at appropriate places on your time-line. When would you want to start investing systematically and or strategically?