1. Saving and Investing

2. Introduction Who do you want to be?
Bob and John are good friends. They are both 25 years old. They are thinking about saving for their retirement.
Bob decides to start saving now. For the next ten years, he invests $2,000 a year (total investment=$20,000). After ten years, he leaves what he has earned in the investment (without adding additional funds) until age 65.
On the other hand, John decides to enjoy life while he is still young and decides to wait. At age 35, John decides it’s time to start investing. He also invests $2,000 a year. John, however, invests $2,000 a year until he is 65 (total investment=$62,000).
Bob and John earn the same 9% fixed rate of return, compounded monthly on their investment. There are no differences.
Unfortunately, Bob and John both died the day they turned 65. However, they left their investments to their heirs. If you could choose who to be an heir to, who would you choose?

3. Five Foundations Save a $500 Emergency Fund Get Out of Debt
Ramsey Video Ch 2 1.1
Save a $500 Emergency Fund
Get Out of Debt
Pay Cash for your Car
Pay Cash for College
Build Wealth and Give
How can having an emergency fund and saving help you to protect and grow your wealth?

4. Saving vs Investing – Is There A Difference?
Objective
Short-term needs or emergencies
Long-term capital growth
Vehicles Used
Bank or money market account, certificate of deposit
Stocks, bonds, mutual funds
Risk
None on balances (generally up to $100,000 per depositor) in federally insured bank accounts and CDs
varies depending on securities owned
Source of Return
Interest paid on money deposited
Interest and capital gains (or losses), depending on securities owned
Key Benefit
Money is safe and accessible
Returns have outpaced inflation over the long term
Key Drawback
Returns historically have not outpaced inflation over time
You could lose money if securities decline in value

5. Investment Pyramid

6. Opportunity Cost and Benefit of Spending and Saving
What is the benefit and opportunity cost of spending your income today?
benefit=instant gratification
cost=less money in future
What is the benefit and opportunity cost of saving some of your income?
benefit=more money in future
cost=less gratification now
Why save? (Ramsey video ch 2 2.1, 2.2, 2.3)
Emergency Fund = financial security
emergencies, unemployment, accidents
3-6 months of take-home pay of the “bread winner”
Reach Financial Goals
new car or down payment on house
Sinking Fund Approach!
Wealth Building
Earn more money

7. Who Did You Choose? Bob or John Time value of money
Money to be paid out or received in the future is not equivalent to money paid out or received today
The Effect of Compounding Interest
difference of $235,000
Future Value
amount money will be worth X years from now
What will affect the future value of money?
1. amount of money invested 2. rate of return
3. length of time money is invested 4. rate of inflation
What will affect the future value of money? The bolded words will determine the amount an investment will be worth---inflation is out of our control

8. Time
The earlier individuals invest, the more time their investment has to compound interest and increase in value

9. A Little Goes a Long Way
Sally Saver puts away $3,000 per year in her IRA account earning 10% - she starts at age 18 and does this for 10 years then stops.
Sally accumulates $1,239,564 by the age of 65.
Ed Uninformed waits until he is 28. He must contribute $3,000 to his IRA account earning 10% for 38 years.
Ed accumulates $1,102,331 by the age of 65`

10. Amount Invested
Investing only a small amount a month is better than not investing at all
Ex. At 8% interest, invested at age 17, one dollar per day will become $17, by age 65
The larger the amount invested the greater return a person will earn

11. The Costs Add Up
Investing at age 18 at 8% interest until age 65 (total of 47 years).
Item
Average Yearly Expense
Future Value
Daily cup of coffee at $2.50
$912.50
$38,704.46
Eating lunch out 5 days per week at a cost of $5-$10 each time
$1, $2,600.00
$55,140.60
$1,
Daily can of soda or chips at $1.00 each or both a can of pop and chips $2.00
$365.00
$730.00
$15,481.78
$30,963.57
Daily candy bar at $1.00

12. Interest Rate The percentage rate paid on the money invested or saved
Higher interest=more money earned
$1,000 Invested Compounded Monthly
Interest Rate
1 Year
5 Years
10 Years 4%
$1,040.74
$1,221.00
$1,490.83 6%
$1,061.68
$1,348.85
$1,819.40

13. Simple vs. Compounding Interest
Simple Interest: interest only paid on the principal (i=pxrxt)
Compound Interest: interest earned on principal and interest—earning interest on interest (fv=P(1+(r/n))n*t
Dave Ramsey video Ch 2 3.1
Example:
Invest $100 at 8% annual interest for three years
interest = $8 ($100 x .08 x 1)
total = $108, yr 2= 116, yr3 = 124
Invest $100 at 8% annual interest for three years compounded quarterly
fv=$100(1+(.08/4))4*3
fv=$126.82
examples on board

14. Assignment
Simple and Compound Interest worksheet