2 What is Saving? Results in Saving – accumulation of excess funds by intentionally spending less than you earnSavings –portion of income not spent on consumption (purchase of goods and services)Results in
3 Short-term goals & expenses Why Save?Your present self impacts your future self By saving money today you will have financial security in the futureEmergency savingsCash set aside to cover the cost of unexpected eventsShort-term goals & expensesPay for items that aren’t part of a typical spending planFinancial securityLower stressLower negative emotions
4 Saving Reduces Financial Risk and Uncertainty Savings is a monetary assetContributes to net worthVery liquid (can quickly andeasily be converted into cash)
5 How Much Money Should Be Saved? At least six months worth of expenses in emergency savings$2,000 monthly expenses6 months$12,000Depends on…IncomeJob securityInsurance coverageDependents
6 Saving on an Income & Expense Statement Saving is a form of unearned income when used to pay for an expenseSaving is an expense when money is being saved
7 Identifying Money to Save Examine current spendingWhat changes can you make to reduce current spending?Ask yourself if items are a need or a wantConsider small, often daily, expensesConsider large, often monthly, expenses
8 Identifying Money to Save Do It YourselfIncrease IncomeDecrease ExpensesInstead of paying someoneTrade-offInvesting time and skills
9 Set a goal! Create a Savings Plan What are you saving for? How much needs to be saved?How can the goal be achieved?Is the goal realistic?When will the goal be reached?
10 Make Sure Your Goal is Realistic! Saving money for futureGiving up the purchase of something in the presentEnsure the trade-offs are realistic and opportunity cost of what is given up to save is not too high!Why can saving be difficult?
11 My Saving Quest Part 2: My Current Spending Identify three changes you will make to your current income or spending today to start saving for the futureTrade-offWhat is the trade-off for each change?Place a star next to items with a realistic opportunity cost
12 Pay Yourself First Your present self impacts you future self! Save a predetermined amount of moneyDo so before using money for spendingDo so each time you are paidMake it automatic!
13 Saved Money Provides For Your Future Self…. Interest RateMoneyTime… and can increase in value!Time Value of Money -money available at the present time (today) is worth more than the same amount if received in the future
14 What is Interest? Interest – the price of money Interest rate – percentage rate used to calculate interestInterest may be earned or paidDepository institutions offer secure accounts to save moneyWhen you don’t withdraw interest earned from an account the interest earns additional interestCompounding interest – earning interest on interestInterest - the price of moneyInterest rate - percentage rate used to calculate interestCompounding interest – earning interest on interest
15 How Do Interest Rates Affect The Time Value of Money? More Money Earned$1,000 Saved for 5 Years with Compounding Interest
16 More Money Earned Time How Does Time Affect the Time Value of Money? College Savings FundFelix and his parentsSaved for: 18 yearsStarted when he was bornContributed: $50/monthTotal Contribution: $10,800Savannah and her parentsSaved for: 4 yearsStarted when she was a freshmanContributed: $350/monthTotal Contribution: $16,800Both earned the same interest rateBoth currently have the same balance (about $19,500)Savannah’s parents contributed significantly more
17 How Does Money Affect the Time Value of Money? More Money EarnedMoney3% interest for 5 yearsPrincipalValue of Savings$100$115.93$1,000$1,159.27$10,000$11,592.74Principal - original amount of money saved or invested
18 Time Value of Money Magic! Year 20Interest Earned: $111.07Amount Investment is Worth: $386.97Year 15Interest Earned: $79.19Amount Investment is Worth: $275.90Initial Investment (Principal): $ at 7% compounding interestYear 1Interest Earned: $7.00Amount Investment is Worth:Year 10Interest Earned: $56.46Amount Investment is Worth: $196.72Year 5Interest Earned: $33.26Amount Investment is Worth: $140.26Year 50Interest Earned: $845.46Amount Investment is Worth: $
19 Maximize Your Return! Save for as long as possible! Interest RateMoneyTimeSave for as long as possible!Save as much as possible, as often as possible!Save at the highest interest rate possible!