Presentation on theme: "Value of money saved in accounts increases!"— Presentation transcript:
1 Value of money saved in accounts increases! Time Value of MoneyValue of money saved in accounts increases!Time value of money- money paid in future is not equal to money paid today
2 Factors affecting the Time Value of Money Save for as long as possible!Amount of MoneySave as much as possible, as often as possible!InterestRateSave at the highest interest rate possible!
3 Time Value of Money Magic! Year 20Interest Earned: $111.07Amount Savings is Worth: $386.97Year 15Interest Earned: $79.19Amount Savings is Worth: $275.90Initial Savings: $ at 7% interestYear 1Interest Earned: $7.00Amount Savings is Worth:Year 10Interest Earned: $56.46Amount Savings is Worth: $196.72Year 5Interest Earned: $33.26Amount Savings is Worth: $140.26Year 50Interest Earned: $845.46Amount Savings is Worth: $
4 How do you choose to save money over spend money? Pay Yourself First!A StrategySet aside money for saving before spending any moneySave then spend!Creates a habitSaving is not what is left at end of monthWhy?
5 To successfully practice “pay yourself first”… Set goals!Goal-End result of something a person intends to accomplishFinancial Goal-Specific objectives to be accomplished through financial planning
6 What is a trade-off to saving money for the future? What are you willing to give up to obtain the item you want to purchase?This is a trade-off! Trade-off - giving up one thing for another Every decision you make involves a trade-off!What is a trade-off to saving money for the future?Being more financially secure in the future by saving money is a trade-off to spending money in the present
7 In order to choose saving money over spending money… “Pay Yourself First”To successfully practice this strategy…Set financial goalsExamine trade-offsExamine current spending
8 Simple Interest vs. Compound Interest Interest earned on the principal investmentEarning interest on interestPrincipal is the original amount of money invested or saved
9 Simple Interest Equation: Step 1 (Principal)P(Interest Rate)r(Time Period)t(Interest Earned)I1,000.075350.00$1,000 invested at 7% interest rate for 5 years
10 Simple Interest Equation: Step 2 (Principal)P(Interest Earned)I(Amount Investment is Worth)A$1,000 invested at 7% interest rate for 5 years1,000350$1,350.00
11 Compound Interest Equations There are two methods for calculating compound interestSingle sum of moneyMoney invested only once at the beginning of an investmentEqual number of investments spread over timeEqual amounts of money are invested multiple times (once a month, once a year, etc.)
12 Compound Interest Equation – Single Sum P (1 + r)n = AAmount Investment is WorthPrincipal (1 + Interest Rate)Time Periods =$1,000 invested at 7% interest rate compounded yearly for 5 years1,000 (1+ .07)5 = $
13 Compound Interest Equation - Multiple Investments in Equal Amounts PMTx(1+r)n-1=ArPaymentx(1+Interest Rate)Time Period-1=Amount Investment is WorthInterest Rate$1,000 invested every year at 7% annual interest rate for 5 years1,000x(1+.07)5-1=$5,757.00.07
14 Time Value of Money Math Practice #1 Sara deposited $ into a savings account one year ago. She has been earning 1.2% in annual simple interest. Complete the following calculations to determine how much Sara’s money is now worth.Step One:600.00.01217.20Step Two:600.007.20607.20
15 Time Value of Money Math Practice #1 How much is Sara’s investment worth after one year?$607.20
16 Time Value of Money Math Practice #2 Tim’s grandparents have given him $ to invest while he is in college to begin his retirement fund. He will earn 2.3% interest, compounded annually. What will his investment be worth at the end of four years?What is the equation?$1,500 ( )4
17 Time Value of Money Math Practice #2 Step One:1.0231.023Step Two:41.0231.095Step Three:1.0951500
18 Time Value of Money Math Practice #2 What will Tim’s investment be worth at the end of four years?$
19 Time Value of Money Math Practice #3 Nicole put $ into an account that pays 2% interest and compounds annually. She invests $ every year for five years. What will her investment be worth after five years?What is the equation?$2,000x(1+.02)5-1.02
20 Time Value of Money Math Practice #3 Step One:1.021.02Step Two:51.021.104Step Three:1.1041.104
21 Time Value of Money Math Practice #3 Step Four:.104.025.2Step Five:5.2200010,400.00What will Nicole’s investment be worth at the end of five years?$10,400.00
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