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Time Value of Money Value of money saved in accounts increases! Time value of money- money paid in future is not equal to money paid today.

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Presentation on theme: "Time Value of Money Value of money saved in accounts increases! Time value of money- money paid in future is not equal to money paid today."— Presentation transcript:

1 Time Value of Money Value 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 Time Save for as long as possible! Amount of Money Save as much as possible, as often as possible! Interest Rate Save at the highest interest rate possible!

3 Year 5 Interest Earned: $33.26 Amount Savings is Worth: $ Year 10 Interest Earned: $56.46 Amount Savings is Worth: $ Year 15 Interest Earned: $79.19 Amount Savings is Worth: $ Year 20 Interest Earned: $ Amount Savings is Worth: $ Year 50 Interest Earned: $ Amount Savings is Worth: $ Time Value of Money Magic! Initial Savings: $ at 7% interest Year 1 Interest Earned: $7.00 Amount Savings is Worth:

4 How do you choose to save money over spend money? Pay Yourself First! A Strategy Creates a habit Saving is not what is left at end of month Set aside money for saving before spending any money Save then spend! Why?

5 To successfully practice pay yourself first… Set goals! Goal- End result of something a person intends to accomplish Financial Goal- Specific objectives to be accomplished through financial planning

6 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… Examine trade-offs Set financial goals Examine current spending

8 © Family Economics & Financial Education – May 2012 – Time Value of Money Math – Slide 8 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona G1 Simple Interest Compound Interest Simple Interest vs. Compound Interest Interest earned on the principal investment Earning interest on interest Principal is the original amount of money invested or saved

9 © Family Economics & Financial Education – May 2012 – Time Value of Money Math – Slide 9 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona G1 1, Simple Interest Equation: Step 1 P (Principal) r (Interest Rate) t (Time Period) I (Interest Earned) $1,000 invested at 7% interest rate for 5 years

10 © Family Economics & Financial Education – May 2012 – Time Value of Money Math – Slide 10 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona G1 Simple Interest Equation: Step 2 P (Principal) I (Interest Earned) A (Amount Investment is Worth) $1,000 invested at 7% interest rate for 5 years 1,000350$1,350.00

11 © Family Economics & Financial Education – May 2012 – Time Value of Money Math – Slide 11 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona G1 Compound Interest Equations There are two methods for calculating compound interest There are two methods for calculating compound interest 1.Single sum of money Money invested only once at the beginning of an investment 2.Equal number of investments spread over time Equal amounts of money are invested multiple times (once a month, once a year, etc.)

12 © Family Economics & Financial Education – May 2012 – Time Value of Money Math – Slide 12 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona G1 Compound Interest Equation – Single Sum P ( 1 + r) n = A $1,000 invested at 7% interest rate compounded yearly for 5 years 1,000 (1+.07) 5 = $ Principal (1 + Interest Rate) Time Periods = Amount Investment is Worth

13 © Family Economics & Financial Education – May 2012 – Time Value of Money Math – Slide 13 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona G1 Compound Interest Equation - Multiple Investments in Equal Amounts $1,000 invested every year at 7% annual interest rate for 5 years PMTx (1+r) n -1 =A r Paymentx (1+Interest Rate) Time Period -1 = Amount Investment is Worth Interest Rate 1,000x (1+.07) 5 -1 =$5,

14 © Family Economics & Financial Education – May 2012 – Time Value of Money Math – Slide 14 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona G1 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 Saras money is now worth. Step One: Step Two:

15 © Family Economics & Financial Education – May 2012 – Time Value of Money Math – Slide 15 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona G1 Time Value of Money Math Practice #1 How much is Saras investment worth after one year? $607.20

16 © Family Economics & Financial Education – May 2012 – Time Value of Money Math – Slide 16 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona G1 Time Value of Money Math Practice #2 Tims 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 (1+.023) 4

17 © Family Economics & Financial Education – May 2012 – Time Value of Money Math – Slide 17 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona G1 Time Value of Money Math Practice #2 Step One: Step Two: 4 Step Three:

18 © Family Economics & Financial Education – May 2012 – Time Value of Money Math – Slide 18 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona G1 Time Value of Money Math Practice #2 What will Tims investment be worth at the end of four years? $

19 © Family Economics & Financial Education – May 2012 – Time Value of Money Math – Slide 19 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona G1 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)

20 © Family Economics & Financial Education – May 2012 – Time Value of Money Math – Slide 20 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona G1 Time Value of Money Math Practice #3 Step One: Step Two: 5 Step Three:

21 © Family Economics & Financial Education – May 2012 – Time Value of Money Math – Slide 21 Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona G1 Time Value of Money Math Practice #3 Step Four: Step Five: What will Nicoles investment be worth at the end of five years? $10, ,400.00


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