Download presentation

Presentation is loading. Please wait.

1
**Family Economics & Financial Education**

Time Value of Money Family Economics & Financial Education

2
Time Value of Money Time value of money -- Money to be paid out or received in the future is not equivalent to money paid out or received today

3
**$1,000 Invested Compounded Annually at 10% Interest Rate**

Compounding Interest Compounding interest -- Earning interest on interest “Make your money work for you” Developed because compounding interest causes money to make money $1,000 Invested Compounded Annually at 10% Interest Rate 1 Year 2 Years $1,104.71 $1,220.39

4
Simple Interest Simple interest -- Interest earned on the principal investment Principal -- The original amount of money invested or saved Amount invested x annual interest rate x number of years = interest earned Ex. 1,000 x 0.10 x 2=$200 $1,000 Invested at 10% Simple Interest Rate 1 Year 2 Years $1,100.00 $1,200.00 $1,000 Invested at 10% Simple Interest Rate 1 Year 2 Years $1,100.00 $1,200.00

5
**Three Factors Affecting the Time Value Calculations**

Amount invested Interest rate

6
Time The earlier an individual invests, the more time their investment has to compound interest and increase in value

7
A Little Goes a Long Way Sally Saver puts away $3,000 per year in her IRA account earning 10% - she 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

8
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 Always pay yourself first Savings should be a fixed expense

9
**Amount Invested continued**

Rule 70% Spent 20% Saved 10% Invested Flexible expenses can be decreased in order to increase the amount a person is able to invest

10
**The Costs Add Up Investing at age 18 at 8% interest until age 65. 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

11
**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

12
**Risk A higher interest rate generally has a greater risk**

Risk -- The uncertainty of the outcome of an investment

13
Fixed Interest Rate Fixed interest rate -- The rate will not change for the lifetime of the investment Having a savings or investment plan with a fixed interest rate guarantees a specific return but can provide a moderate risk If the average interest rates rise, the amount a person earns from this type of investment will not increase

14
Inflation Another consideration with interest rates is ensuring the interest rate is higher than the rate of inflation Inflation -- The steady rise in the general level of prices Ex. If an individual has money invested at 4% interest and the inflation rate is 4%, the individual’s wealth will stay the same

15
**Time Value of Money Calculations**

Present value PV=(FV)(1+i)-N Future value FV=(PV)(1+i)N Financial calculators may be used to complete these calculations.

16
**Calculation Components**

Present value (PV) -- How much money a person has today Future value (FV) – How much money a person expects to have in the future Interest rate (i) – The percentage rate paid on the money invested or saved Time (N) -- Length of investment Calculated by the number of compounding periods (daily, monthly, or annually)

17
**Review Compounding interest earns interest on interest**

Increased time=more interest earned Higher principle=more interest earned Higher interest rate=more interest earned

Similar presentations

OK

Simply put 72 Is a Magical Number. The Rule of 72 The most important and simple rule to financial success.

Simply put 72 Is a Magical Number. The Rule of 72 The most important and simple rule to financial success.

© 2017 SlidePlayer.com Inc.

All rights reserved.

Ads by Google

Download ppt on pollution Electroluminescent display ppt on tv Ppt on mass energy equation Ppt on air pollution control act Ppt on religion in india Ppt on cement industry in india Ppt on isobars and isotopes definition Ppt on cloud computing security issues Ppt on applied operational research consultants Ppt on summary writing lesson