Basics of Financial Investing Lesson 1: Why Save? Basics of Financial Investing

Why Save? Today we will discuss: What it is to save. Why people save. How interest is calculated on money saved

Why Save? Many financial experts think Americans save too little!!! The U.S. Bureau of Labor Statistics reports that we spend (_________), on average, ___% of our disposable income. In other words, we save ONLY ____% of our ______________income. consume 97 3 disposable

$$ Income $$ Money ________ for work performed or from investments; may include salaries, wages, dividends, bonuses, interest, or allowance, money as gifts or earned for doing jobs at home received

Disposable Income Spent on Goods Services _______ – products purchased Groceries, gas, clothes ________ – something someone performs for you Hair Cut, Oil Change, Dentist, Doctor Goods Services

DISPOSABLE INCOME & SAVING Disposable income = consumption + saving _________ _________ – The money a person has left to spend or save after taxes and other required deductions have been taken out of his or her gross pay. ___________________ - Spending of disposable income ________ = disposable income - consumption Disposable Income Consumption Saving

Activity 1 A Conversation Among Friends Divide into groups Choose a reporter to take notes Choose a leader to keep the group on task Read Activity 1 and discuss the two questions P__ Y___ F__! AY OURSELF IRST

PYF P_____ Y___________ F_______ ay ourself irst A person saves before spending money on goods & services Take 10% of your income & “save” it ay ourself irst

Reasons People Save Satisfaction of purchasing a special gift For a large purchase Emergencies that might arise Money might be matched College Education ?

Saving All savings decisions relate to some future use of money Thinking about saving = thinking about ______ goals

Simple vs. Compound We’re going to look at how the type of investments you choose can affect how your savings will grow. Starting at a very elementary level we’ll compare Simple interest to Compound interest.

INTEREST EARNED ON AN INITIAL $100 SAVED AT 8 PERCENT INTEREST RATE Year Simple Interest Adds Total Saving Using Simple Compound Using Compound 1 8.00 108.00 $8.00 $108.00 2 116.00 9.00 117.00 3 124.00 126.00 4 132.00 10.00 136.00 5 140.00 11.00 147.00 6 148.00 12.00 159.00 7 156.00 171.00 8 164.00 14.00 185.00 9 172.00 15.00 200.00 Bean Activity

________ Interest Simple Interest paid on the initial investment only; calculated by multiplying the investment principal times the annual rate of interest times the number of years.

Calculating Simple Interest Interest (I) = Principal (P) (amount of initial savings) x Rate (R) (of interest being paid on savings) x Time (T) (in years) I = P*R*T Example: Simple Interest on $100 at 7% for 4 years Interest = ($100) X (.07) X (4); $7.00 X 3 = $21.00

Principal An original amount of money invested or lent.

Compound Interest Interest (money) paid on the __________ and on interest earned previously. principal

Compounding Periods Interest is calculated on the new balance (principal (previous balance) plus interest earned during the last period). Periods might be: Compounded Annually 1 x per year Compounded Semi-annually 2 x per year Compounded Quarterly 4 x per year Compounded Monthly 12 x per year Compounded Daily Daily

Rule of 72 A mathematical rule used to approximate the number of years it will take for an investment to double in value when interest is compounded.

Rule of 72 72 divided by the Rate (of interest being paid on savings) = the Number of Years it will take for savings to double when interest is allowed to compound.

Rule of 72 Example: Compound Interest at 6% for 12 years 72 divided by 6 = 12 years At the end of twelve years, the initial savings of $100 have increased to $200 – double the amount of initial savings.

Compounding Interest ________________ involves the calculation of interest periodically over the life of the investment Compounding Future Value Present Value _________ _______ is the amount of an investment at the end of the last period. _________ _______ is the value of an investment made today.

What does “Time Value” of money refer to? _____________ refers to how the value of money changes over time. A dollar today is more valuable than a dollar ten years from now. You could invest the dollar you have today to make it grow to be worth more than a dollar in 10 years. Time Value

Time Value of Money inflation Due to ________, a dollar today will not be worth the same as a dollar in ten years. Example: Today you could buy a dozen eggs for $1.00 or less. In 10 years that same dollar might only buy a half dozen eggs.

Three Rules for Building Wealth Start early _______________. Give money time to grow. Keep your money invested. Don’t put all your eggs in one basket. Buy and hold Diversify

Charlayne Becomes A Millionaire - Accidentally It is possible to become a millionaire by saving regularly. Charlayne saved $20 per week, matched by an employer’s contribution of $20 per week. Each year she saved $2080 - $40 x 52 weeks per year. That amount grew to $2168.40 in one year

Charlayne’s Million Each year Charlayne continued to contribute $20 per week and her employer matched the $20. She added $2080 to her savings and her investment grew like such: Refer to Charlayne’s Million Excel Spreadsheet file “Charlayne’s Million.xls”

The Magic of Compounding When you save, you earn interest. When you take the interest out and spend it, it stops growing. But if you leave the interest in your account so it can grow, you start to earn interest on the interest you earned previously. Interest on interest is money you didn’t work for. It is money your money makes for you! Over time, interest on interest can increase your total savings greatly!!!!!

Marcus’s Mistake Marcus had the same job and pay as Charlayne, but didn’t start investing until 10 years after Charlayne. Because of Marcus’s later start, he would only be able to save a little over $400,000.

Buy and Hold In order to leave money in savings or investments, you have to do these things: Spend _______ than you receive. Become connected to _________________. Manage your ________ responsibly. less financial institutions credit

Don’t Put All Your Eggs in One Basket Diversification means holding various assets instead of concentrating wealth on a single asset. Diversifying is taking on many small risks rather than one large risk.

Risk vs. Reward If a person wants a high return, then they have to be willing to take the risk of losing their entire investment. If one wants a safe investment, one might have to settle for a lower return.

Forms of Saving and Investing Some Benefits & Costs Savings accounts: provide a small but steady return Certificate of deposit: very safe, but instant access carries a penalty Bonds: lending money to a corporation or government, with a promise of higher returns than those offered by bank savings accounts and CDS Real estate: the risks and benefits of being landlord.

The Pyramid of Risks and Reward Highest Risk – Highest Potential Return or Loss Stocks & Real Estate Bonds Certificates of Deposit Savings Accounts Lowest Risk – Lowest Potential Return or Loss

Resources PowerPoint created using information from Lesson 1 Why Save? and Lesson 12 Building Wealth over the Long Term from “Learning, Earning and Investing – High School,” 5th Edition, © 2006, National Council on Economic Education Lesson 14 The Mathematics of Savings from “Mathematics & Economics: Connections for Life” – Grades 9-12, © 2001, National Council on Economic Education Chapter 12 Compound Interest and Present Value from “Practical Business Math Procedures”, Eighth Edition, Slater, © 2001, McGraw-Hill Slides designed by Lisa Fox, Hitchcock County High School Business Teacher, Trenton, NE