“Take Charge of Your Finances” Advanced Level Choosing to Save “Take Charge of Your Finances” Advanced Level

My Wish List My Wish List Brainstorm a personal wish list for yourself. My Wish List Include anything of monetary value

“Today’s self has an impact on future self” What does this statement mean to you? “Today’s self has an impact on future self”

What is the difference between saving and investing? Purchase of assets with the goal of increasing future income Portion of current income not spent on consumption Used to pay for: Used to pay for: Emergencies Large Purchases Higher Education Retirement

What is an Asset? Assets- everything an individual owns with monetary value Examples of Assets Cash Clothing Houses Electronics Savings Accounts Automobiles Furniture Make a list of your assets

Liquidity- how quickly and easily an asset can be converted to cash What is Liquidity? Liquidity- how quickly and easily an asset can be converted to cash Less Liquid Savings Tools More Liquid Investments

Liquid Assets Savings Tools Liquid Accessible in emergencies Assets Would any of your assets provide cash to fund an emergency?

Why are saving and investing important? Serve different purposes but both are essential Saving Investing Provides the foundation for financial security Enhances and helps build wealth

What is wealth and how is it measured? Wealth - measurement of how much a person owns once all debts have been paid Net worth statement - describes a person’s overall financial condition on a specified date Assets Liabilities Net Worth (wealth)

Juanita’s Net Worth Statement Alexis’ Net Worth Statement Who is Wealthier? Juanita - earns $35,000 per year Alexis – earns $100,000 per year Juanita’s Net Worth Statement Assets Home $60,000 Retirement $24,000 Automobile $8,000 Total Assets $92,000 Liabilities College loan $6,000 Mortgage $35,000 Total Liabilities $41,000 Net Worth $51,000 Alexis’ Net Worth Statement Assets Home $75,000 Retirement $35,000 Automobile $8,000 Total Assets $118,000 Liabilities College loan $10,000 Automobile loan $4,000 Credit card debt $20,000 Mortgage $65,000 Total Liabilities $99,000 Net Worth $19,000

The Choices You Make Today Impact Your Future! Saving and investing… Increase Assets Decrease Liabilities Changed the font the old one (rage italic) was too hard to read Increased Wealth! Why is it important to increase wealth?

Why are saving and investing important? Help pay for a level of living and reach a desired standard of living Level of Living Standard of Living Money needed to pay for the necessities and comforts currently enjoyed Higher level of living that person wishes to reach PRESENT FUTURE

How much money should be saved and invested? SAVINGS Recommended Amount Example How At least six months worth of expenses in liquid assets Household with $2,000 per month of expenses = at least $12,000 in savings ($2,000 x 6 months) Save 10-20% of net income every month until appropriate amount of savings is reached

How much money should be saved and invested? INVESTING Make sure an appropriate amount of savings is accessible Redirect goals from saving to investing Continue to invest 10-20% of net income every month

Saving vs. Investing Activity- Does the characteristic describe saving or investing? Builds Wealth Saving or Investing: Investing

Saving vs. Investing Activity Characteristic: Used to pay for emergencies Saving or Investing: Saving

Saving vs. Investing Activity Characteristic: Provides the Foundation for Financial Security Saving or Investing: Saving

Saving vs. Investing Activity Characteristic: Less Liquid Saving or Investing: Investing

True or False? Identify if each statement is true or false… □ If Janie makes a one time investment of $500 at age 20 in a tool that earns the historic 12% average, by age 60 the $500 will become $46,525. If Samuel invests $3,000 annually from ages 22-31 (a total of $30,000 invested) in a tool earning 10% interest, he will have $1.2 million dollars by age 65. They are both true. The time value of money makes this possible!

What is the Time Value of Money? Money paid out or received in the future is not equivalent to money paid out or received today Interest Rate Money Time Factors that make the time value of money possible:

What is Interest? Interest - the price of money Interest rate - percentage rate paid on money saved Compounding interest – earning interest on interest

How Do Interest Rates Affect Time Value of Money? Larger Return Return- profit generated by saving and investing $1,000 invested for 5 years Interest Rate (compounding) Amount Investment is Worth 1% $1,051.01 3% $1,159.27 5% $1,276.28 7% $1,402.55 9% $1,538.62

How Does Time Affect the Time Value of Money? Larger Return Time Interest Rate Money Time

Ed waits until he is 28 and contributes $3,000 at 10% for 37 years A Little Goes a Long Way Sally puts away $3,000 per year for 10 years, at age 22. She earns 10% on her investment Sally invests a total of $30,000 and has earned $1,205,063 by the age of 65 Ed invests a total of $111,000 and accumulates $1,079,856 by the age of 65 Ed waits until he is 28 and contributes $3,000 at 10% for 37 years

How Does Money Affect the Time Value of Money? Larger Return Money Interest Rate Money Time Principal - original amount of money saved or invested

Amount of Principal Investment Amount of Money 7% interest compounded annually for 5 years Amount of Principal Investment Return $100.00 $40.26 $1,000.00 $402.55 $10,000.00 $4,025.52

Time Value of Money Magic! Year 20 Interest Earned: $111.07 Amount Investment is Worth: $386.97 Year 15 Interest Earned: $79.19 Amount Investment is Worth: $275.90 Initial Investment (Principal): $100.00 at 7% compounding interest Year 1 Interest Earned: $7.00 Amount Investment is Worth: 107.00 Year 10 Interest Earned: $56.46 Amount Investment is Worth: $196.72 Year 5 Interest Earned: $33.26 Amount Investment is Worth: $140.26 Year 50 Interest Earned: $845.46 Amount Investment is Worth: $2945.70

Maximize Your Return! Time Money Interest Rate Invest for as long as possible! Invest as much as possible, as often as possible! Invest at the highest interest rate possible!

How do I begin to save money? Follow this process… Consider what savings goals you want to reach Evaluate the consequences of that goal: What trade-offs will you have to make? What is the opportunity cost of those trade-offs? How will the trade-offs made affect your spending plan? Write a SMART goal Make saving automatic Let’s learn the details of this process…

What savings goals do you want to reach? Consider what savings goals you want to reach Refer to your wish list. These items represent savings goals! Goal - the end result of something a person intends to accomplish Goal setting helps you think about your future self

Evaluate the consequences of that goal Consequences of Goals Consider what savings goals you want to reach Evaluate the consequences of that goal Do you currently have enough money to acquire all of the items on your wish list? If not, what are you willing to give up in order to acquire one of these items? That is known as a trade-off!

Consequences of Goals- What is a Trade-off? Giving up one thing for another Every decision inevitably involves a trade-off What is the value of this trade-off to you? That is known as opportunity cost!

Consequences of Goals- What is Opportunity Cost? Opportunity cost - value of the next best alternative that must be forgone when a trade-off is made Allows you to analyze the consequences of choices to decide which trade-offs to make

Consequences of Goals- Spending Plans To reach your savings goal you identified trade-offs that would be made. How will these trade-offs affect your spending plan? Spending plan - document used to record both planned and actual income and expenses over a period of time Adjust your spending plan accordingly Income OR Expenses

Set SMART Goals Consider what savings goals you want to reach Evaluate the consequences of that goal Write a SMART goal Write a SMART goal for one of the items on your wish list. My Wish List

Make Saving and Investing Automatic Consider what savings goals you want to reach Evaluate the consequences of that goal Write a SMART goal Make saving automatic Make your goal happen automatically Pay yourself first - saving strategy that means to set aside a predetermined portion of money for saving before any money is used for spending Save then spend!

How can saving and investing become automatic? Automatic Transfers Most depository institutions allow automatic transfers between accounts Designated amount of money will be automatically moved into a saving or investing tool every month

How can saving and investing become automatic? Payroll Deduction Offered by most employers Employees designate money from their paycheck be deposited into an account of their choice

Summary- What is the purpose of saving and investing money and why is it important? Financial security and a positive level of living Saving Wealth accumulation and a desired standard of living Investing Think about your future self!

To practice smart saving and investing habits … Save 10-20% of net income in liquid assets until it equals at least 6 months of expenses Continue to invest 10-20% of income to increase wealth Utilize the time value of money to your greatest advantage

Choose to Save! Follow this process… Consider what savings goals you want to reach Evaluate the consequences of that goal: What trade-offs will you have to make? What is the opportunity cost of those trade-offs? How will the trade-offs made affect your spending plan? Write a SMART goal Make saving automatic