Saving Money The Why, When, and How

Pretest 1. True or False: Only those who are financially well off can save. 2. True or False: The best place to save money is at your local bank. 3. True or False: You should set aside savings before you pay your bills. 4. True or False: The two biggest factors in building wealth are time and the amount of money you save.

Learning Outcomes  Identify the three basic reasons for saving money  Define emergency fund and compound interest  Demonstrate how compound interest works  Identify the best place to save your money

You can and should Save  You should save money before you pay your bills  Savings is a priority  Three major reasons why every person (regardless of their income) should save

Term: Emergency Fund  Emergency fund: this money is saved and then set aside for emergencies only  Most financial planners recommend saving 3-6 months worth of your salary  Others add that you should have $1,000 cash available at all times  Why should you have an emergency fund?

1 st Reason to save: Plan for the Unexpected  Accidents will happen. Cars will break down. Unexpected illnesses occur.  When an emergency happens the money is there  Called “a rainy day fund”  When it is used it is quickly replaced again

2 nd Reason to Save: Buying Large Purchases  Some items are expensive to purchase Cars Cars College education for your child College education for your child Home repairs Home repairs  A savings plan will mean you can pay for these items in full. You will not need to get a loan and pay interest.

3 rd Reason to Save: Builds Wealth  Saving money builds wealth  Instead of paying interest you receive interest

Compound Interest  Compound interest: is interest paid on interest previously earned  It is credited daily, monthly, semi-annually, or annually depending on the account  It is calculated on both the money you put in (the principal) and any interest you previously earned

5 minute Video Clip  Listen as Dave Ramsey, a famous financial expert, explains compound interest in terms of purchasing a car  Video Clip: Drive Free Retire Rich

How does compound interest work  Imagine you save $1,000 and earn 10% interest on it  Your interest at the end of the year is $100  Your second year you now have $1,100 in your account  Assuming you are still earning 10% the return on your investment the second year is $110.  Your third year you invest $1,210 and see a return of $121

The Story of Ben  Ben saves $167 a month  He invests $2,000 a year beginning at age 19 and stopping at age 26  He invested only $16,000 (8 years multiplied by $2,000)

The Story of Arthur  Arthur also saves $167 a month  Arthur starts saving at age 27 and stops at age 65  He invests 2,000 a month until he is 65, which means he invests $78,000 total.

The Story of Ben and Arthur  Who will have a bigger return or interest yield on their investment—Ben or Arthur?  Look at the “Ben and Arthur” worksheet

Powerful Illustration  Ben invested only $16,000 yet made $2,288,996  Arthur invested more money but started later  Rule of thumb: the earlier you save the more return you will see later on

Assumption in this illustration  Assumes an annual interest rate of 12%  Most banks average a 4-6% annual interest rate  For a higher rate of return you need to invest in the stock market

Post-test 1. True or False: Only those who are financially well off can save. 2. True or False: The best place to save money is at your local bank. 3. True or False: You should set aside savings before you pay your bills. 4. True or False: The two biggest factors in building wealth are time and the amount of money you save.

Post Test Answers 1. False 2. False 3. True 4. True

Summary  You can and should save money  At your age you have great power to build wealth  It is better to save it with a company that has a high annual interest rate  Tomorrow we’ll discuss this—the difference between saving and investing