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

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

3. 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

4. $$ Income $$
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

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

6. 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

7. 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

8. 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

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

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

11. 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.

12. 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

13. ________ 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.

14. 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

15. Principal
An original amount of money invested or lent.

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

17. 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

18. 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.

19. 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.

20. 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.

21. 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.

22. 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

23. 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.

24. 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

25. 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 $ $40 x 52 weeks per year.
That amount grew to $ in one year

26. 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”

27. 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!!!!!

28. 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.

29. 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

30. 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.

31. 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.

32. 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.

33. 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

34. 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