1. Unit 3 - Investing:
Making Money Work for You

2. What do you think?
Adam started saving $50 per month when he turned 18, while Beth started saving $100 per month when she turned 24. They both earn 6% on their money. Beth will have more money by the time they both turn 30.
A dollar today is worth less than a dollar in the future
The higher the interest rate, the less time it takes to reach a savings goal
The smaller the down payment someone makes on a car, the less interest the owner pays for a car loan.

3. What do you think? - Answers
False - Adam started saving $50 per month when he turned 18, while Beth started saving $100 per month when she turned 24. They both earn 6% on their money. Beth will have more money by the time they both turn 30. (Compound interest worked longer for Adam)
False - A dollar today is worth less (more) than a dollar in the future (Inflation)
True - The higher the interest rate, the less time it takes to reach a savings goal (Faster Money Grows)
False - The smaller the down payment someone makes on a car, the less interest the owner pays for a car loan. (Principal amount accruing interest is smaller)

4. Discussion
Which strategies do you use now to save or invest your money?
Which do you think is better use of your money – saving or investing? Why?

5. Risk / Reward When It comes to Investing Risk and Reward go together.
The more risk to take the higher the potential reward – When it comes to investing, the risk is that you loose your money
Its all about your tolerance for risk vs. your desire for the highest return (reward). As an investor you are either
Conservative – Very Risk Averse willing to take very little risk
Average – willing to take some risk for some reward
Aggressive – willing to take high risks for potential high rewards

6. Saving = Investing
Saving is what people do to meet short-term goals. Safe (FDIC Insured) in a savings account earning a small amount of interest
Investing means you are setting your money aside for long-term goals There is no guarantee that the money you invest will grow, over time investment rise and fall in value RISK / REWARD

7. Exercise 3A – Ways to save and invest
________________
________________

8. Time Value of Money
Refers to the relationship among time, money and rate of interest
Inflation – rise in cost of goods and services over time

9. Time value of Money
Earned Interest – payment you receive for allowing a financial institution or corporation to use your money
The more money you have to save or invest the more money you will earn
The higher the rate of interest you earn, the more money you are likely to have
The sooner you invest your money the more time it has to make new money

10. Interest = Principal x Interest Rate x Time
$3 = $100 x .03 x 1 year

11. Answers to Exercise 3B ? ? ? ? ? ? 4% $10.40 $10.82 $11.70 $12.66 8%
Interest Rate
1 Year
2 Years
4 Years
6 Years 4%
$10.40
$10.82
$11.70
$12.66 ? ? 8%
$10.80
$11.66
$13.60
$15.87 ? ? ? ?

12. A = P(1+i)n Show me the money!
Compound Interest – idea of earning interest on interest already earned
A = P(1+i)n
*Assignment 3-1*

13. The Price of Procrastination
The more time you have to invest the more money you are likely to end up having
By waiting to invest you’re paying an opportunity cost
Saving for your goals involves delayed gratification

14. Rule of 72 Doubling your money
Interest Rate =
Years Needed to
Double Investment 72
Interest Rate
Required =
Years Needed to
Double Investment
3-H

15. The Rule of 72 Doubling your money
Compounding – concept that your money is making more money while you sleep
Divide 72 by rate of interest or # of years
72 / 6% interest = 12 years to double the investment
72 / 4 years = 18% interest to double the investment

16. Exercise 3C
What interest rate would be necessary to double a $100 investment in 24 years?
How many years would it take to double $100 if it earned interest at a rate of 8% per year?
What interest rate would be necessary to double a $100 investment in 11 years?
How many years would it take to double $100 if it earned 7.75% interest per year?

17. Exercise 3C Answers
What interest rate would be necessary to double a $100 investment in 24 years?
72 / 24 = 3%
How many years would it take to double $100 if it earned interest at a rate of 8% per year?
72 / 8 = 9 years
What interest rate would be necessary to double a $100 investment in 11 years?
72 / 11 = 6.55%
4. How many years would it take to double $100 if it earned 7.75% interest per year?
72 / 7.75 = 9.29 years

18. Risky Business
When people hear investment they think of the stock market (the place where stocks are bought and sold) plus they think about loosing all of their money
All investment have some degree of risk
Risk/reward trade off is the principle that an investment must offer higher potential returns to compensate for the increased potential risk

19. Financial Planning Pyramid
Penny
Stock
Commo- dities
Collectibles
Speculative
Stock / Bonds /
Mutual Funds
Real
Estate
Blue-Chip
Common
Growth
Mutual
Funds
High-Grade
Convertible
Bonds
Preferred
Balanced
Corporate Bonds
or Mutual Funds
Municipal Bonds
Money Market
Accounts
Certificates
of Deposit
U.S. Savings
Insured Savings /
Checking Accounts
Treasury
Issues
Financial Planning Pyramid
Highest Risk
Highest Earnings
Lower Risk
Lower Earnings
3-J

20. Risky Business Vocabulary
Dividend – Share of the profits you receive as a stockholder
Capital gain – difference between purchase and sale price when the sale price is greater than the purchase price
Capital loss - difference between purchase and sale price when the sale price is less than the purchase price
Rate of return – annual percentage return on investment – tell you how fast your money is growing

21. Income Investments Savings account U.S. Savings Bond
Often the first banking product people use
Earn a small amount of interest
Federal Government guarantees safety of money up to $250,000
Liquid asset
Federal government pays interest to investors for loaning it money
Bond – formal agreement where the borrower can use your money for a set period of time and the lender will get paid interest
Can be held for up to 30 years - Penalty for cashing in early

22. Income Investments Bank/Credit Unions version of a savings bond
Certificates of Deposit (CDS)
Money market deposit accounts
Bank/Credit Unions version of a savings bond
Set period of time
The longer the term the higher the interest
Penalty for cashing in early
Offered by bank & credit unions
Work like a checking account
May have a limited number of checks you can write per month
Pay a higher rate of interest than savings accounts due to higher minimum balances
Insured by the Federal Government

23. Income Investments
Money Market Mutual Funds
Corporate and Government Bonds
Investment company takes your money and invests it into a diversified group of securities
Stable way to save your money but No guarantee
Not insured by Federal Government
Earn higher rate of interest than Money market deposit accounts
Pay the highest interest rates
A bond’s potential return is referred to as a yield
US bonds (treasury bonds) safer since backed by Government
But Corporate bonds offer higher interest rates
Range from 2-30 years, longer the time the larger the interest rate

24. Growth Investments Stocks Real Estate You own a part of the company
Investors who buy stock are called shareholders
Riskier investment because you can loose more money
Generally liquid asset
Investors buy property – land or buildings hoping to generate a profit
Many forms of investment – malls, apartment complex, farmland, undeveloped land etc.
Not a liquid asset because it is difficult to sell

25. Growth Investments Collectibles Mutual Funds
Items relatively rare in number
Paintings, sculptures, other works of art, baseball cards, antiques etc
Don’t make a profit/loss until item is sold
High risk due to small market for collectibles
Take money from many investors and uses it to make growth or income investments based on a investment objective
Offer investors an affordable way to own shares of many stocks
Professionally managed

26. Many baskets of eggs
Diversification – reducing investment risk by putting money in several types of investments
By spreading your money around you are reducing the impact that a drop in any one investment’s value can have on your overall investment portfolio

27. Smart, Steady Eddie
PYF even if it a small amount at first cause the little money can build up quickly Dollar cost averaging – practice of investing a fixed amount in the same investment at regular intervals, regardless of what the market is doing

28. Dollar-Cost Averaging
One-Time Investment
Dollar-Cost Averaging
Amount
Invested
Share
Price ($)
Shares
Purchased
Amount
Invested
Share
Price ($)
Shares
Purchased
$1,000.00
$20.00
50.00
$100.00
$20.00
5.00
$100.00
$19.50
5.13
$100.00
$19.25
5.19
$100.00
$19.75
5.06
$100.00
$19.20
5.21
$100.00
$18.90
5.29
100/19.78 = 5.06 shares, not 5.08 (second to last row on the right)
Total shares purchased then becomes 51.66, not 51.68
$100.00
$18.00
5.56
$100.00
$18.60
5.38
$100.00
$19.78
5.06
$100.00
$20.90
4.78
$1,000.00
$20.00
50.00
$1,000.00
$19.39*
51.66
* Average Share Price