Presentation on theme: "In this Unit We Will: Know the difference between saving and investing Be familiar with the time value of money Be able to compare investment options."— Presentation transcript:
In this Unit We Will: Know the difference between saving and investing Be familiar with the time value of money Be able to compare investment options Recognize the risks and rewards of investing Know how to integrate investing into your financial planning
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. True False True False
Saving vs. Investing Savings: Saving money for short term goals; small interest Investing: Setting money aside for longer-term goals; investments can earn a lot more than you can usually make in a savings account
The Time Value of Money refers to the relationship among time, money, and rate of interest Inflation: a rise in the cost of goods and services over time Earned interest: the payment you receive for allowing a financial institution or corporation to use your money
Time, Money and Rate of Interest 1.The more money you have to save or invest, the more money you are likely to earn. 2.The higher the rate of interest you earn, the more money you are likely to have. 3.The sooner you invest your money, the more time it has to make new money, making it likely that you could earn much more as a result.
Compound Interest The idea of earning interest on interest 11.70 12.65 10.8011.6613.6015.87
A = P (1+ i) A = amount in the account P = is the principle (which is the original amount invested) i = interest rate is expressed as a decimal n = number of years compounded n
The Rule of 72 How long will it take to double your money? Divide 72 by the interest rate What interest rate will double my money in a certain amount of time? Divide 72 by the number of years
Answer the following questions: 1.Diana invests $500 today in an account earning 7%. How much will it be worth in 3 years? 2.Now Diana finds an account that earns 10%. How much will her $500 be worth at the new rate in 3 years? 3.What interest rate would be necessary to double $500 in 10 years? 4.How many years would it take to double $500 in at 8%?
Risk/Reward Trade Off the principle that an investment must offer higher potential returns to compensate for the increased potential unpredictability.
Investments Add Up! Interests: the return earned on an investment Dividends: a share of the profits you receive as a stockholder Capital gains: Return from growth of stock prices; If an investor buys a stock and sells it later at a higher price, the difference between the purchase price and the selling price Rate of Return/Interest: the annual percentage return on an investment; how fast your money is growing
Financial Risk Pyramid Speculative Investment Tools Increasing potential for higher returns Increasing risk Savings Tools Checking Account Savings Account Money Market Deposit Account Certificate of Deposit Savings Bonds Investment Tools Bonds Stocks Mutual Funds Real Estate OptionsCollectibles Futures Commercial Paper Index Funds The risk level for specific investment tools may vary
Investment Options Savings Accounts: small interest; safe low risk; very liquid U.S. Savings Bonds: length of period 1-30 years; higher interest than savings accounts; lose interest if you cash too early – Bond: a formal agreement where the borrower can use your money a set period of time and in return you get interest Certificates of Deposits (CDs): Bank and credit union version of savings bonds; 3,6, 12 months; higher rate of interest than u.s. savings bonds; lose interest if you cash too early
Investment Options Money Market Deposit Accounts: Offered by Banks and CU; work like checking accounts; higher rate of interest than savings accounts but lower than CDs; insured by the government; higher minimum balance than savings account Money Market Mutual Funds: similar to MMDAs; higher interest than MMDAs; not insured or guaranteed by the gov’t; but pretty safe
Investment Options Corporate and Government Bonds (Treasury bonds): highest interest rate among the income investments; gov’t bonds safer than corporate; corporate has higher interest rates; time range 2- 30 years Growth Investments: stocks; own part of the company; risky; make more money over a longer period of time; fairly liquid Real Estate: not liquid Collectibles: high in risk