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Published byHarold Griffin Modified over 8 years ago
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Saving Money The Why, When, and How
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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.
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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
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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
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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?
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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
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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.
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3 rd Reason to Save: Builds Wealth Saving money builds wealth Instead of paying interest you receive interest
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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
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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
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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
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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)
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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.
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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
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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
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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
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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.
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Post Test Answers 1. False 2. False 3. True 4. True
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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
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