Understanding Savings and Investing Economics – Chapter 16

Intro Question If you could have $100 right now or $150 in one year, which would you choose and why? Moral of the story:  In our financial lives, waiting often means the opportunity to earn more money (delayed gratification) Essential question: How does saving and investing impact my financial goals?

What is saving? Saving sounds boring $1 saved is $1 not spent on something you want right now Try thinking about it differently: Rather than focusing on what you’re NOT buying now, think about what you CAN buy in the future

What is saving? Think of this: The Opportunity Cost of buying something -- like a cheeseburger or an Oreo Blizzard (which will quickly be used up) -- is the Future Value of the money.

Why Save / Invest? Both saving and investing can earn money because of potential benefits such as interest and rate of return.  It is important to consider the risks and rewards involved with different saving/investing options Video: Power of InvestingPower of Investing

Investing Language Stock – a share of a corporation (entitles the stockholder to assets of the corporation) Dow Jones Industrial Average – the most popular indicator of day-to-day stock market activity. Average of 30 most popular stocks. Initial public offering (IPO) – a company’s first offering of stock to the public Dividends – a share of the profits of a corporation distributed to stockholders. Mutual funds – a collection of stocks Index funds – a portfolio of stocks, which represents a particular market Investment risk – the probability or likelihood of occurrence of losses relative to the expected return on any particular investment

How the Stock Market Works Company’s will choose to sell or issue stock if they want additional money to expand the business and increase profits. Not every company is sold “publicly”. The price of a particular stock is impacted by the supply and demand for it (buying and selling)

How the Stock Market Works Buying and selling stock is relatively easy  Buy thru a brokerage firm (financial advisor)  Online brokerage firm (limited financial advice – ex. E-trade) Deciding which stocks to purchase can be challenging. Consult a financial advisor, educate yourself, review the history of stocks / funds, etc.

How the Stock Market Works The government regulates stock transactions to ensure equality  (U.S. Securities and Exchange Commission) Investing is a risk! But one that historically pays dividends!

Impact of Saving / Investing Saving early is best – it takes advantage of the power of compound interest. If you invest when you’re young, your money has more chances to double. Example: Compound Interest at 8% for 9 years  72 divided by 8% = 9 years  At the end of nine years, the initial savings of $100 have increased to $200 — double the amount of initial savings.  Video: Power of Compound InterestPower of Compound Interest

Impact of Saving / Investing The Rule of 72 is a simple way to illustrate the magic of compound interest.  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.  The Rule of 72 illustrates how compound interest doubles savings more quickly than simple interest.

Article: How teens can become MillionairesHow teens can become Millionaires

Saving / Investing Scenario If you had $5,000 today, what would you do? If you invest it at 7% interest for 4 years…  End of year 1 = $5,350  End of year 2 = $5,724  End of year 3 = $6,125  End of year 4 = $6,553

Saving / Investing Scenario If you had $5,000 today, what would you do? If you invest it at 10% interest for 4 years…  End of year 1 = $5,500  End of year 2 = $6,050  End of year 3 = $6,655  End of year 4 = $7,320

Next Steps Are you convinced that saving and investing will help you meet your financial goals?  Do you have a personal savings account?  Do you have an education investing account (example 529)?

Investment Calculator Try out the investment calculatorinvestment calculator

What kind of investment would you choose if you were saving… 1. For college? 2. To buy a house? 3. For a trip in your senior year? 4. For retirement? 5. For graduate school? 6. For when you want to have children? 7. For a new car? 8. For a rainy day?

Complete Class Assignment What’s my Interest? Consider the risks and rewards involved with different investment options (ex. stocks, mutual funds, index funds, bonds etc.)