Saving and Investing

Introduction Who do you want to be? Bob and John are good friends. They are both 25 years old. They are thinking about saving for their retirement. Bob decides to start saving now. For the next ten years, he invests $2,000 a year (total investment=$20,000). After ten years, he leaves what he has earned in the investment (without adding additional funds) until age 65. On the other hand, John decides to enjoy life while he is still young and decides to wait. At age 35, John decides it’s time to start investing. He also invests $2,000 a year. John, however, invests $2,000 a year until he is 65 (total investment=$62,000). Bob and John earn the same 9% fixed rate of return, compounded monthly on their investment. There are no differences. Unfortunately, Bob and John both died the day they turned 65. However, they left their investments to their heirs. If you could choose who to be an heir to, who would you choose?

Five Foundations Save a $500 Emergency Fund Get Out of Debt Ramsey Video Ch 2 1.1 Save a $500 Emergency Fund Get Out of Debt Pay Cash for your Car Pay Cash for College Build Wealth and Give How can having an emergency fund and saving help you to protect and grow your wealth?

Saving vs Investing – Is There A Difference? Objective Short-term needs or emergencies Long-term capital growth Vehicles Used Bank or money market account, certificate of deposit Stocks, bonds, mutual funds Risk None on balances (generally up to $100,000 per depositor) in federally insured bank accounts and CDs varies depending on securities owned Source of Return Interest paid on money deposited Interest and capital gains (or losses), depending on securities owned Key Benefit Money is safe and accessible Returns have outpaced inflation over the long term Key Drawback Returns historically have not outpaced inflation over time You could lose money if securities decline in value

Investment Pyramid

Opportunity Cost and Benefit of Spending and Saving What is the benefit and opportunity cost of spending your income today? benefit=instant gratification cost=less money in future What is the benefit and opportunity cost of saving some of your income? benefit=more money in future cost=less gratification now Why save? (Ramsey video ch 2 2.1, 2.2, 2.3) Emergency Fund = financial security emergencies, unemployment, accidents 3-6 months of take-home pay of the “bread winner” Reach Financial Goals new car or down payment on house Sinking Fund Approach! Wealth Building Earn more money

Who Did You Choose? Bob or John Time value of money Money to be paid out or received in the future is not equivalent to money paid out or received today The Effect of Compounding Interest difference of $235,000 Future Value amount money will be worth X years from now What will affect the future value of money? 1. amount of money invested 2. rate of return 3. length of time money is invested 4. rate of inflation What will affect the future value of money? The bolded words will determine the amount an investment will be worth---inflation is out of our control

Time The earlier individuals invest, the more time their investment has to compound interest and increase in value

A Little Goes a Long Way Sally Saver puts away $3,000 per year in her IRA account earning 10% - she starts at age 18 and does this for 10 years then stops. Sally accumulates $1,239,564 by the age of 65. Ed Uninformed waits until he is 28. He must contribute $3,000 to his IRA account earning 10% for 38 years. Ed accumulates $1,102,331 by the age of 65`

Amount Invested Investing only a small amount a month is better than not investing at all Ex. At 8% interest, invested at age 17, one dollar per day will become $17,865.52 by age 65 The larger the amount invested the greater return a person will earn

The Costs Add Up Investing at age 18 at 8% interest until age 65 (total of 47 years). Item Average Yearly Expense Future Value Daily cup of coffee at $2.50 $912.50 $38,704.46 Eating lunch out 5 days per week at a cost of $5-$10 each time $1,300.00-$2,600.00 $55,140.60 $1,10281.21 Daily can of soda or chips at $1.00 each or both a can of pop and chips $2.00 $365.00 $730.00 $15,481.78 $30,963.57 Daily candy bar at $1.00

Interest Rate The percentage rate paid on the money invested or saved Higher interest=more money earned $1,000 Invested Compounded Monthly Interest Rate 1 Year 5 Years 10 Years 4% $1,040.74 $1,221.00 $1,490.83 6% $1,061.68 $1,348.85 $1,819.40

Simple vs. Compounding Interest Simple Interest: interest only paid on the principal (i=pxrxt) Compound Interest: interest earned on principal and interest—earning interest on interest (fv=P(1+(r/n))n*t Dave Ramsey video Ch 2 3.1 Example: Invest $100 at 8% annual interest for three years interest = $8 ($100 x .08 x 1) total = $108, yr 2= 116, yr3 = 124 Invest $100 at 8% annual interest for three years compounded quarterly fv=$100(1+(.08/4))4*3 fv=$126.82 examples on board

Assignment Simple and Compound Interest worksheet