Opportunity costs and strategies Chapter 3 Section 2

Strategies to reach financial goals Obtain financial resources Plan Spend Wisely Save Borrow Wisely Invest Manage Risk Plan for Retirement

Personal Opportunity Costs Personal Resources Health, knowledge, skills, and time Do you eat a lot of junk food and avoid exercise? Do you get enough sleep each night? Example: Tickets to a sold out concert vs Major test the next day and you need a good grade to pass

Financial opportunity costs $129 sneakers vs Saving money Time Value of Money – the increase of an amount of money due to earned interest. Every time you spend, save, or invest money, think about the time value of that money as an opportunity cost.

Calculating interest You can calculate the time value of your savings by figuring out how much interest you will earn. Principal – the original amount of money on deposit Annual Interest Rate – interest rate when opening an account, given as a percentage, extra money earned FORMULA: Principal x Annual Interest Rate = Interest Earned for One Year

Example: Annual Interest You just deposited $1,000 in a savings account. The bank will pay you 3 percent annual interest. How much interest will you earn if you keep your money in the bank for one year. FORMULA $1,000 x .03 = $30 How much will you earn in interest? $30 Multiplying the principal by the annual interest rate and then adding that interest amount to the principal (compounding).

Example: Compounding Interest You just deposited $1,000 in a savings account that will pay you 3 percent annual interest. You earned $30 in interest after the first year. How much will you earn after two years? FORMULA: (Principal + Previously Earned Interest) x Annual Interest Rate = Interest Earned for the Second Year SOLUTION: ($1,000 + $30) x .03 = $30.90 $1,030 + $30.90 = $1,060.90 The future value of your original deposit will be $1,060.90 after two years.

Future values of a series of Equal deposits Some savers like to make regular deposits into their savings. A series of equal regular deposits is called an annuity. Example: Determine the future value of $1,000 a year at 5 percent annual interest for six years. page 79 Part B of Figure 4

Present value of a single deposit Present value – the amount of money you would need to deposit now in order to have a desired amount in the future. Example: If you want to have $1,000 in five years for a down payment on a car, and your savings account pays 5% annual interest, how much money will you need to deposit now to accumulate $1,000? page 79 Part C of Figure 4

Present value of a series of deposits Used to determine how much you would need to deposit so you can take a specific amount of money out of your savings account for a certain number of years. Example: if you want to take $400 out of your account each year for nine years, and your money is earning interest at 8 percent a year, how much money would you need to deposit now? page 79 Part D of Figure 4

Finished with Worksheet? Using your iPad for research and recording information on a separate sheet of paper (this will be collected) Select one financial institution, conduct research using their website and record the following: What is the name of the financial institution? Branch locations List and describe three savings/investing options. Is there a special savings account for students? Which savings/investing option yields the best interest rate? What is that interest rate?