Chapter 14 – Savings & Investing Mr. Singh

Saving vs Investing Saving – The money you put aside for future use When you deposit money in a savings account it collects interest (Ex. 2%) Investing – using your savings to earn extra income. Advantage – Investments yield a higher rate of return and can grow or exceed the rate of inflation Disadvantage – Very risky and not guaranteed

Saving vs Investing You may want to develop a savings plan Why save? Putting money aside to reach your financial goal Why save? May have an emergency (Sickness therefor can’t work, accident) Many financial experts say you should have 3-6 months salary in case you lose your job Some people have short and long term goals Maybe they want to buy a car (long term) ot a TV (short term)

Saving vs Investing Some people just want a sense of security and satisfaction Maybe they want extra income for retirement People who are free from financial worries tend to be happier

Selecting a savings plan You want to select a plan that has the best benefits letting you earn interest while keeping your money safe How does the account work? When you deposit money, you’re lending the institution your money so they can lend it to other customers The financial institutions pays you interest – money you receive over time for letting others borrow your money

Selecting a savings plan Interest – is a percentage of the original investment : this is called rate of return or yield Example: Suppose you deposit $1000. If the interest on the account is 5% (rate of return of 5% a year), how much interest would you earn by the end of the year? Answer: $50 ($1000 x 0.05 = $50) 5%  rate of return or yield

Earnings and Yield In the example we just did, interest was calculated yearly Sometimes interest can be calculated daily, weekly or monthly. The more often interest is paid, the greater the return Simple Interest – calculated only on the principal (the amount you deposited) Compound Interest – calculated on the principal plus any interest you earned

Calculating Simple Interest Eg. $1000 at 5% simple interest earns $50 every year +$50 in the second year (Total: $1100) +$50 in the third year (Total: $1150) +$50 in the fourth year (Total: $1200) +etc.

Calculating Compound Interest E.g. $1000 at 5% compound interest earns $50 in the first year +$52.50 in the second year (total $1102.50) +$55.13 in the third year (total $1157.63) +$57.88 in the fourth year (total $1215.60)