Choose to Save Advanced Level

Alexander who used to be rich last Sunday Bell work: 1. How many of you have ever found yourself in a situation similar to Alexanders? 2. What contributes to your behavior? 3. In general, people are either spenders or savers by nature. Who here considers themselves a spender? How about a saver? 4. Are we stuck in our role as a spender or a saver?

Congratulations! You have two job offers! Each job has a different pay option You will work five days a week, for four full weeks Make the best financial choice based on the following situations

Which option will you choose? The Possibilities Option 1: For the first twenty days of work, you will be paid $200 a day Option 2: The pay will be 1 penny for the first day. Each day the pay will double. So, it will be 2 pennies the second day, 4 the third, and so on Which option will you choose?

How much would you be paid if you chose option 1? Option 1 - $200 per day How much would you be paid if you chose option 1? 20 days $200 $4,000

Option 2 - A Penny Doubled Daily How much would you be paid if you chose option 2? Day 1 $ 0.01 Day 2 $0.02 Day 3 $0.04 Day 4 $0.08 Day 5 $0.16 Day 6 $0.32 Day 7 $0.64 Day 8 $1.28 Day 9 $2.56 Day 10 $5.12 Day 11 $10.24 Day 12 $20.48 Day 13 $40.96 Day 14 $81.92 Day 15 $163.84 Day 16 $327.68 Day 17 $655.36 Day 18 $1310.72 Day 19 $2621.44 Day 20 $5242.88

Which would you prefer? Powerful Penny! Option 1: $4,000.00 OR

Which option would you choose? If you won the lottery… Which option would you choose? Option 1: $1,000,000 today Option 2: A penny doubled every day for thirty days

If you choose the penny, you would have earned $5,368,709.12! A Million or a Penny? Day 21 $10,485.76 Day 26 $335,544.32 Day 22 $20,971.52 Day 27 $671,088.64 Day 23 $41,943.04 Day 28 $1,342,177.28 Day 24 $83,886.08 Day 29 $2,684,354.56 Day 25 $167,772.16 Day 30 $5,368,709.12 If you choose the penny, you would have earned $5,368,709.12!

Bingo Compound interest Principal Consumption Saving Do it yourself Savings Emergency Savings Time Value of Money Interest Opportunity Cost Interest Rate Delayed Gratification Liquidity Investing Pay yourself first

When you complete a task yourself rather than paying someone else Do it yourself Cash set aside to cover the cost of unexpected events Emergency savings Setting money aside for long-term goals, involves risk of loss, something of value is purchased and sold Investing Value of what you give up to get something else Opportunity cost

Money available at the present time (today) is worth more than the same amount in the future Time Value of Money Earning interest on interest Compound Interest Accumulation of excess funds by intentionally spending less than you earn Saving How quickly and easily assets can be accessed and converted into cash Liquidity

Original amount of money saved or invested Saving for the future by putting money aside before paying regular monthly bills or using income for discretionary purchases Pay yourself first Percentage rate used to calculate interest Interest rate Original amount of money saved or invested Principal The purchase of goods and services Consumption

Portion of income not spent on consumption Savings Waiting to get something so that you can get another item you value more Delayed gratification Price paid for using someone else’s money or money earned for letting someone use your money Interest

What is Saving? Results in Saving – accumulation of excess funds by intentionally spending less than you earn Savings – portion of income not spent on consumption (purchase of goods and services) Results in

Short-term goals & expenses Why Save? Your present self impacts your future self By saving money today you will have financial security in the future Emergency savings Cash set aside to cover the cost of unexpected events Short-term goals & expenses Pay for items that aren’t part of a typical spending plan Financial security Lower stress Lower negative emotions What are examples of emergency expenses?

Saving Reduces Financial Risk and Uncertainty Savings is a monetary asset Contributes to net worth Very liquid (can quickly and easily be converted into cash) What monetary assets do you have for emergencies?

How Much Money Should Be Saved? At least six months worth of expenses in emergency savings $2,000 monthly expenses 6 months $12,000 Depends on… Income Job security Insurance coverage Dependents

Identifying Money to Save Do It Yourself Increase Income Decrease Expenses Instead of paying someone Trade-off Investing time and skills What can you do yourself to save money?

Pay Yourself First Your present self impacts you future self! Save a predetermined amount of money Do so before using money for spending Do so each time you are paid Make it automatic!

Saved Money Provides For Your Future Self…. Interest Rate Money Time … and can increase in value! Time Value of Money - money available at the present time (today) is worth more than the same amount if received in the future

What is Interest? Interest – the price of money Interest rate – percentage rate used to calculate interest Interest may be earned or paid Depository institutions offer secure accounts to save money When you don’t withdraw interest earned from an account the interest earns additional interest Compounding interest – earning interest on interest Interest - the price of money Interest rate - percentage rate used to calculate interest Compounding interest – earning interest on interest

How Do Interest Rates Affect The Time Value of Money? More Money Earned $1,000 Saved for 5 Years with Compounding Interest

More Money Earned Time How Does Time Affect the Time Value of Money? College Savings Fund Felix and his parents Saved for: 18 years Started when he was born Contributed: $50/month Total Contribution: $10,800 Savannah and her parents Saved for: 4 years Started when she was a freshman Contributed: $350/month Total Contribution: $16,800 Both earned the same interest rate Both currently have the same balance (about $19,500) Savannah’s parents contributed significantly more

How Does Money Affect the Time Value of Money? More Money Earned Money 3% interest for 5 years Principal Value of Savings $100 $115.93 $1,000 $1,159.27 $10,000 $11,592.74 Principal - original amount of money saved or invested

Time Value of Money Magic! Year 20 Interest Earned: $111.07 Amount Investment is Worth: $386.97 Year 15 Interest Earned: $79.19 Amount Investment is Worth: $275.90 Initial Investment (Principal): $100.00 at 7% compounding interest Year 1 Interest Earned: $7.00 Amount Investment is Worth: 107.00 Year 10 Interest Earned: $56.46 Amount Investment is Worth: $196.72 Year 5 Interest Earned: $33.26 Amount Investment is Worth: $140.26 Year 50 Interest Earned: $845.46 Amount Investment is Worth: $2945.70

Maximize Your Return! Time Money Interest Rate Save for as long as possible! Save as much as possible, as often as possible! Save at the highest interest rate possible!

Savings is an Essential Component of a Financial Plan Reduces future financial uncertainty Reduces negative emotions Requires trade-offs be made Best accomplished when automatic Opportunity for savings to increase in value