Choosing to Save Essentials Advanced Level

Brainstorm a personal wish list for yourself now and in the future My Wish List Brainstorm a personal wish list for yourself now and in the future My Wish List Your wish list can include anything of monetary value as well as personal achievements

“Today’s self has an impact on future self” What does this statement mean to you? “Today’s self has an impact on future self”

Saving vs. Investing Investing Savings Portion of current income not spent on consumption Purchase of assets with the goal of increasing future income Money saved is used to pay for: Money invested is used to pay for: Emergencies Large Purchases Higher Education Retirement

What is an Asset? Assets- everything an individual owns with monetary value Examples of Assets Cash Clothing Houses Electronics Savings Accounts Automobiles Furniture Make a list of your assets

What is Liquidity? Would any of your assets provide cash Liquidity- how quickly and easily an asset can be converted to cash More Liquid Savings Tools Less Liquid Investments Savings are known as liquid assets, because they are easily accessible in emergency situations Would any of your assets provide cash to fund an emergency?

Why are Saving & Investing Important? Serve different purposes in an individual’s finances but are both essential Savings Investing Provides the foundation for financial security by providing funds in case of emergency Enhances and helps build wealth- measurement of how much a person or household owns once all debts have been paid

The Choices You Make Today Impact Your Future! Saving and investing… Increase the amount you own- your assets Decrease the amount you owe- your liabilities Increased Wealth! Why is it important to increase wealth?

Financial Life Cycle Stage 3: Wealth Distribution Stage 2: Wealth Accumulation Stage 1: Wealth Protection There is a typical financial life cycle pattern that applies to most people

Stage One: Wealth Protection Characteristics Recommended Amount Includes saving Focuses on building financial security 10-20% of net income At least 6 months of expenses saved in liquid assets

Stage Two: Wealth Accumulation Characteristics Recommended Amount Includes investing Focuses on wealth accumulation Stage one (saving) should be a prerequisite to stage 2 (investing) 10-20% of net income

Stage Three: Wealth Distribution Characteristics Consumption of wealth Usually during retirement

Saving vs. Investing Activity Determine if the characteristic describes saving or investing Characteristic: Builds Wealth Saving or Investing: Investing

Saving vs. Investing Activity Characteristic: More Liquid Saving or Investing: Saving

Saving vs. Investing Activity Characteristic: Used to pay for emergencies Saving or Investing: Saving

Saving vs. Investing Activity Characteristic: Stage 2 of the Financial Life cycle Saving or Investing: Investing

Where Can Money Be Saved? A depository institution A business that offers banking and finance services, such as savings and investment tools When money is saved or invested at a depository institution, an individual can take advantage of the time value of money What is the name of a depository institution in your community?

Three factors affect how an investment will grow. Time Value of Money Money paid out or received in the future is not equivalent to money paid out or received today Three factors affect how an investment will grow. Interest Rate Money Time

Interest is the price of money. What is Interest? Interest is the price of money. Interest rate is the percentage rate paid on the money invested or saved

How Do Interest Rates Affect Time Value of Money? More Money $1,000 invested for 5 years Interest Rate Amount Investment is Worth 1% $1,051.01 3% $1,159.27 5% $1,276.28 7% $1,402.55 9% $1,538.62 Every depository institution will offer different interest rates on their savings and investment tools

How Does Time Affect the Time Value of Money? Interest Rate Money Time The longer an individual invests, the more time their investment has to increase in value

How Does the Amount of Money Affect the Time Value of Money? Larger Return 7% interest compounded annually for 5 years Amount of Principal Investment Return on Investment $100.00 $40.26 $1,000.00 $402.55 $10,000.00 $4,025.52

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: $100.00 at 7% 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

Maximizing Your Return Time Invest for as long as possible! Amount of Money Invest as much as possible, as often as possible! Interest Invest at the highest interest rate possible! Make the time value of money work to your advantage!

Wish List Refer to your wish list Do you currently have enough money to acquire all of the items on your wish list? If not, what are you willing to give up in order to acquire an item on your wish list? That is known as a trade-off!

Trade-offs What is the value of this trade-off to you? Trade-off - Giving up one thing for another Every decision inevitably involves a trade-off What is the value of this trade-off to you? That is known as opportunity cost!

Opportunity Cost Opportunity cost is the value of the next best alternative that must be forgone when a trade-off is made Allows you to analyze the consequences of choices to decide which trade-offs to make

Spending Plans When analyzing trade-offs and opportunity costs of a financial decision, current spending and spending plans should be considered A spending plan is a document used to record both planned and actual income and expenditures over a period of time

Goals After analyzing the trade-offs and opportunity costs of a decision and evaluating current spending plans, you can then set a goal! Goal - the end result of something a person intends to acquire, achieve, do, reach, or accomplish Financial Goal - specific objective to be accomplished through financial planning Goal setting helps you think about your future self Financial goals should be SMART goals

SMART Goals Specific Measurable Attainable Realistic Time Bound State exactly what is to be done with the money involved Specific Write the exact dollar amount the goal is for Measurable Determine how it can be reached, which is often determined by an individual’s budget Attainable Do not set goal for something unattainable or unrealistic Realistic Specifically state when the goal needs to be reached Time Bound By analyzing trade-offs, opportunity cost, and spending plans before setting a goal, goals become more attainable and realistic

Write a SMART goal for one of the items on your wish list Set SMART Goals Now that trade-offs, opportunity costs, and spending plans have been considered: Write a SMART goal for one of the items on your wish list My Wish List

Make Saving and Investing Automatic To help reach financial goals, saving and investing should be considered a fixed expense that is automatic Pay yourself first is a saving strategy that means to set aside a predetermined portion of money for saving before any money is used for spending

Summary- What is the purpose of saving and investing money? Financial security and a positive level of living Saving Wealth accumulation and a desired standard of living Investing

To practice smart saving and investing habits … Save 10-20% of net income in liquid assets until at least 6 months of expenses are reached Continue to invest 10-20% of income to increase wealth Utilize the time value of money to your greatest advantage

in order to save and invest 10-20 % of Net Income, follow this process… Consider the opportunity costs of those trade-offs Examine trade-offs that can be made Evaluate current spending plan Set a SMART goal (includes adjusting spending plans) Make saving and investing automatic Utilize the time value of money