Choosing to Save

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 goals.

“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 Savings Investing Portion of current income not spent on consumption Purchase of assets with the goal of increasing future income

Savings vs. Investing Money saved is used to pay for: Money invested is used to pay for: Emergencies Large Purchases Higher Education Retirement

Liquidity Cash Clothing Houses Electronics Savings Accounts Assets: Everything an individual owns with monetary value. Liquidity: How quickly and easily an asset can be converted to cash. Examples of Assets Cash Clothing Houses Electronics Savings Accounts Automobiles Furniture Make a list of your assets.

In most cases, investments are not as liquid as savings. Liquid Assets In most cases, investments are not as liquid as savings. More Liquid Savings Tools Less Liquid Investments Savings are known as liquid assets, because they are easily accessible in emergency situations. Of your assets, which are the most liquid?

Why are Saving & Investing Important? Savings Investing Provides the foundation for financial security Enhances and helps build wealth

Wealth Wealth is a measurement of how much a person or household owns once all debts have been paid

Level of Living & Standard of Living Savings and investing help pay for a level of living in the present and reach a standard of living in the future Level of Living Standard of Living A higher level of living that an individual or household sets to reach, through income increases and wealth accumulation The amount of money needed to pay for the necessities and comforts currently enjoyed PRESENT FUTURE

How is Wealth Measured? Assets Liabilities Net Worth Net worth statement - Describes an individual or family’s overall financial condition on a specified date Assets Liabilities Net Worth The components include: Assets – Everything a person owns with monetary value Liabilities – Debts (what is owed to others) Net Worth – the amount of money left when liabilities are subtracted from assets (indicates wealth)

The Choices You Make Today Impact Your Future! Saving and investing… Increase Assets Decrease Liabilities Changed the font the old one (rage italic) was too hard to read Increased 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

Financial Life Cycle Varies for every individual: Stage 3: Wealth Distribution Stage 2: Wealth Accumulation Stage 1: Wealth Protection Varies for every individual: amount of time it takes to move through the financial life cycle amount of money needed in liquid assets

Financial Life Cycle Stage 3: Wealth Distribution Stage 2: Wealth Accumulation Stage 1: Wealth Protection Identify someone you know that is in each of the three financial life cycle stages.

Saving vs. Investing Activity Directions: A characteristic of saving or investing will be identified Move to the side of the classroom you believe to be correct Discuss the answer

Saving vs. Investing Activity 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

Saving vs. Investing Activity Characteristic: Provides the Foundation for Financial Security Saving or Investing: Saving

True or False? Identify if each statement is true or false… □ If Janie makes a one time investment of $500 at age 20 in a tool that earns the historic 12% average, by age 60 the $500 will become $46,525. If Samuel invests $3,000 annually from ages 22-31 (a total of $30,000 invested) in a tool earning 10% interest, he will have $1.2 million dollars by age 65. They are both true. Now we are going to learn how!

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. Interest Rate Interest is the price of money. Interest rate is the percentage rate paid on the money invested or saved Are you earning interest on any money?

How Do Interest Rates Affect Time Value of Money? More Money Interest Rate $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

Return is the profit or income generated by savings and investing. Definitions Return is the profit or income generated by savings and investing. Unearned income is income derived from sources other than employment, such as interest.

Simple Interest vs. Compounding Interest Interest earned on the principal investment Earning interest on interest Principal is the original amount of money invested or saved

Simple Interest Equation: Step 1 (Principle) r (Interest Rate) t (Time Period) I (Interest Earned) $1,000 .07 5 $350 $1,000 invested at 7% interest rate for 5 years

Simple Interest Equation: Step 2 (Principal) I (Interest Earned) A (Amount Investment is Worth) $1,000 invested at 7% interest rate for 5 years $1,000 $350 $1,350

Compounding Interest Equations There are two equations for compounding interest Single sum of money Money invested only once at the beginning of an investment Equal number of investments spread over time Equal amounts of money is invested multiple times (once a month, once a year, etc.)

Compounding Interest Equation – Single Sum P (1 + i)n = A Amount Investment is Worth Principal (1 + Interest Rate)Time Periods = $1,000 invested at 7% interest rate compounded yearly for 5 years $1,000 (1+ .07)5 = $1402.55

Compounding Interest Equation- Equal Number of Investments PMT x (1+i)n-1 = A i Payment x (1+Interest Rate)Time Period-1 = Amount Investment is Worth Interest Rate $1,000 invested every year at 7% annual interest rate for 5 years $1,000 x (1+.07)5-1 = $5,750.74 .07

Compounding vs. Simple interest Compounding Interest for a Single Sum = $1,402.55 Why? By reinvesting the interest earned, the interest payment keeps growing as interest is compounded on interest

Single Sum vs. Investments Over Time Compounding Interest for a Single Sum = $1402.55 Compounding Interest for Investments Over Time = $5750.74 To make the most of your money, utilize compounding interest and continue to invest!

Amount Investment is Worth Compounding Interest The number of times interest is compounded has an effect on return Interest compounding frequently will yield higher returns $1,000 invested at 7% for 5 years Compounding Method Amount Investment is Worth Daily $1,419.02 Monthly $1,417.63 Quartely $1,414.78 Semi-Annually $1,410.60 Annually $1,402.55

Time Interest Rate Money Time The longer an individual invests, 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 for 10 years, at age 22. She earns 10% on her investment. Sally invests a total of $30,000 and has earned $1,205,063 by the age of 65 Ed Uninformed waits until he is 28 and contributes $3,000 at 10% for 37 years Ed invests a total of $111,000 and accumulates $1,079,856 by the age of 65

Amount of Money Interest Rate Money Time The larger the amount of money invested, the larger the return on investment will be

Amount of Money Amount 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

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! Use compounding interest that compounds as frequently (annually, semi-annually, quarterly, monthly, daily) as possible!

Smart Investing OR Which would you choose? An investment earning compounding interest An investment earning simple interest OR

Smart Investing OR Which would you choose? An investment earning an interest rate of 2% An investment earning an interest rate of 2.1% OR

Smart Investing OR Which would you choose? An investment with an interest rate compounded monthly An investment with an interest rate compounded yearly OR

Set Goals! Wish List Refer to your wish list. How will you receive these items? Set Goals! Goal setting helps you think about your future self.

Goals Short-Term Goal - Goal - Long-Term Goal - Financial Goal - The end result of something a person intends to acquire, achieve, do, reach, or accomplish Short-Term Goal - Can be achieved in less than one year Long-Term Goal - Can be achieved in more than one year Financial Goal - Specific objective to be accomplished through financial planning

SMART Goals Specific Measurable Attainable Realistic Time Bound Financial goals should be SMART goals 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

Setting SMART Goals In order to set SMART goals the following must be considered: Trade-offs Opportunity Cost Spending Plans

Trade-off - Giving up one thing for another Trade-offs Trade-off - Giving up one thing for another Every decision inevitably involves a trade-off What is a trade-off to earning more money in the future by saving and investing? Spending money in the present

Your Trade-offs What trade-offs will you have to make in order to receive any of the items on your wish list?

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

Opportunity Cost In regards to money, the opportunity cost is the best alternative of what one could have done instead of choosing to spend, save or invest. What is the opportunity cost of saving and investing money? The value of spending money in the present

Your Opportunity Costs What are the opportunity costs of your trade-offs?

Trade-offs & Opportunity Costs By analyzing trade-offs and the opportunity cost of those trade-offs, goals become more attainable and realistic

Spending Plans In order to reach goals, current spending plans may need to be evaluated and adjusted A spending plan is a document used to record both planned and actual income and expenditures over a period of time

Adjusting a Spending Plan Increase income or decrease expenses to save or invest more May require trade-offs obtaining another job moving acquiring a roommate selling a car giving up a cell phone or Internet

1. Examine Flexible Expenses 2. Examine Fixed Expenses Adjusting Expenses: 1. Examine Flexible Expenses 2. Examine Fixed Expenses Eliminate or decrease flexible expenses Fixed expenses are more difficult to eliminate because many are contractual Examples- Entertainment, Gas, or Food Examples- Rent, Cell Phones, or Internet

Adjusting a Spending Plan The amount of money that will become available by adjusting a spending plan varies Depends on how many trade-offs a person is willing to make Reaching goals may take a long time

Your Spending Plan: Income Income can come from many sources: Jobs Allowance Family members Gifts Scholarships What are your sources of income?

Your Spending Plan: Expenses Everyone has expenses: Housing Food Clothing Automobile (gas, repairs) Cell Phone Entertainment Brainstorm a list of your expenses.

Your Spending Plan Refer to your list of trade-offs and opportunity costs for the items on your wish list. Can you adjust your spending plan to receive any of the items on your wish list?

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 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

How can savings and investing become automatic? Automatic Transfers & Payroll Deduction

Automatic Transfers Most depository institutions allow automatic transfers between accounts Depository institution- a business that offers banking and finance services, such as savings and investing tools A designated amount of money will be automatically moved into a saving or investing tool every month

Payroll Deduction Most employers offer payroll deduction to employees Employees can designate an amount of money from their paycheck be deposited into an account of their choice

Financial security and a positive level of living Summary Financial security and a positive level of living Saving Wealth accumulation and a desired standard of living Investing

Summary To practice smart savings and investing habits and reach a desired standard of living…

Summary 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

Summary Set goals! Think about the trade-offs of your goals and the opportunity costs of those trade-offs

Summary Evaluate and adjust current spending in order to reach those goals Make saving and investing automatic to make reaching goals easier