Introduction to Investing "Take Charge of Your Finances" Financial Literacy

What is Investing? Purchase of assets with the goal of increasing future income Focuses on wealth accumulation Appropriate for long-term goals What are examples of long-term goals that can be accomplished by investing?

Investments usually earn higher rates of return than savings tools Rate of Return Total return on investment expressed as a percentage of the amount of money invested Total Return Amount of Money Invested Rate of Return Remember: Return is the profit or income generated by savings and investing Investments usually earn higher rates of return than savings tools

What is Mandy’s Rate of Return? Mandy saved $2,200 in a money market deposit account. After one year, she has a return of $110. What is Mandy’s rate of return? $110 $2,200 .05 = 5% Mandy’s rate of return on investment is 5%

What is Derek’s Rate of Return? Derek invested $900. When he withdrew his money from the investment, he had a total of $1,050. What is Derek’s rate of return? $150 $900 .167 = 16.7% Derek’s rate of return on investment is 16.7%

Number of years needed to double the principal investment Rule of 72 Allows a person to easily calculate when the future value of an investment will double the principal amount 72 Interest Rate Number of years needed to double the principal investment

“It is the greatest mathematical discovery of all time.” Albert Einstein Credited for discovering the mathematical equation for compounding interest, thus the “Rule of 72.” At 10% interest rate, money doubles every 7.2 years, T=P(I+I/N)YN “It is the greatest mathematical discovery of all time.”

What Can the “Rule of 72” Determine? How many years it will take an investment to double at a given interest rate How long it will take debt to double if no payments are made The interest rate an investment must earn to double within a specific time period How many times money (or debt) will double in a specific time period

“Rule of 72” FYI Only an approximation Interest rate must remain constant Interest rate is not converted to a decimal Equation does not allow for additional payments to be made to the original amount Interest earned is reinvested Tax deductions are not included

Jessica’s Credit Card Debt Jessica has a $2,200 balance on her credit card with an 18% interest rate. If Jessica chooses to not make any payments and does not receive late charges, how long will it take for her balance to double? $2,200 balance on credit card 18% interest rate 72 18 4 years to double

Jacob’s Car 18% interest rate 4 years 72 $5,000 to invest Jacob currently has $5,000 to invest in a car after graduation in 4 years. What interest rate is required for him to double his investment? $5,000 to invest Wants investment to double in 4 years 72 4 years 18% interest rate

Rhonda’s Treasury Note Rhonda is 22 years old and would like to invest $2,500 into a U.S. Treasury Note earning 7.5% interest. How many times will Rhonda’s investment double before she withdraws it at age 70? Age Investment 22 $2,500 31.6 (double once) $5,000 41.2 (double twice) $10,000 50.8 (double 3 times) $20,000 60.4 (double 4 times) $40,000 70 (double 5 times) $80,000 72 = 9.6 years 7.5% to double investment

Another Example Age Investment 18 $500 28.2 (double once) $1,000 $500 invested at age 18 7% interest How many times will investment double before age 69? Age Investment 18 $500 28.2 (double once) $1,000 38.4 (double twice) $2,000 48.6 (double 3 times) $4,000 58.8 (double 4 times) $8,000 69 (double 5 times) $16,000 72 = 10.2 years 7% to double investment

Summary What is the relationship between risk and return? How can a person reduce investment risk? Who should a person contact to purchase investment tools? What are the six main investment tools? What is a tax-sheltered investment? What is the Rule of 72?