Chapter 1.2 Opportunity Costs Financial Strategies Personal Finance Chapter 1.2 Opportunity Costs Financial Strategies

Objectives Determine how opportunity costs impact decisions Calculate interest

Opening Question You just won $2,000,000!!!!!!!!!! What would you do with the money?

Opportunity Cost The cost or value of what you give up.

Time Value of Money Increase of an amount of money as a result of interest or dividends earned

Calculating Interest Principal: Amount of money you deposit on which interest is paid You deposit $1,000 a year in a savings account that gives you 3% interest. How much interest do you make? Principal x Annual Int. Rate = Int. $1,000 X .03= $30 per year

Future Value The amount your original deposit will be worth in the future based on earning a specific interest rate over a specific period of time

Future Value Equation (Principal + Previous INT earned) X Annual Interest Rate How much will that deposit earn in 2 years? ($1,000+$30) X 3% = $30.90 S0, $1,000 earns $60.90 of interest in 2 years

Future Value of a Single Deposit Math Problem Grandma just gave you $2,750. You decide to put it into a savings account where you will earn 5% interest. How much will you have at the end of 6 years? Answer: $2,750 x 1.340 = $3,685

Future Value of a Single Deposit Math Problem Grandma just gave you $2,750. You decide to put it into a savings account where you will earn 5% interest. How much will you have at the end of 6 years? Answer: $2,750 x 1.340 = $3,685

Annuity A series of equal regular deposits

Future Value of a Series of Deposits Math Problem If you deposit $75 a year at 5% for 9 years, how much will you have at the end of the nine years?

Future Value of a Series of Deposits Math Problem If you deposit $75 a year at 5% for 9 years, how much will you have at the end of the nine years? Answer: $75 x 11.027 = $827.03

Present Value The amount of money a person would need to deposit now in order to attain a desired amount in the future

Present Value of a Single Deposit Math Problem If you want to have $1,000 in five years for a down payment on a car, and your savings account pays 5% annual interest, how much money will you need to deposit now in order to earn enough interest to accumulate $1,000?

Present Value of a Single Deposit Math Problem If you want to have $1,000 in five years for a down payment on a car, and your savings account pays 5% annual interest, how much money will you need to deposit now in order to earn enough interest to accumulate $1,000? Answer: $1000 x .784 = $784

Present Value of a Series of Deposits Math Problem Next year when you are in college, you plan to take $1,000 out of your savings each year for 5 years. Your money will earn 9% interest. How much money will you & your parents need to deposit to make this plan successful?

Present Value of a Series of Deposits Math Problem Next year when you are in college, you plan to take $1,000 out of your savings each year for 5 years. Your money will earn 9% interest. How much money will you & your parents need to deposit to make this plan successful? Answer: $1,000 x 3.890 = $3,890

RECAP Future Value Tables: Present Value Tables: Save time and reduce errors when computing interest over long time periods Present Value Tables: Help determine how much to deposit now in order to have a certain amount of money in the future

Eight Strategies to Achieve Your Financial Goals (p.25) Obtain Plan Spend Save Borrow Invest Manage Risk Retire

Class work/Group Work In Groups: Discuss your personal financial goals Come up with opportunity costs for each Discuss the decision you would make and why

Closing Question Complete the following statement: “By learning to use my money wisely now, I’ll be able to…” Example: “…achieve many of my financial goals.”

Block Period Work Chapter 1 Study Guide (Quiz Friday) Page 28-29 Review Key Concepts #1-5 Apply Key Concepts #1-4 Problem Solving Today Real World Application