Personal and Financial Opportunity Costs Whenever you make a choice, you have to give up, or trade off, some of your other options. See Question #1, page 25

Personal Opportunity Costs Like financial resources, your personal resources require management: Health (consequences as you age) Knowledge Skills Time

Financial Opportunity Costs Most people have a limited amount of money. Consider: Time Value of Money=the increase of an amount of money due to earned interest/dividends (spend your money now…or save so it will be worth more later) Calculate Interest: Principal x Annual Interest Rate = Interest Earned for One Year Example: $1,000 x.03 = $30 ($30 earned in one year) See example top of page 21 “Go Figure, Annual Interest”

Financial Opportunity Costs (cont.) Future Value of a Single Deposit: Amount your original deposit will be worth in the future based on earning a specific interest over a specific period of time. Interest is earned on your principal and on previously earned interest. To calculate the interest earned for the second year, add interest earned in the first year to the principal. Then take that amount and multiply it by the annual interest rate. See “Go Figure” bottom of page 21

Future Value computations are also called “COMPOUNDING” He called Compounding Interest the “Most Powerful Force in the Universe” and the 8 th “Wonder of the World” your money earns increases faster over time. The more frequently your balance is compounded, the greater your yield (rate of return) Yield = Total interest earned divided by amount of original deposit…see example p. 137 Why would a bank and a credit card company compound interest differently?

Financial Opportunity Costs (cont.) Future Value of a Series of Deposits: A series of equal regular deposits…Also called an annuity Present Value of a Single Deposit: Amount of money you would need to deposit now in order to have a desired amount in the future Present Value of a Series of Deposits: Amount of money you would need to deposit so you can take a specific amount of money out of your savings account for a certain number of years (used for retirement) SEE FUTURE and PRESENT VALUE TABLES on page 23

Strategies to Achieve Your Financial Goals Obtain financial resources Plan how you will spend money Spend Wisely Save Borrow Wisely Invest Manage Risk (Insurance) Plan of Retirement

1.2 Assessment 1. What are the opportunity costs associated with financial decisions? Pg. 19 Personal opportunity costs Financial opportunity costs

1.2 Assessment 2. What is the “Time Value of Money”? Pg. 19 The increase of an amount of money due to earned interest or dividends (Increasing your current income and helping your money grow over time)

1.2 Assessment (cont.) 3. What are the eight strategies you can apply to achieve your financial goals? Pg. 24 Obtain Plan Spend Save Borrow Invest Manage Risk Retire

Assessment 1.2 (cont.) Read problem 5 from book, p.25: Use Table B, fig 1.4 (p. 23) Locate the intersection of “5” years at 5%” Tanya will have $16,578 available in 5 years $3,000 x = $16, 578 Tanya needed $18,000 She will need to raise an additional $1,422 $18,000 – 16,578 = $1,422 HOW MUCH WOULD TANYA HAVE SAVED IF SHE DID NOT RECEIVE ANY INTEREST?

KNOW FOR QUIZ: Opportunity Cost Future Value Savings Account Principal Present Value Time Value of Money