Unit 6: Financial Planning Driving Question: Why is it important that we invest in ourselves?

By the end of this lesson I CAN: 1.Explain what tradeoffs are and provide an example to show how a person’s choices involve trade-offs 2.Describe 3 ways that I can impact my future standard of living 3.Analyze the relationship between risk and return when investing

What does it mean to pay yourself first? Pay yourself first: A phrase commonly used in personal finance that means to automatically route your specified savings contribution from each paycheck at the time it is received. How can we do it?

Why do people save for the future? Reasons…………

Disposable Income & Saving Disposable Income: What you have left over after paying bills, taxes, etc. Saving involves using part or your disposable income Saving Putting money aside for later use Must determine the amount to save based on the amount of your disposable income

How is saving impacted by interest? Accruing interest increases the amount of your savings Which provides more returns, simple interest or compound interest? Simple interest: interest pain only on principal (amount your originally saved) Calculation: principal x interest Example: 8% simple interest earned on $100 = $24

How is saving impacted by interest? Compound Interest: interest earned on principal AND previously earned interest Formula to calculate: Amount = Principal (1 + Interest) number of years Example of compound interest earned on $1000 over 3 years with 5% compound interest = $

Why might people choose not to save? Trade off: When you make a choice you give up something else Example: Money you spend on clothes can’t be spent on something else you want Costs & Benefits of Saving: Costs: you use money that you could use on other things your savings aren’t instantly accessible

Why might people choose not to save? Costs & Benefits of Saving continued Benefits: You have money set aside to use later Examples: college, emergencies, retirement, etc. People are Inconsistent: We often know what we should do but we don’t always do it Example: we know that we should eat healthy but we still make unhealthy choices

Why might people choose not to save? Instant Gratification Many people want to get the things they want immediately Saving involves sacrifice: you have to pass up instant gratification for a reward later on Example: When you save you can’t always buy something you want BUT later you will have money that you need for something important like retirement

How can goal setting help us save? Types of Goals: Short term: achieved in 1 year or less Example: vacation Medium term: achieved in 1-5 years Example: down payment on a car Long term: achieved in more than 5 years Example: college or retirement

How can we invest in ourselves and our future? Your career & salary are based on human capital Career/Occupation: your job Human Capital: your skills and education

Investing in ourselves – Look closely at this chart

How can we invest in ourselves and our future? What is the relationship between education & wages? What is the relationship between education & unemployment? What can we conclude from this?

What should we keep in mind when investing in ourselves and our future? Costs vs. Returns: is what I am paying/giving up going to be worth what I receive later Example: Is it worth having $30,000 in student loans to become a nail technician? How does debt impact our investment in education today?

What other choices can we make when planning our financial future? Investment: Putting money to work to make more money Ex: Stocks, bonds, real estate, etc. Risks in Investment Risk of principal: The risk that some or all of the original deposit or investment may be lost. Market risk: The risk that the forces of supply and demand or unforeseen events may affect the value of an investment. Interest-rate risk: The risk that interest rates will change. An investor, for example, might hold a fixed-rate investment, such as a bond. If the bond holder decides to sell the bond before maturity and market interest rates are higher than what the bond is earning, the price of the bond will be lower. Inflation risk: The risk that the return on an investment will not keep pace with inflation, and the saver’s purchasing power will fall.

What is the relationship between investment and risk? What other choices can we make when planning our financial future?