1. Personal Finance Time Value of Money
Bill Klinger

2. Personal Finance Review Opportunity cost Cash flow statement
Changes over time
Factors affecting
Balance sheet
Assets
Liabilities
Net worth
Analysis
Ratios

3. Interest Interest is the cost of money When you borrow
You pay interest to get the money
When you invest or loan
Others pay you interest to get the money

4. Time Value of Money
A dollar today is worth less than a dollar in the future
Why?
If you give up money today, you expect to receive more in the future
You have opportunity costs
What is opportunity cost?

5. Future Value Simple future value (FV) Example
FV = amount x (1 + interest rate)
Example
Assume interest rate of 3%
If invest $1000 today, how much will you have next year?
FV = 1000 x ( )
FV = $1040

6. Future Value Compound interest FV formula too complex for this class
Earn interest on the interest on the interest …
Einstein said was the most powerful force in the universe
FV formula too complex for this class
Will use tables in text
Can also use Excel function, FV
FV = PV x FVIF
FV = Future value, amount you will have in the future
PV = Present value, amount you have today
FVIF = Future value interest factor, found in text Appendix C.1

7. Future Value
Problems
You invest $100 today at 4% interest. How much will you have in 4 years?
You invest $100 today at 4% interest. How much will you have in 10 years?
You invest $100 today at 9% interest. How much will you have in 4 years?
You invest $100 today at 9% interest. How much will you have in 10 years?
What can you say about the length of time you invest?
What does that say about your investment plans?
What can you say about the difference the interest rate makes?

8. Future Value Years to double = 72 / (interest rate)
Compounding rule of thumb
Rule of 72
Calculate how long it will take money to double
Years to double = 72 / (interest rate)

9. Present Value
Present value represents the value of future payments to you now
For example
What is $1000 next year worth to you now?
Can also think of it as willingness to pay
What would you pay today for $10,000 in 5 years?
To calculate PV, need to know
Future amount
Interest rate
Number of years

10. Present Value PV formula too complex for this class PV = FV x PVIF
Will use tables in text
Can also use Excel function, PV
PV = FV x PVIF
PV = Present value, amount you have today
FV = Future value, amount you will have in the future
PVIF = Present value interest factor, found in text Appendix C.2

11. PV = FV x PVIFi,n Text Error Table C.2 has an error
Heading is incorrect
Should read
PV = FV x PVIFi,n

12. Present Value Problems
What is $10,000 five years from now worth today if interest rates are 4%?
What is $10,000 ten years from now worth today if interest rates are 4%?
What is $10,000 five years from now worth today if interest rates are 10%?
What is $10,000 ten years from now worth today if interest rates are 10%?
What can you say about the effect of the length of time?
What can you say about the difference the interest rate makes?

13. Present Value Problems
How much are you willing to pay for $5,000 next year if interest rates are 6%?
How much are you willing to pay for $50,000 in 20 years if interest rates are 6%?

14. In Class In groups of two Chapter 3 Financial Planning Problems
Create a simple budget with one or two problems
Exchange with another group and find problems