1. Family Economics & Financial Education Take Charge of Your Finances
Time Value of Money
Family Economics & Financial Education
Take Charge of Your Finances

2. Time value of money
Time value of money -- Money to be paid out or received in the future is not equivalent to money paid out or received today.

3. $1,000 Invested Compounded Annually at 10% Interest Rate
Compounding interest
Compounding interest -- Earning interest on interest.
“Make your money work for you.”
Developed because compounding interest causes money to make money.
$1,000 Invested Compounded Annually at 10% Interest Rate
1 Year
2 Years
$1,104.71
$1,220.39

4. Simple interest
Simple interest -- Interest earned on the principal investment.
Principal -- The original amount of money invested or saved.
Amount invested x annual interest rate x number of years = interest earned.
Ex. 1,000 x 0.10 x 2=$200
$1,000 Invested at 10% Simple Interest Rate
1 Year
2 Years
$1,100.00
$1,200.00
$1,000 Invested at 10% Simple Interest Rate
1 Year
2 Years
$1,100.00
$1,200.00

5. Three factors affecting the time value calculations
Amount invested
Interest rate

6. Time
The earlier an individual invests, the more time their investment has to compound interest and increase in value.

7. A little goes a long way
Sally Saver puts away $3,000 per year in her IRA account earning 10% - she does this for 10 years then stops.
Sally accumulates $1,239,564 by the age of 65.
Ed Uninformed waits until he is 28. He must contribute $3,000 to his IRA account earning 10% for 38 years.
Ed accumulates $1,102,331 by the age of 65.

8. Amount invested
Investing only a small amount a month is better than not investing at all.
Ex. At 8% interest, invested at age 17, one dollar per day will become $17, by age 65.
The larger the amount invested the greater return a person will earn.
Always pay yourself first.
Savings should be a fixed expense.

9. Amount invested continued
Rule
70% Spent
20% Saved
10% Invested
Flexible expenses can be decreased in order to increase the amount a person is able to invest.

10. Average Yearly Expense
The costs add up
The future value problems are calculated for an 18 year old person investing at 8% until age 65.
Item
Average Yearly Expense
Future Value
Eating lunch out 5 days per week at a cost of $5-$10 each time
$1, $2,600.00
$55, $110,281.21
Daily candy bar
$365.00
$15,481.78
Monthly gym membership at $38.00
$456.00
$19,341.63
Monthly hair cut at $25.00 per month
$300.00
$12,724.75

11. Interest rate The percentage rate paid on the money invested or saved.
Higher interest=more money earned
$1,000 Invested Compounded Monthly
Interest Rate
1 Year
5 Years
10 Years 4%
$1,040.74
$1,221.00
$1,490.83 6%
$1,061.68
$1,348.85
$1,819.40

12. Risk A higher interest rate generally has a greater risk.
Risk -- The uncertainty of the outcome of an investment.

13. Fixed interest rate
Fixed interest rate -- The rate will not change for the lifetime of the investment.
Having a savings or investment plan with a fixed interest rate guarantees a specific return but can provide a moderate risk.
If the average interest rates rise, the amount a person earns from this type of investment will not increase.

14. Inflation
Another consideration with interest rates is ensuring the interest rate is higher than the rate of inflation.
Inflation -- The steady rise in the general level of prices.
Ex. If an individual has money invested at 4% interest and the inflation rate is 4%, the individual’s wealth will stay the same.

15. Time value of money calculations
Present value
PV=(FV)(1+i)-N
Future value
FV=(PV)(1+i)N
Financial calculators may be used to complete these calculations.

16. Calculation components
Present value (PV) -- How much money a person has today.
Future value (FV) – How much money a person expects to have in the future.
Interest rate (i) – The percentage rate paid on the money invested or saved.
Time (N) -- Length of investment
Calculated by the number of compounding periods. (daily, monthly, or annually)

17. Review Compounding interest earns interest on interest.
Increased time=more interest earned
Higher principal=more interest earned
Higher interest rate=more interest earned

18. $100.00 Invested at an 8% interest rate
What would you do?
If participants choose to invest the money into an account earning 8% interest compounded annual at age 17 and leave the money invested until age 65, they will earn $4,
$ Invested at an 8% interest rate
Age
Amount Earned 17
$100.00 25
$189.25 35
$420.06 45
$932.38 55
$2,069.54 65
$4,593.63

19. $100.00 Invested at an 8% interest rate
What would you do?
What if the participant chooses to invest $30.00?
$ Invested at an 8% interest rate
Age
Amount Earned 17
$30.00 25
$56.77 35
$126.02 45
$279.71 55
$620.86 65
$1,378.09