1. Compound Interest
How money grows exponentially!

2. Compound Interest Future $ Value Key Assumptions
Compound Interest: Is earning interest on “interest”
Key Assumptions
You save the money in a non-taxable account
You re-invest all interest period
$5,000 Savings
Future
$ Value
You save $5,000
+ 10% Interest Payments
Year 1= $5,000 + $500 = $5,500
Lesson: interest payments
keep rising!
Year 2= $5,500 + $550 = $6,050
Year 3= $6,050 + $605 = $6,655

3. The Magic of Compounding
nominal terms
Money Doubles in
70/10.0% = 7 years

4. How/Why to Save Money Savings is delaying gratification
Target: save 10% of every paycheck
Goal: transfer purchasing power to the future
Must earn greater than rate of inflation => real wealth ↑
ROI: return on investment = % rate of return on principal

5. How to Save Money & Build Wealth!
Banks
Checking & Savings accounts, credit cards, loans, etc
Brokerage Firms
Specialize in accounts for stocks, bonds, mutual funds => where you SAVE!
Link checking & brokerage accounts
keep them at separate institutions
Save $ through Direct Deposit & Automatic Investing
90% of Paycheck
to Checking
10% of Paycheck
to Savings

6. Small Cap Vanguard Index Fund: 1992 – 2015
2,000 stocks 1.9% Dividend Yield
2018
$554,000
2015
$446,000
With Dividends
$100,000 => $600,000
+8.0% per year
2006
$270,000
1999
$200,000
2007
$115,000
Start 1992
$100,000
(7700 shares)
2002
$107,000

7. Compounding Video: 4 minutes
Compounding Worksheet

8. Buying a house (Before 2000)
Consumers were required to put a 20% down payment
For a $500,000 home:
$100,000 down payment & borrow $400,000 (mortgage)
loan is paid back over 30-years at a Fixed interest rate
(This meant the monthly payment stayed the same for 30-years)
The loan was less than the value of the house
So banks were taking very little/no risk of default
Consumers would not “walk away” or they would lose deposit

9. Housing Bubble Analysis
Subprime Mortgage Example
Price Paid: $1,000,000
Down Payment: 0
You owe: $1,000,000
Major Problem!
Initial Value of House $1,000,000
New Value: $700,000
Homeowner still owes 1 million but owns a house worth only $700,000
If they can’t pay their monthly mortgage, the Bank will foreclose on their house!

10. Housing Bubble Analysis
Caused by
Credit
Bubble
Too easy to get loans

11. Loans turned into Mortgage Backed Securities
Banks Makes
Home Loans
Banks sell Loans to
Wall Street
Wall Street turns
them into securities
Securities became
worthless and Banks
went Bankrupt

12. House of Cards 60 minutes video link