Financial LiteracyBanking, Financing, Investing, and Planning for your

Future

An Introduction

• Dave Ramsey – financial freedom guru

Banking

Definitions-write these

Savings- the process of setting money aside for a future date instead of spending it today.

Savings are for emergencies, short-term goals, and eventually, investing.

Save first, and then when you have saved money, consider investing it. (We discuss investing later in the semester.)

Investing- increases wealth over time, funds long-term financial goals, such as retirement.

Definitions- write these

• Deposit- money you put into your savings account. Safer than under your mattress.

• Withdrawal- Money taken out of your savings account. Leave it there until you actually need it!

• Account balance- total amount of money that is in the account at a given time. Always know how much money you have in your accounts!!!

Definitions- write these

• Interest- money paid to you by the bank for being able to use your money. (So, when you deposit money into a savings account, you are lending money to the bank, and they will pay you for it.) They can’t pay you for it if it’s not there!

• Interest rate- percentage you are paid for your money. It’s not much, but better than nothing. Remember, you need this money for emergencies, and investing!!

Interest

The amount of interest you earn is based on:

• The interest rate

• Whether it is compounded yearly, monthly, or daily.

• Monthly yields more than yearly, daily yields more than monthly.

• If you know that the yearly interest rate is 3%, but is compounded monthly, then you must divide 3 by 12 to find the monthly rate.

Example

• You deposit $1,000 in the bank, and your bank offers 3% annual interest, compounded monthly.

• How much money is in the account after 3 months?

• First divide 3 by 12. So you will calculate at 0.25 % (Remember we still need to divide a percent by 100 for punching in the calculator)

How interest is calculated

Beginning balance * interest rate = interest payment$1,000 * 0.0025 = $2.50

Beginning balance + interest payment = ending balance$1,000 + $ 2.50 = $1,002.50

Beginning account balance comes from ending account balance on previous line.

Try it:

• Figure out the next 3 months. What would your ending balance be after a total of 6 months of earning interest?

Definition- write this

Compound Interest- when interest is calculated based on total amount in an account, including previously earned interest.

This is what happens when your starting balance is always your ending balance from the previous line of the spreadsheet.

Definitions- write these

• Future Value- how much a set amount of money will be worth in the future.

• We saw that $1,000 had a three-month future value of $1007.52.

• Present Value- The value of money right now, today.

Calculating interest including deposits and withdrawals

Rule of 72

• A formula designed to help people estimate how long it will take to double their money at a certain expected interest rate.

• Simple: divide 72 by your interest rate.

• If your annual interest rate is 3%, 72/3 = 24, so it will take 24 years to double your initial deposit.

Remember, keep more “water” going in the bucket than coming out!

The first step

• https://www.youtube.com/watch?v=sAV7Nsxv2ng

Assignment

• Read the text, add any notes that you would like

• Complete the spreadsheet that we started with an additional 6 months, with a $200 withdrawal in month 11. Continue to make $320 deposits.

• Complete worksheet for homework

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