Financial Markets Economics. Section 1: Savings and Investing.
Savings & Investing
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Transcript of Savings & Investing
Savings & Investing
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© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 2Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at
the University of Arizona
Are:SafeLiquid
Used For:Large PurchasesEmergenciesFinancial Security
Savings Tools
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© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 3Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at
the University of Arizona
Are:Checking Account
Savings AccountMoney Market Account
Certificate of Deposit
U. S. Savings Bond
5 Savings Tools
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© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 4Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at
the University of Arizona
Savings Tools are Safe
$Why? Government Insured/Guaranteed
With the Exception of US Savings Bonds
FDIC-Federal Depository Insurance Corporation up to $250,000 $Federal government agency that insures
depository institutions
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© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 5Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at
the University of Arizona
Choosing a Savings Tool
$ By understanding the features of different savings tools, an individual can choose which tools will help them reach their financial goals.
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© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 6Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at
the University of Arizona
Depository Institutions
$ Features of savings tools vary between different depository institutions Interest rates Accessibility options Fees Penalties Minimum balance requirements
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© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 7Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at
the University of Arizona
Depository Institutions
$ Research and compare savings tools at different depository institutions in order to find the best option
$ Not limited to one depository institution Can have different savings tools at
different depository institutions
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© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 8Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at
the University of Arizona
$DEFINITION Account used to
transfer funds electronically and by writing checks
$INTEREST May or may not
earn interest If does earn
Interest, rate will be the lowest of the savings tools
Checking Account
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© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 9Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at
the University of Arizona
$ACCESSIBILITY Most liquid of all the savings tools
$Funds are easily accessed by:$Checks$Automated teller machines (ATMs)$Debit cards$Telephone$Internet
Checking Account
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© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 10Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at
the University of Arizona
$FEATURES Can have minimum balance requirements Can charge transaction fees Can have a limit on the number of checks
written monthly Reduces the need to carry large amounts
of cash
Checking Account
Before opening a checking account, learn all of the requirements
and restrictions.
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© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 11Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at
the University of Arizona
$ADDITIONAL INFORMATION If interest is earned on the account,
you must report it on your income taxes (unearned income) in the year it was earned$You will receive a form 1099 that tells you
the total interest you earned for the year
Checking Account
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© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 12Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at
the University of Arizona
$DEFINITION Account to
safely hold money you don’t want to spend
$INTEREST Interest earning Higher interest
rates than checking accounts
Savings Account
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© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 13Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at
the University of Arizona
Savings Account$ACCESSIBILITY
More liquid than all savings tools except a checking account$Funds may be accessed or transferred
between accounts through: Automated teller machines Telephones Internet Debit Card
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© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 14Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at
the University of Arizona
Savings Account
$FEATURES Allows for frequent deposits or
withdrawals Easily accessible (the same as checking
except no checks) Money storage for financial security Available at depository institutions May require a minimum balance or
have a limited number of withdrawals per month
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© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 15Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at
the University of Arizona
$ADDITIONAL INFORMATION Interest earned on the account
must be reported on your income taxes (unearned income) in the year it was earned$You will receive a form 1099
that tells you the total interest you earned for the year
Savings Account
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© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 16Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at
the University of Arizona
$DEFINITION This is a kind of combination
checking/savings account.
Money Market Deposit Account
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© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 17Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at
the University of Arizona
Money Market Deposit Account
$INTEREST Minimum balance requirement with
tiered interest rates$The amount of interest earned depends on
the account balance
$For example: a balance of $10,000 will earn a 4% interest rate while a balance of $2,500 would only earn 3%
$1,000-$5,000 3%$5,001-$10,000 4%$10,001-$15,000
5%$15,001-$20,000
6%
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© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 18Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at
the University of Arizona
Money Market Deposit Account
$ACCESSIBILITY Less liquid than checking and
savings accounts$Accessibility is limited to a certain
number of transactions per month (usually 3-6)
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© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 19Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at
the University of Arizona
Money Market Deposit Account
$FEATURES Minimum amount required to open
the account, often $1,000 If the average monthly balance
falls below a specified amount, the account will earn a lower interest rate for the entire month
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© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 20Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at
the University of Arizona
$ADDITIONAL INFORMATION Interest earned on the account
must be reported on your income taxes (unearned income) in the year it was earned$You will receive a form 1099 that tells you
the total interest you earned for the year
Money Market Deposit Account
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© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 21Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at
the University of Arizona
$DEFINITION An insured interest
earning savings tool that allows restricted access to the funds
Deposits have to be held for a certain length of time$Usually 7 days to 8
years
$INTEREST Varies depending
upon the time length and amount of money deposited$The longer the
period of time, the higher the interest rate
Certificate of Deposit
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© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 22Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at
the University of Arizona
Certificate of Deposit
$ACCESSIBILITY Less liquid than checking, savings,
and money market deposit accounts$Large fees are assessed if funds are
withdrawn before the end of the designated time period
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© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 23Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at
the University of Arizona
Certificate of Deposit
$FEATURES Minimum deposits range from
$100-$250,000 Low risk and no fees if funds are
held for the designated time period
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© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 24Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at
the University of Arizona
$ADDITIONAL INFORMATION Interest earned on the account
must be reported on your income taxes (unearned income) in the year it was earned even if you don’t touch the money$You will receive a form 1099 that
tells you the total interest you earned for the year
Certificate of Deposit
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© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 25Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at
the University of Arizona
US Savings BondE now EE
$DEFINITION Current bonds purchased for face
value from the U.S. Government $Loan given to the government$As of 2012, all bonds are electronic—
no paper
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© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 26Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at
the University of Arizona
US Savings Bond
$INTEREST Earns interest up to 30 years then
mature (stops)
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© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 27Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at
the University of Arizona
US Savings Bond
$ACCESSIBILITY Least liquid of all the savings tools
$Access to funds is restricted$Can only be redeemed after 1 year with
a substantial penalty$Can be redeemed after 5 years with 3
months of interest penalty$After that no penalty
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© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 28Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at
the University of Arizona
Savings Bond
$FEATURES Cannot be transferred; whoever
owns it must cash it in—if die, goes to estate
Purchased for $25 - $10,000 Any one SS# is allowed a total
yearly bond purchase of no more than $10,000
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© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 29Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at
the University of Arizona
Savings Bond
$ADDITIONAL INFORMATION Taxes
$Interest earned on a bond is tax exempt until redeemed (cashed in)
$ Once cashed in or when bond matures (30 years), interest earned on the bond must be reported on your income taxes (unearned income)
$If the bond and its interest are used to pay for higher education the interest it earned will be tax exempt when redeemed
© Family Economics & Financial Education – May 2010 – Savings Unit – Choosing to SaveFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
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Liquidity
Examples of AssetsCash
Automobiles
Houses
Furniture
Assets: Everything an
individual owns with monetary
value.
Liquidity: How quickly and
easily an asset can be converted
to cash.
ClothingElectro
nics Savings
Accounts
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© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 31Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at
the University of Arizona
Liquidity
Checking Account
Savings Account
Money Market Deposit Account
Certificate of Deposit
Savings Bond
Most Liquid
Least Liquid
Lowest Interest
Highest Interest
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© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 32Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at
the University of Arizona
Choosing a Savings Tool
$ Different savings tools can be utilized to assist in reaching personal financial goals
$ Higher interest rates are a trade-off for lower liquidityHigher
Interest
Lower Liquidi
ty
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© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 33Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at
the University of Arizona
Choosing a Savings Tool
$ When and how often access is needed to funds helps determine which savings tool to use
An individual wants to
develop an emergency
savings fund
They need a very liquid
account
A savings account is very liquid
and accessible in emergency situations
Additional info savings
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© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 34Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at
the University of Arizona
Savings Tools Scenarios
$ Read each Savings Tool Scenario$ Discuss which savings tool would be
recommended for each scenario
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© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 35Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at
the University of Arizona
Savings Tools Scenario #1
Sean is a high school student that just received his first paycheck from
his new part-time job at the local grocery store. He currently has no expenses to pay, and his goal is to
save every paycheck from his job to buy a new car in two years. He needs
to find a savings tool that will help him reach his financial goal. Which savings tool would you recommend
Sean utilize and why?
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© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 36Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at
the University of Arizona
Savings Tools Scenario #2
Brittany recently moved into her first apartment. Before, she was living with her parents and had very few
expenses to keep track of. Now that she has to pay rent and utilities for her apartment, she needs to find a
savings tool that will help her manage her money and ensure she
can pay her bills every month. Which savings tool would you recommend
Brittany utilize and why? $
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© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 37Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at
the University of Arizona
Savings Tools Scenario #3
Bryan has a goal to become financially secure by developing an emergency
fund. He has been saving twenty percent of his net income for the past year and now has $2,000. He plans
to maintain this balance and only use this money for emergency expenses.
Which savings tool would you recommend Bryan utilize and why?
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© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 38Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at
the University of Arizona
Saving vs. Investing
Portion of current
income not spent on
consumption
Savings Purchase of
assets with the goal of increasing
future income or
wealth used for long-term
goals
Investing
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© Family Economics & Financial Education – May 2010 – Saving Unit – Savings Tools – Slide 39Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at
the University of Arizona
Savings vs. Investing
• Emergencies• Large Purchases
• Financial Security
Money saved is used to pay for: • Higher
Education• Buying a Home
• Retirement
Money invested is used to pay
for:
© Family Economics & Financial Education – May 2010 – Savings Unit – Choosing to SaveFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
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Liquid Assets
Savings are known as liquid assets, because they are
easily accessible (turned into cash) in emergency situations.
In most cases, investments are not as liquid as savings.
More Liquid
Savings Tools
Less LiquidInvestments
Of your assets, which are the most liquid?
© Family Economics & Financial Education – May 2010 – Savings Unit – Choosing to SaveFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
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Savings
Investing
Why are Saving & Investing Important?
Provides the
foundation for
financial security
Enhances and helps
build wealth
© Family Economics & Financial Education – May 2010 – Savings Unit – Choosing to SaveFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
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Saving vs. Investing Activity
• Directions:– A characteristic of saving or
investing will be identified– Decide which you think is
correct– Discuss the answer
© Family Economics & Financial Education – May 2010 – Savings Unit – Choosing to SaveFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
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Saving vs. Investing Activity
Characteristic:BUILDS WEALTH
Saving or Investing:INVESTING
© Family Economics & Financial Education – May 2010 – Savings Unit – Choosing to SaveFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
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Saving vs. Investing Activity
Characteristic:MORE LIQUID
Saving or Investing:SAVING
© Family Economics & Financial Education – May 2010 – Savings Unit – Choosing to SaveFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
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Saving vs. Investing Activity
Characteristic:USED TO PAY FOR
EMERGENCIESSaving or Investing:
SAVING
© Family Economics & Financial Education – May 2010 – Savings Unit – Choosing to SaveFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
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How is Wealth Measured?
• The components include: – Assets – Everything a person owns with
monetary value – Liabilities – Debts (what is owed to others) – Net Worth – the amount of money left when
liabilities are subtracted from assets (indicates wealth)
Assets
Liabilities
Net Worth
Net worth statement - Describes an individual or family’s overall financial
condition on a specified date
© Family Economics & Financial Education – May 2010 – Savings Unit – Choosing to SaveFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
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The Choices You Make Today Impact Your Future!
Increased Wealth!
Saving and investing…
Increase Assets
DecreaseLiabilities
© Family Economics & Financial Education – May 2010 – Savings Unit – Choosing to SaveFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
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True or False?Identify if each statement is true or
false…
□If Janie makes a one time investment of $500 at age 20 in a tool that earns the historic 12% average, by age 60 the $500 will become $46,525.
□
If Samuel invests $3,000 annually from ages 22-31 (a total of $30,000 invested) in a tool earning 10% interest, he will have $1.2 million dollars by age 65.
They are both true. Now we are going to learn how!
© Family Economics & Financial Education – May 2010 – Savings Unit – Choosing to SaveFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
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Time Value of MoneyMoney paid
out or received in
the future is not
equivalent to money
paid out or received
today
Three factors
affect how an
investment will grow.
Interest
Rate
Money
© Family Economics & Financial Education – May 2010 – Savings Unit – Choosing to SaveFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
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Interest Rate
Interest is the price of using money.
Interest rate is the percentage rate paid on the
money invested or saved
Are you earning interest on any money?
© Family Economics & Financial Education – May 2010 – Savings Unit – Choosing to SaveFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
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How Do Interest Rates Affect Time Value of Money?
$1,000 invested for 5 yearsInterest
RateAmount Investment
is Worth1% $1,051.013% $1,159.275% $1,276.287% $1,402.559% $1,538.62
Interest
Rate
More Mone
y
© Family Economics & Financial Education – May 2010 – Savings Unit – Choosing to SaveFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
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Time
The longer an
individual invests, the more money
he/she will make.
Interest
Rate
Money
© Family Economics & Financial Education – May 2010 – Savings Unit – Choosing to SaveFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
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A Little Goes a Long Way
• Sally Saver puts away $3,000 per year for 10 years, at age 22. She earns 10% on her investment.
• Sally invests a total of $30,000 and has earned $1,205,063 by the age of 65
• Ed Uninformed waits until he is 28 and contributes $3,000 at 10% for 37 years
• Ed invests a total of $111,000 and accumulates $1,079,856 by the age of 6553
© Family Economics & Financial Education – May 2010 – Savings Unit – Choosing to SaveFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
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Amount of MoneyThe larger
the amount of
money invested, the larger the return
on investment
will be
Interest
Rate
Money
© Family Economics & Financial Education – May 2010 – Savings Unit – Choosing to SaveFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
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Amount of Money
7% interest compounded annually for 5 years
Amount of Principal
Investment
Return on Investment
$100.00 $40.26$1,000.00 $402.55
$10,000.00 $4,025.52
Amount of
MoneyLarger Retur
n
© Family Economics & Financial Education – May 2010 – Savings Unit – Choosing to SaveFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
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Maximizing Your Return• Time:
– Invest for as long as possible!• Amount of Money:
– Invest as much as possible, as often as possible!
• Interest:– Invest at the highest interest rate
possible!– Use compounding interest that
compounds as frequently (annually, semi-annually, quarterly, monthly, daily) as possible!
© Family Economics & Financial Education – May 2010 – Savings Unit – Choosing to SaveFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
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Smart Investing
An investment earning an
interest rate of 2%
An investment earning an
interest rate of 2.1%
OR
Which would you choose?
© Family Economics & Financial Education – May 2010 – Savings Unit – Choosing to SaveFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
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Simple Interest
Compounding Interest
Simple Interest vs. Compounding Interest
• Interest earned on the principal investment
• Earning interest on the principal AND past interestPrincipal is the original
amount of money invested or saved
© Family Economics & Financial Education – May 2010 – Savings Unit – Choosing to SaveFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
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$1,000 x .05 x 3/12=$12.50$1,000 + $12.50=$1,012.50
$1,012.50 x .05 x 3/12=$12.66$1,012.50 + $12.66=$1,025.16
$1,025.16 x .05 x 3/12=$12.81$1,025.16 + $12.81=$1,037.97
$1,037.97 x .05 x 3/12=$12.98$1,037.97 + $12.98=$1,050.95
$1,000 invested at 5% interest rate compounded quarterly for 1 year
Return to slide 60
© Family Economics & Financial Education – May 2010 – Savings Unit – Choosing to SaveFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
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$1,000 .07 5 $350
Simple Interest Equation: Step 1
P(Principal)
r(Intere
st Rate)
t(Time
Period)
I(Intere
st Earned
)
$1,000 invested at 7% interest rate for 5 years
© Family Economics & Financial Education – May 2010 – Savings Unit – Choosing to SaveFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
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Simple Interest Equation: Step 2
P(Princip
al)
I (Interes
t Earned)
A(Amoun
t Investment is Worth)
$1,000 invested at 7% interest rate for 5 years
$1,000 $350 $1,3
50
© Family Economics & Financial Education – May 2010 – Savings Unit – Choosing to SaveFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
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Compounding Interest Equations
There are two equations for compounding interest
1. Single sum of money• Money invested only once at
the beginning of an investment
2. Equal number of investments spread over time• Equal amounts of money is
invested multiple times (once a month, once a year, etc.)
© Family Economics & Financial Education – May 2010 – Savings Unit – Choosing to SaveFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
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Compounding Interest Equation – Single Sum
$1,000 invested at 7% interest rate compounded quarterly for 5 years
(.07÷4) +1=1.017520 =1.41478 x
$1,000=$1414.78
Interest Rate # of times compounded per year
Amount Investment is
Worth
+1)(Total # of times compounded
=n; then take n
Answer from above x Principal=
© Family Economics & Financial Education – May 2010 – Savings Unit – Choosing to SaveFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
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Compounding Interest Equation – Single Sum
$1,000 invested at 5% interest rate compounded quarterly for 1 year
(.05÷4) +1=1.01254 =1.0509 x
$1,000=$1,050.95
Interest Rate # of times compounded per year
Amount Investment is
Worth
+1)(Total # of times compounded
=n; then take n
Answer from above x Principal=
Go back to slide 59 for comparison
© Family Economics & Financial Education – May 2010 – Savings Unit – Choosing to SaveFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
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DefinitionsReturn
is the profit or income generated by savings
and investing.Unearned income
is income derived from sources other than
employment, such as interest.
© Family Economics & Financial Education – May 2010 – Savings Unit – Choosing to SaveFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
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Smart InvestingWhich would you choose?
An investment
earning compoundin
g interest
An investment
earning simple interest
OR
© Family Economics & Financial Education – May 2010 – Savings Unit – Choosing to SaveFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
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Compounding Interest• The number of times interest is
compounded has an effect on return
• Interest compounding frequently will yield higher returns$1,000 invested at 7% for
5 yearsCompounding
MethodAmount
Investment is Worth
Daily $1,419.02Monthly $1,417.63Quartely $1,414.78
Semi-Annually $1,410.60Annually $1,402.55
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 72Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
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Rate of Return• Investments usually earn
higher rates of return than savings tools
• Rate of Return–The total return (earned) on
an investment expressed as a percentage of the amount of money investedTotal
Return
Amount of
Money Invest
ed
Rate of
Return
Remember: Return is the profit or income generated by savings
and investing.
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 73Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1What is Mandy’s
Rate of Return?Mandy saved $2,200 in a
money market deposit account. After one year, she
has a return of $110. What is Mandy’s rate of return?
$110 $2,200
.05 = 5%
Mandy’s rate of return on investment is 5%
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 74Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1What is Derek’s
Rate of Return?Derek invested $900. When he withdrew his money from the investment, he had a total of
$1,050. What is Derek’s rate of return?
$150 $900.167
= 16.7
%
Derek’s rate of return on investment is 16.7%
$1,050 $900 $150 Return
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 75Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
RiskPOTENTIA
L RETURN
RISK
Risk• The uncertainty regarding the outcome
of a situation or eventInvestment Risk
• The possibility that an investment will fail to pay the expected return or fail to pay a return at all
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 76Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
Investment Risk• Risk is a trade-off for the
potential to receive high returns• All investments carry some
level of risk
Financial Risk PyramidIllustrates the trade-offs between risk
and return for a number of saving and investing tools
What is the risk level of
savings tools?
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 77Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1Financial Risk
Pyramid
Wealth Accumulati
on- Investments
Financial Security- Savings Tools
SpeculationIncreasing
potential for higher returnsIncreasing risk
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 78Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
InflationInflation
The rise in the general level of prices
Inflation RiskThe danger that money won’t be worth
as much in the future as it is today
Inflation risk should not be a concern with savings since the
goal of savings is to provide current financial security
The rate of return on an investment should be
higher than the rate of inflation.
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 79Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1Investment
PhilosophyEach individual has a tolerance level for the
amount of risk they are willing to take on
Investment PhilosophyAn individual’s general
approach to investment risk
The greater the risk a person is willing to
make on an investment, the greater
the potential return will
be.
Generally divided into three categories: conservative, moderate, and aggressive
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 80Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1Portfolio
DiversificationPortfolio Diversification-
reduces risk by spreading investment money among a
wide array of investment toolsCreates a collection of
investments that will provide an acceptable
return with an acceptable exposure to risk
Assists with investment risk reduction
Referred to as “Building a Portfolio.”
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 81Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1Types of
Investment ToolsStocks Bonds
Mutual Funds
Index Funds
Real Estate
Speculative
Investments
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 82Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
Stocks• Stock
–A share of ownership in a company
• Stockholder or shareholder–Owner of the stock
Usually a stockholder owns a very small part
of a company.
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 83Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
Return on Stocks• The share of profits distributed
in cash to stockholders• Stockholder may or may not
receive dividends- depends on company profit
Dividends
• The current price that a buyer is willing to pay for stock
• If stock is sold for a market price higher than what was paid, stockholder will receive a return
• If stock is sold for a market price lower than what was paid, stockholder will lose money
Market Price
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 84Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
Corporate Bonds• A loan to a company• The company pays annual interest
to the investor until the maturity date is reached– The specified time in the future when
the principal (or initial investment) amount of the bond is repaid to the bondholder
– If company fails, bondholders are given some money before stockholders
Bonds are less risky
than stocks but do not have the
potential to earn as
much as a stock.
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 85Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
Mutual Funds• Mutual fund- Created when a
company combines the funds of many different investors and then invests that money in a diversified portfolio of stocks and bonds that is professionally managed.
Always research the fees
charged by a mutual
fund.
Reduces investment risk
by helping people diversify their portfolio
Fees can be high
Saves investors time
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 86Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
Index Fund• Index fund
– A mutual fund that was designed to reduce fees by investing in the stocks that make up an index
• Index- a group of similar stocks and bonds– Examples- Standard and Poor 500,
Nasdaq Composite Index, Dow Jones Industrial Average
• Offer high diversification with low fees
What is the difference between a
mutual fund and an
index fund?
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 87Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
Real Estate• Includes any residential or
commercial property or land as well as the rights accompanying that land
• A family home is not considered an investment asset
• Can be risky and more time consuming but has potential for large returns
Examples of real estate
investments include
rental units and
commercial property.
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 88Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1Speculative
Investments• Have the potential for
significant fluctuations in return over a short period of time–Examples- futures, options,
commercial paper, collectibles
• Recommended for people with an aggressive investment philosophy and a high level of financial security
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 89Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
futures• Contract to buy a specific
amount of an investment at a specific time in the future for a specific amount of money.
• Example–Farmer would sell 5000
bushels of wheat for $3.50/bushel for delivery on December 1, 2016.
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 90Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
Stock Option• The right to buy or sell a
specific amount of shares for a specific amount of money in a specified period of time (you don’t have to do this)
• Example–As a bonus, the company
you work for gives you a stock option to purchase 100 shares of company stock at $6/share until June 30, 2016.
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 91Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
Commercial Paper• A short-term loan given to a
company• Not usually backed by
collateral so generally purchased at a discount
• Example–Coca-Cola offers
commercial paper with a face value of $100 for $80 that matures June 30, 2016
–You pay $80 and at the end of June you get $100
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 92Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
DISCOUNT
BROKER
Buying and Selling Investments
Investors must utilize a brokerage firm that acts as a buying and selling agent
for the investor (except for when buying real estate and certain speculative
investments).FULL
SERVICE GENERAL
BROKERAGE FIRM
Complete investment
transactions
Offer investment advice and one-on-one attention
from a broker
Only complete
investment transactions
Offer no advice to investors
but charge 40-60% less
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 93Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
Services Offered for Investing
• Retirement Planning • Saving for Retirement • Nearing or In Retirement • Life Events • College Planning • Tax • Life Insurance • Estate Planning • Charitable Giving • Financial Guidance
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 94Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1Investment
Companies• Goldman Sachs • JP Morgan Chase • Morgan Stanley • Citigroup • Merrill Lynch• Barclays • Lazard • Credit Suisse • Deutche Bank • Wells Fargo
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 95Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
TaxationProfits earned on investments
are considered to be unearned income
Income taxes MUST be paid on this money
Includes all forms of returns: interest, dividends, and price
appreciationTaxes are due on most
investment returns in the year the unearned income is
received
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 96Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1Tax-Sheltered
Investments• The government tries to
encourage certain types of investments by making them tax-sheltered
• Tax-sheltered investments– Eliminate, reduce, or defer taxes
• Examples- retirement plans (IRA), education expenses (529 plan), health care expenses (employer-funded plan)
Tax-sheltered investments are not tax-free!
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 97Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1Tax-Sheltered
Investments• If taxes are not eliminated,
then the taxes are either paid when the money is put into the account or when the money is taken out of the account
• There are limits to the amount of money that can be invested
• An individual should invest as much money as possible in tax-sheltered investments
What is the benefit of a
tax-sheltered
investment if taxes still have to be
paid?
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 98Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1Employee-Sponsored
Investment Accounts• Allow employees to reduce
their tax liability and make investing automatic
• Money is automatically taken out of an employee’s paycheck
• Employers often contribute a portion of money to the investment with no additional cost from the employee
It is recommend
ed that a person
utilize these investment
tools as much as
possible if they are offered.
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 99Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
Rule of 72Rule of 72
Allows a person to easily calculate when the future
value of an investment will double the principal amount
72Intere
st Rate
Number of years
needed to double the principal
investment
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 100Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
Albert EinsteinCredited for
discovering the mathematical equation for
compounding interest, thus the
“Rule of 72.” At 10% interest rate, money
doubles every 7.2 years,
T=P(I+I/N)YN
“It is the greatest mathematical
discovery of all time.”
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 101Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1What Can the “Rule
of 72” Determine?How many years
it will take an investment to
double at a given interest
rate using compounding
interest
How long it will take debt to double if
no payments are made
The interest rate an
investment must earn to double within a specific time
period
How many times money (or debt) will double in a
specific time period
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 102Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
“Rule of 72” FYI• The rule is only an
approximation• The interest rate must remain
constant• Can’t add money, pay money
(loan), or take money out• Don’t convert % to decimals or
vice versa
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 103Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1Doug’s Certificate
of Deposit
• Invested $2,500 Interest Rate is 6.5%
Doug invested $2,500 into a Certificate of Deposit earning a 6.5%
interest rate. How long will it take Doug’s investment to double?
72 ÷ 6.5 11 Yrs=
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 104Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1Jessica’s Credit
Card Debt
• $2,200 balance on credit card 18% interest rate
Jessica has a $2,200 balance on her credit card with an 18% interest
rate. If Jessica chooses to not make any payments and does not receive late charges, how long will it take for
her balance to double?
72 ÷ 18 4 Yrs=
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 105Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
Jacob’s Car
• $5,000 to invest • Wants investment to double in 5
years
Jacob currently has $5,000 to invest in a car after graduation in 5 years. What interest rate is required for
him to double his investment?
724
years
18% interest
rate5 14.4%
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 106Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
Julie’s CollegeJulie wants to save for college. She is
5 years old now and has a possible investment that earns 8% interest.
She has $2,000 currently. How long will it take for her investment
to double? 72 8 9 years
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 107Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
How much money would Julie have when she was 14?
Answer the following:1) How long did she have the investment?2) How many times will the investment
double while she had the investment?
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 108Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
so Question 1) How long did she have the investment?
she’s 14 yrs old now and was 5 yrs old when she started
14 – 5 = 9 yrs that she had the investment
And
Question 2) How many times will the investment double while she had the investment?
9 yrs that she had the investment and 9 yrs to double
9 ÷ 9 =1 time that it doubles
so
$2,000 x 2 (doubled)= $4,000
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 109Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
23 years old?
Question 1) How long did she have the investment?
she’s 23 yrs old now and was 5 yrs old when she started
23 – 5 = 18 yrs that she had the investment
AndQuestion 2) How many times will the investment double while she had the investment?
18 yrs that she had the investment and 9 yrs to double
18 ÷ 9 =2 times that it doubles so
$2,000 x 2 (doubled)= $4,000$4,000 x 2 (doubled)= $8,000
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 110Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G142 years old?
Question 1) How long did she have the investment?
she’s 42 yrs old now and was 5 yrs old when she started
42– 5 = 37 yrs that she had the investment
AndQuestion 2) How many times will the investment double while she had the investment?
37 yrs that she had the investment and 9 yrs to double
37 ÷ 9 =4 times that it doubles (approximately)so
$2,000 x 2 (doubled)= $4,000$4,000 x 2 (doubled)= $8,000
$8,000 x 2 (doubled)= $16,000$16,000 x 2 (doubled)= $32,000
© Family Economics & Financial Education – June 2010 – Investing Unit – Introduction to Investing – Slide 112Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.12.1.G1
Advisor Expectations• Prepare a Needs Analysis• Won’t Make any Specific
Recommendations Initially• Try to Help you Understand your
Financial Situation
© Family Economics & Financial Education – May 2010 – Savings Unit – Choosing to SaveFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.14.1.G1
Make Saving and Investing Automatic
• Saving and investing should be considered a fixed expense that is automatic
• Pay yourself first is a saving strategy that means to set aside a predetermined portion of money for saving before any money is used for spending
© Family Economics & Financial Education – May 2010 – Savings Unit – Choosing to SaveFunded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona
1.14.1.G1
Automatic Transfers&/or
Payroll Deduction
How can savings and investing become automatic?