Investing:Making Money Work For You

In this Unit We Will:

• Know the difference between saving and investing

• Be familiar with the time value of money• Be able to compare investment options• Recognize the risks and rewards of investing• Know how to integrate investing into your

financial planning

What Do You Think?• Adam started saving $50 per month when he turned 18, while Beth

started saving $100 per month when she turned 24. They both earn 6% on their money. Beth will have more money by the time they both turn 30.

• A dollar today is worth less than a dollar in the future.• The higher the interest rate, the less time it takes to reach a savings

goal.• The smaller the down payment someone makes on a car, the less

interest the owner pays for a car loan.

TrueFalseTrue

False

Saving vs. Investing

• Savings: Saving money for short term goals; small interest

• Investing: Setting money aside for longer-term goals; investments can earn a lot more than you can usually make in a savings account

The Time Value of Money

• refers to the relationship among time, money, and rate of interest

• Inflation: a rise in the cost of goods and services over time

• Earned interest: the payment you receive for allowing a financial institution or corporation to use your money

Time, Money and Rate of Interest

1. The more money you have to save or invest, the more money you are likely to earn.

2. The higher the rate of interest you earn, the more money you are likely to have.

3. The sooner you invest your money, the more time it has to make new money, making it likely that you could earn much more as a result.

Compound Interest

• The idea of earning interest on interest

11.70 12.65

10.80 11.66 13.60 15.87

A = P (1+ i)• A = amount in the account• P = is the principle (which is the

original amount invested)• i = interest rate is expressed as a

decimal• n = number of years compounded

n

The Rule of 72• How long will it take to double your money?

Divide 72 by the interest rate• What interest rate will double my money in a

certain amount of time?Divide 72 by the number of years

72 / 24 = 3%

72 / 8% = 9 years

72 / 11 = 6.5%

72 / 7.75% = 9.29 years

Answer the following questions:

1. Diana invests $500 today in an account earning 7%. How much will it be worth in 3 years?

2. Now Diana finds an account that earns 10%. How much will her $500 be worth at the new rate in 3 years?

3. What interest rate would be necessary to double $500 in 10 years?

4. How many years would it take to double $500 in at 8%?

Risk/Reward Trade Off

• the principle that an investment must offer higher potential returns to compensate for the increased potential unpredictability.

The greater the risk you take with your money…

the higher

the potential returnson your invest-ments.

the lower the

potential returns will

likely be

lower the amount of risk

you take

Investments Add Up!

• Interests: the return earned on an investment• Dividends: a share of the profits you receive as

a stockholder• Capital gains: Return from growth of stock

prices; If an investor buys a stock and sells it later at a higher price, the difference between the purchase price and the selling price

• Rate of Return/Interest: the annual percentage return on an investment; how fast your money is growing

Financial Risk Pyramid

Speculative Investment

ToolsIncreasing potential for

higher returns

Increasing risk

Savings ToolsChecking

AccountSavings Account

Money Market Deposit Account

Certificate of Deposit

Savings Bonds

Investment Tools

Bonds

Stocks

Mutual Funds

Real Estate

Options Collectibles

Futures

Commercial Paper

Index Funds

The risk level for specific investment tools may vary

Investment Options• Savings Accounts: small interest; safe low risk;

very liquid• U.S. Savings Bonds: length of period 1-30 years;

higher interest than savings accounts; lose interest if you cash too early– Bond: a formal agreement where the borrower can use

your money a set period of time and in return you get interest

• Certificates of Deposits (CDs): Bank and credit union version of savings bonds; 3,6, 12 months; higher rate of interest than u.s. savings bonds; lose interest if you cash too early

Investment Options

• Money Market Deposit Accounts: Offered by Banks and CU; work like checking accounts; higher rate of interest than savings accounts but lower than CDs; insured by the government; higher minimum balance than savings account

• Money Market Mutual Funds: similar to MMDAs; higher interest than MMDAs; not insured or guaranteed by the gov’t; but pretty safe

Investment Options

• Corporate and Government Bonds (Treasury bonds): highest interest rate among the income investments; gov’t bonds safer than corporate; corporate has higher interest rates; time range 2-30 years

• Growth Investments: stocks; own part of the company; risky; make more money over a longer period of time; fairly liquid

• Real Estate: not liquid• Collectibles: high in risk