Investing: Making Money Work For You

October 24, 2009

What Do You Think?(True/False)

• 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.

• 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 when they both turn 30.

The Advantage of Starting Early

• You invest start investing $2000 every year when you turn 18. You put it in an account that grows by 7% each year and invest the same amount for ten years.

• Your sister doesn’t start investing until she turns 31. She puts aside $2000 every year for the next 35 years in an account that also earns 7%

• Who will have more money at age 65?

The Advantage of Starting Early

• Total Investments:– Yours: $2000 * 10 years = $20,000– Your sister’s: $2000 * 35 years = $70,000

• YET BECAUSE YOU STARTED EARLY…• You will have $361,418• Your sister will have $276,474• At age 65, you will have $84,944 more

Saving ≠ Investing

• Saving: what people usually do to meet short-term goals. Your money is very safe in a savings account, and it is usually earning a small amount of interest. It’s also easy for you to get your money as soon as you need it.

• Investing: setting your money aside for longer-term goals. There’s no guarantee that the money you invest will grow. In fact, it’s normal for investments to rise an fall in value over time. But in the long run, you can earn a lot more than you usually would in a savings account.

The Time Value of Money

• Is a dollar always worth a dollar?• The time value of money: the relationship between

time, money and the rate of interest• Money: The amount you invest, or principal• Inflation: the rise in the cost of goods and services

over time, decreases the spending power of a dollar• Earned Interest: the payment you receive for

allowing a financial institution or corporation to use your money.

The Time Value of Money

• Thus…• The more money you have to save or invest,

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

more money you are likely to have.• The sooner you invest your money the more

time it has to make new money, making it likely you could earn much more.

Exercise: The Power of Compounding

• Compounding is the idea of earning interest on interest.

• Assuming you have $10 to invest, fill in the missing amounts

Interest 1 year 2 years 4 years 6 years

4% $10.40 $10.82 8%

The Rule of 72

• The rule of 72: an easy estimate for computing compounding interest

• To see how long it will take to double your money, divide the number 72 by the interest.

• For example, if you want to know how long it will take you to double $200 at 6% interest…– 72/6% interest = 12 years to make $400

Investment Options

• There are many ways for you to put your money to work for you.

• Income vs. Growth Investments• Income: Get paid—in cash—for owning the account or

investment, typically for setting money aside for a few months or few years – Less risky

• Growth: Buy and hold an investment with the hope that it will increase in price over time, typically for setting money aside for long periods of time– More risky

Income Investments

• Savings Accounts• U.S. Savings Bonds• Certificates of Deposit (CD’s)• Money Market Deposit Amounts• Money Market Mutual Funds• Corporate and Government Bonds

Growth Investments

• Stocks• Real Estate• Collectibles• Mutual Funds

Many Baskets of Eggs

• Like your mother said, do NOT put all your eggs in one basket

• Diversification: reducing investment risk by putting money in different types of investments

• Create a diverse investment portfolio by taking advantage of a number of investment options

Assignment 3: Your Investing Plan

• Outline a plan to use income and growth investments to help you meet your intermediate- and long-term financial goals

• Include the following– Details of at least two investment strategies you

plan to use– A summary of how your saving and investing plan

will help meet your financial goals