NEFE High School Financial Planning Program Unit Three – Investing: Making Money Work for You Bell Ringer: pg. 28 True/False 1.Adam started saving $50

NEFE High School Financial Planning ProgramNEFE High School Financial Planning ProgramUnit Three – Investing: Making Money Work for You

Bell Ringer: Bell Ringer: pg. 28 pg. 28 True/FalseTrue/False

1.1. Adam started saving $50 per month when he Adam started saving $50 per month when he turned 18, while Beth started saving $100 per turned 18, while Beth started saving $100 per month when she turned 24. They both earn 6% month when she turned 24. They both earn 6% on their money. Beth will have more money by on their money. Beth will have more money by the time they both turn 30.the time they both turn 30.

2.2. A dollar today is worth less than a dollar in the A dollar today is worth less than a dollar in the future.future.

3.3. The higher the interest rate, the less time it The higher the interest rate, the less time it takes to reach a savings goal.takes to reach a savings goal.


Unit 3 - Investing: Unit 3 - Investing: Making Money Work for YouMaking Money Work for You


Saving vs InvestingSaving vs Investing

SavingSaving: short term goals: short term goals• money very safe money very safe • Earns a small amount of interestEarns a small amount of interest• Easy to get money when you need itEasy to get money when you need it

InvestingInvesting: longer term goals: longer term goals• No guarantee money will growNo guarantee money will grow• Normal for investments to rise and fall in Normal for investments to rise and fall in

value over timevalue over time• Long-run can earn more than savingsLong-run can earn more than savings


3-A

Savings and InvestmentsSavings and Investments

UniqueUniqueSavingsSavingsFeaturesFeatures

UniqueUniqueInvestmentInvestment

FeaturesFeatures

CommonCommonFeaturesFeatures

What are some features common to both What are some features common to both investments and savings?investments and savings?


The Advantage of Starting The Advantage of Starting EarlyEarly

• ““You” invest $2,000 every year in an account You” invest $2,000 every year in an account that earns 7% each year for 10 years that earns 7% each year for 10 years • You let your money sit – still earning 7% - until age 65You let your money sit – still earning 7% - until age 65

Total Investment = $20,000Total Investment = $20,000

• ““Your Sister” waits until she is 31 – did the same Your Sister” waits until she is 31 – did the same thing you did - $2,000 @ 7% for 35 years until thing you did - $2,000 @ 7% for 35 years until age 65age 65

Total Investment = $70,000Total Investment = $70,000

Who has more money?Who has more money?

You = $361,418You = $361,418 Your Sister = $276,474Your Sister = $276,474


Time Value of MoneyTime Value of Money

1.1. The more The more moneymoney you have to save ore you have to save ore invest, the more money you are likely to invest, the more money you are likely to earnearn

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

3.3. The sooner you invest your money, the The sooner you invest your money, the more more time time it has to make new moneyit has to make new money


Investing Weekly at 5% InterestInvesting Weekly at 5% Interest

3-B

Amount SavedAmount SavedPer WeekPer Week

Value AfterValue After10 Years10 Years

$ 7.00$ 7.00

$ 14.00$ 14.00

$ 21.00$ 21.00

$ 28.00$ 28.00

$ 35.00$ 35.00

$ 4,720$ 4,720

$ 9,440$ 9,440

$ 14,160$ 14,160

$ 18,880$ 18,880

$ 23,600$ 23,600

1


InterestInterest

• Earned Interest – payment you receive for Earned Interest – payment you receive for allowing a financial institution to use your allowing a financial institution to use your moneymoney

• Simple Interest – a “simple” fee paid to you Simple Interest – a “simple” fee paid to you on your principalon your principal

Interest = Principal x interest rate x timeInterest = Principal x interest rate x timeExample:Example:

You open a savings account with $1,000 at a 3% simple You open a savings account with $1,000 at a 3% simple APR. What will you earn in interest in the first year?APR. What will you earn in interest in the first year?

$1,000 x .03 x 1 = $30 interest earned every year$1,000 x .03 x 1 = $30 interest earned every year


Compound InterestCompound Interest

***One of the MOST POWERFUL principals in ***One of the MOST POWERFUL principals in personal finance! ***personal finance! ***

• Earning interest on interestEarning interest on interest• Each time your interest compounds, it gets Each time your interest compounds, it gets

added back to your account and becomes added back to your account and becomes part of your principalpart of your principal

Example:Example:

$1,000 x .05 x 1 = $50 $1,000 x .05 x 1 = $50 interest in year oneinterest in year one

$1,050 x .05 x 1 = $52.50 $1,050 x .05 x 1 = $52.50 interest earned in year twointerest earned in year two

What will you start with in year 3?What will you start with in year 3?


CompoundingCompounding

You can use this formula to calculate compound You can use this formula to calculate compound interest:interest:

A = P (1 + i)A = P (1 + i)

A = amount in the accountA = amount in the account

P = principalP = principal

I = interest rateI = interest rate

N = number of years compoundedN = number of years compounded

How much will you have after 5 years if you put How much will you have after 5 years if you put $100 principal in account earning 10%$100 principal in account earning 10%

n


3-G3-G

Answers to Exercise 3BAnswers to Exercise 3B

8%

4% $10.40 $10.82

Interest Rate 1 Year 2 Years 4 Years 6 Years

?? ?? ?? ??

????

$10.80 $15.87$13.60$11.66

$12.65$11.70

654321


Rule of 72Rule of 72

3-H3-H

7272Interest RateInterest Rate

==Years Needed toYears Needed to

Double InvestmentDouble Investment

7272 Interest RateInterest RateRequiredRequired==

Years Needed toYears Needed toDouble InvestmentDouble Investment


Bell Ringer: pg. 28Bell Ringer: pg. 28

1. Adam started saving $50 per month when he turned 18, 1. Adam started saving $50 per month when he turned 18, while Beth started saving $100 per month when she while Beth started saving $100 per month when she turned 24. They both earn 6% on their money. Beth will turned 24. They both earn 6% on their money. Beth will have more money by the time they both turn 30.have more money by the time they both turn 30.

FALSE – Although they both invested $7,200 FALSE – Although they both invested $7,200 over the years, the power of compound over the years, the power of compound interest was working longer for Adam, so he interest was working longer for Adam, so he will have more money when they turn 30. will have more money when they turn 30.



2. A dollar today is worth less than a dollar 2. A dollar today is worth less than a dollar in the future.in the future.

FALSE. FALSE. A dollar is worth more today A dollar is worth more today than a dollar in the future because of than a dollar in the future because of inflation. inflation.



3.3. The higher the interest rate, the less time The higher the interest rate, the less time it takes to reach a savings goal.it takes to reach a savings goal.

TRUE. TRUE. The higher the rate, the faster The higher the rate, the faster the money will grow, and the sooner the money will grow, and the sooner you will reach a savings goal. you will reach a savings goal.

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NEFE High School Financial Planning Program Unit Three – Investing: Making Money Work for You Bell Ringer: pg. 28 True/False 1.Adam started saving $50