Saving and Investing Basics4.03

Saving and Investing Basics Why borrow money?

Individuals- to purchase large items such as homes and cars

Businesses- to operate or expand their business (purchase a building, replace old equipment, offer new products)

Government- expand transportation, schools or other public services

Saving and Investing Basics What is saving?

• Putting away money for future use What is investing?

• Using savings to earn more money for the future

Saving and Investing Basics continued

Saving influences on economic activity• Makes more money available to individuals,

businesses and the government• When borrowed money is spent

> demand for goods and services increase> more jobs> creates spending for workers

Saving and Investing Basics continued Two main goals of savers and

investors: • Immediate income• Long-term growth (money for the future)

Growth of savings- Interest is money you receive while others borrow your money• Simple interest is interest paid on the

amount of money deposited for a period of time

Saving and Investing Basics continued

How is simple interest calculated?**I = P * R * T

P= principal R= rate T= timeI= Interest

Example: P= $1000 R= 5% T= 1 yr $1000 * 5% * 1 yr = $50.00

Saving and Investing Basics continued

Compound interest is computed on amount saved plus the interest previously earned

How is compound interest calculated?

Year Beg. Balance

10% Ending Balance

1 $1000 $100 $1100

2 $1100 $110 $1210

3 $1210 $121 $1331

Savings GrowthSimple interest$2,000 at 10%

Year 1: $2,000 * .10 = $200

$2,000 + $200 = $2,200Year 2:

$2,000 * .10 = $200$2,200 + $200 =

$2,400What would the value

be at the end of year 3?

Compound interest$2,000 at 10%

Year 1: $2,000 * .10 = $200

$2,000 + $200 = $2,200Year 2:

$2,200 * .10 = $220$2,200 + $220 =

$2,420What would the value

be at the end of year 3?