UNIT 5: InvestingPart 2: Savings Plan

Dollars & Sense

Why Have a Savings Plan?

• Savings Plan: putting money aside in a systematic way to help reach a financial goal.

• Savings plans are used to buy the goods and services we need and want.•Also used for future expenses and

emergencies.

Using Savings for Investing

• Investing: using your savings to earn more money.

• In order to invest your money, you must have money set aside in order to do so.

• CAUTION: Investments are not guaranteed to make $$$$$ (NOT FDIC or NCUA INSURED)

Making Savings Work for You!

• Interest: money you receive for letting others use your money. • Savings put to work to earn interest is a form of

investment.

• Principal: money that you put into savings or investment. Your contribution to the savings plan.

Example: Joe put $100 in a savings account. The $100 is the principal.

Earning Interest• Simple Interest: computed only on the

amount saved. • Formula = Principal X Rate X Time

Simple Interest Example

• Example: David saves $50 a month. In a year his savings will be $600. After 1 year, his savings will be $600. He earns 10% annual interest.

• After 1 year, he will have made $60. - - for doing nothing!

$50 X 12 Months = $600

$600 X 10% X 1 Year = $60

Earning Interest

• Compound Interest: computed on the amount saved plus the interest previously entered. • Interest can be compounded daily, monthly,

quarterly, semiannually, or annually

Which Grows faster the savings rate or the investing rate?

Selecting an Investment•When deciding how to invest your savings,

three main factors should be considered.• Safety• Rate of Return (Yield)• Liquidity

Selecting a Savings Plan• Safety: assurance that the money you

have invested will be returned to you.•How safe are the following?• Savings Account at Local Bank• Purchasing a House• Investing in a Stock

Selecting a Savings Plan• Rate of Return (Yield): the

percentage of interest that will be added to your savings over a period of time.• How much will you “get back”

in return for the invested amount of money.

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2

3

4

5

6

7

8

9

10

Potential Rate of Return

Risk

1 2 3 4 5 6 7 8 9

As the risk of the investment increases, so does the potential rate of return Usually higher

rates of return and greater risks of loss go together.

The Rule of 72

• The Rule of 72 gives you the answer to the question of how long it will take to double your money at various rates of return.

Interest Rate Years to Double

1% 72

2% 36

3% 24

4% 18

5% 14

6% 12

7% 10.3

8% 9

9% 8

10% 7.2

11% 6.5

12% 6

15% 4.8

Selecting a Savings Plan• Liquidity: the ease with which an investment can

be changed into cash without losing any of its value.•When an investment can be turned into money

quickly, it is said to be a liquid investment.

Which is more of a liquid investment?

Bank AccountWorth

$5,000

LandWorth

$5,000

Savings/Investing Activity•Worksheet • Saving! Every penny counts!