Three reasons to invest

Transcription

1 Investing

2 Three reasons to invest Investing helps beat inflation Investments should grow faster Investing increases wealth Investments increase wealth faster than savings accounts Investing is fun and challenging Opportunity to take risk Gain knowledge

3 7 Wise practices of investing G1 1. Define you financial goals 1. Specific monetary targets and timetable 2. Go slowly 1. Knowledge is power 2. If it sounds to good to be true it probably is 3. Follow through 1. Don t wait for future dates 4. Keep good records 1. Bank statements, investment balances

4 7 Wise practices of G1 investing 5. Seek good investment advice 1. Get advice from trained professionals 2. Ask questions 6. Keep knowledge current 1. Stay up on stock market and economic issues 7. Know you limits 1. How much money can you afford to risk? 2. How much risk are you willing to take?

5 Time Value of Money Family Economics & Financial Education

6 Time Value of Money Time value of money -- Money to be paid out or received in the future is not equivalent to money paid out or received today

7 Simple Interest Simple interest -- Interest earned on the principal investment Principal -- The original amount of money invested or saved Amount invested x annual interest rate x number of years = interest earned Ex. 1,000 x 0.10 x 2=$200 $1,000 Invested at 10% Simple Interest Rate 1 Year 2 Years $1, $1,200.00

8 Compounding Interest Compounding interest -- Earning interest on interest Make your money work for you $1,000 Invested Compounded Annually at 10% Interest Rate 1 Year 2 Years $1, $1,220.39

9 Three Factors Affecting the Time Value Calculations G1 Time Amount invested Interest rate

10 Time The earlier an individual invests, the more time their investment has to compound interest and increase in value

11 A Little Goes a Long Way Sally Saver puts away $3,000 per year in her IRA account earning 10% - she does this for 10 years then stops. Sally accumulates $1,239,564 by the age of 65. Ed Uninformed waits until he is 28. He must contribute $3,000 to his IRA account earning 10% for 38 years. Ed accumulates $1,102,331 by the age of 65

12 Amount Invested small amount a month is better than nothing Ex. At 8% interest, invested at age 17, one dollar per day will become $17, by age 65 Larger amount invested = greater return Always pay yourself first Savings should be a fixed expense

13 The Costs Add Up Investing at age 18 at 8% interest until age 65. Item Average Yearly Expense Future Value Daily cup of coffee at $2.50 $ $38, Eating lunch out 5 days per week at a cost of $5-$10 each time Daily can of soda or chips at $1.00 each or both a can of pop and chips $2.00 $1, $2, $55, $1, $ $ $15, $30, Daily candy bar at $1.00 $ $15,481.78

14 Interest Rate The percentage rate paid on the money invested or saved Higher interest=more money earned $1,000 Invested Compounded Monthly Interest Rate 1 Year 5 Years 10 Years 4% $1, $1, $1, % $1, $1, $1,819.40

15 Interest Rates Fixed interest rate -The rate will not change for the lifetime of the investment Rate guarantees a specific return = moderate risk Adjustable interest rate- rate is raised or lowered at periodic intervals according to the prevailing interest rates in the market Rate can go up or down = more risk

16 Risk A higher interest rate generally has a greater risk

17 Time Value of Money Calculations G1 Present value PV=(FV)(1+i) -N Future value FV=(PV)(I+i) N I= Interest Financial calculators may be used to complete these calculations.

18 Review Compounding interest earns interest on interest Increased time=more interest earned Higher principle=more interest earned Higher interest rate=more interest earned

19 The Rule of 72 The most important and simple rule to financial success.

20 Rule of 72 The time it will take an investment (or debt) to double in value at a given interest rate using compounding interest. 72 = Years to double Interest Rate

21 Albert Einstein Credited for discovering the mathematical equation for compounding interest, thus the Rule of 72 It is the greatest mathematical discovery of all time. T=P(I+I/N) YN

22 What the Rule of 72 can determine G1 How many years it will take an investment to double at a given interest rate using compounding interest. How long it will take debt to double if no payments are made. The interest rate an investment must earn to double within a specific time period. How many times money (or debt) will double in a specific time period.

23 Doug s Certificate of G1 Deposit Doug invested $2,500 into a Certificate of Deposit earning a 6.5% interest rate. How long will it take Doug s investment to double? Invested $2,500 Interest Rate is 6.5% 72 = 11 years to double investment 6.5%

24 Jessica s Credit Card G1 Debt Jessica has a $2,200 balance on her credit card with an 18% interest rate. If Jessica chooses to not make any payments and does not receive late charges, how long will it take for her balance to double? $2,200 balance on credit card 18% interest rate 72 = 4 years to double debt 18%

25 Rhonda s Treasury G1 Note Rhonda is 22 years old and would like to invest $2,500 into a U.S. Treasury Note earning 7.5% interest. How many times will Rhonda s investment double before she withdraws it at age 70? 72 = 9.6 years 7.5% to double investment Age Investment 22 $2, $5, $10, $20, $40, $80,000

26 Conclusion The Rule of 72 can tell a person: How many years it will take an investment to double at a given interest rate using compounding interest; How long it will take debt to double if no payments are made; The interest rate an investment must earn to double within a specific time period; How many times money (or debt) will double in a specific time period.