Unit 3 Saving & Investing. A Little Can Add Up Save this each week … at % interest … in 10 years...
Transcript of Unit 3 Saving & Investing. A Little Can Add Up Save this each week … at % interest … in 10 years...
A Little Can Add Up
• Save this each week … at % interest … in 10 years you’ll have• $7.00 5% $4,720• 14.00 5% $9,440• 21.00 5% $14,160• 28.00 5% $18,880• 35.00 5% $23,600
• You can buy … two fast food meals or one movie ticket (and a candy bar) or save $7.00 this week.
• You can buy … two small cheese pizzas or one large pepperoni pizza, delivered or one new CD or save $14.00 this week.
• What can you give up to save for your financial goals?
Types of Savings Accounts
• statement account• Depositor receives monthly statements.• Accounts are usually accessible through 24-hour automated
teller machines (ATMs).• Interest rates are lower at banks and savings than at credit
union. • Funds are easily accessible.
• interest-earning checking account• Combines benefits of checking and savings.• Depositor earns interest on any unused money in his/her
account.
Choosing a Savings Account
• Interest Rate: • All money earned comes from this factor.
• Balance Requirements • Some accounts require a certain balance before paying any
interest.
Truth in Savings Act
• The Truth in Savings Act (Federal Reserve Regulation DD) requires financial institutions to disclose the following information on savings account plans they offer:• Fees on deposit accounts• The interest rate• Other terms and conditions• Truth in Savings defines the year as 365 days rather than 360, 366,
or some other number.
Certificate of Deposit
• what they are and how they work• Bank pays a fixed amount of interest for a fixed amount of
money during a fixed amount of time.
• benefits• No risk, Simple, No Fees, and offers high interest rates than
savings accounts.
• trade-offs• Restricted access to your money• Withdrawal penalty if cashed before expiration date (penalty
might be higher than the interest earned)
Simple Interest
• Principal (Dollar Amount)* Interest Rate * Length of Time = Amount Earned
• Example• If you had $100 in a savings account that paid 6% Simple
Interest, during the first year you would earn $6.00• The account would continue to grow at $6.00 per year
despite the accumulated interest.
Compound Interest
• Interest is paid on original amount of deposit, plus any interest earned. • (Original Amount + Earned Interest) * Interest Rate * Length of Time
= Amount Earned
• Example: • If you had $100 in a Savings Account that paid 6% interest
compounded annually, the first year you would earn $6.00 in interest. • $100 * .06 * 1 = $6.00• $100 + $6 = $106.00
• Year 2• $106 * .06 * 1 = $6.36• $106 + $6.36 = $112.36
Compound Interest
• EASY Formula
• Future Value of Money = Principal * (1+Interest Rate)² (number of years it is compounding)
© Family Economics & Financial Education – Revised November 2004 – Saving Unit – Rule of 72Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at
the University of Arizona
The Rule of 72
The most important and simple rule to financial
success.
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© Family Economics & Financial Education – Revised November 2004 – Saving Unit – Rule of 72Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at
the University of Arizona
Rule of 72
72 = Years to
Interest Rate
double investment (or debt)
The answers can be easily discovered by knowing the Rule of 72 The time it will take an investment (or debt) to
double in value at a given interest rate using compounding interest.
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© Family Economics & Financial Education – Revised November 2004 – Saving Unit – Rule of 72Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at
the University of Arizona
Albert Einstein
“It is the greatest mathematical
discovery of all time.”
Credited for discovering the mathematical equation for
compounding interest, thus the
“Rule of 72”72 / Years to double investment = Interest Rate Required
72/Interest Rate = Years to double a sum of money
1.14.3.G1
© Family Economics & Financial Education – Revised November 2004 – Saving Unit – Rule of 72Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at
the University of Arizona
What the “Rule of 72” can determine 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.
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© Family Economics & Financial Education – Revised November 2004 – Saving Unit – Rule of 72Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at
the University of Arizona
Things to Know about the “Rule of 72”The “Rule of 72” Is only an approximation The interest rate must remain constant The equation does not allow for
additional payments to be made to the original amount
Interest earned is reinvested Tax deductions are not included within
the equation
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© Family Economics & Financial Education – Revised November 2004 – Saving Unit – Rule of 72Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at
the University of Arizona
Doug’s Certificate of Deposit
Invested $2,500 Interest Rate is 6.5%
72 = ____ years to double investment
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?
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© Family Economics & Financial Education – Revised November 2004 – Saving Unit – Rule of 72Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at
the University of Arizona
Another ExampleThe average stock market return
since 1926 has been 11%
Therefore, every ______ years an individual’s investment in the stock
market has doubled
72 = _______ years to double investment
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© Family Economics & Financial Education – Revised November 2004 – Saving Unit – Rule of 72Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at
the University of Arizona
Jessica’s Credit Card Debt
$2,200 balance on credit card 18% interest rate
72 = ____ years to double 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?
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© Family Economics & Financial Education – Revised November 2004 – Saving Unit – Rule of 72Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at
the University of Arizona
Rhonda’s Treasury Note
72 =______ years
% to double investment
Age Investment
22 $2,500
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?
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© Family Economics & Financial Education – Revised November 2004 – Saving Unit – Rule of 72Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at
the University of Arizona
Another Example $500 invested at age 18 7% interest How many times will investment double before
age 65?
72 =______ years
to double investment
Age Investment
18 $500
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© Family Economics & Financial Education – Revised November 2004 – Saving Unit – Rule of 72Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at
the University of Arizona
TaxesA person can choose to invest into two
types of accounts:Taxable Account – taxes charged to
earned interestTax Deferred Account – taxes are
not paid until the individual withdraws the money from the investment
Bonds
• What Are They• A bond is an “IOU,” certifying that you loaned money to a
government or corporation and outlining the terms of repayment.
• How They Work• Buyer may purchase bond at a discount. The bond has a fixed
interest rate for a fixed period of time. When the time is up, the bond is said to have “matured” and the buyer may redeem the bond for the full face value.
• Types• Corporate, Municipal, Federal Government (Safest)
Mutual Funds
• What Are They• Professionally managed portfolios made up of stocks, bonds, and
other investments.
• How They Work• Individuals buy shares, and fund uses money to purchase stocks,
bonds, and other investments.• Profits returned to shareholders monthly, quarterly, or semi-
annually in the form of dividends.
• Advantages• Allow small investors to take advantage of professional account
management and diversification normally only available to large investors.
Stocks
• What Are They• Stock represents ownership of a corporation. Stockholders own
a share of the company and are entitled to a share of the profits as well as a vote in how the company is run.
• How Earnings Are Made• Company profits may be divided among shareholders in the
form of dividends. Dividends are usually paid quarterly.• Larger profits can be made through an increase in the value of
the stock on the open market.
Stocks
• Advantages• If the market value goes up, the gain can be considerable.• Money is easily accessible.
• Disadvantages• If market value goes down, the loss can be considerable.• Selecting and managing stock often requires study and the help
of a good brokerage firm
Real Estate
• Ways To Invest• Buy a house, live in it, and sell it later at a profit.• Buy property and rent it.• Buy land and hold it until it rises in value.
• Advantages• Excellent protection against inflation.
• Disadvantages• Can be difficult to convert into cash.
Retirement Plans
• What Are They And How They Work• Plans that help individuals set aside money to be used after
they retire.• Federal income tax not immediately due on money put into a
retirement account, or on the interest it makes.• Income tax paid when money is withdrawn.
Retirement Plans
• Types of Retirement Plans • Individualized Retirement Plan (IRA)• Roth IRA• 401 (K)
Avoiding Investment Fraud
• Types• Illegal pyramids, insider trading, and unlicensed investment
brokers• High-risk “penny” stocks and fraudulent securities• Fraudulent franchises and business opportunities
Avoiding Investment Fraud
• Steps to Avoid• Become informed before investing• Talk with others who have made similar investments• Obtain information from state and federal regulatory agencies• Never buy over the phone without first investigating the
situation• Avoid investments that seem “too good to be true”—they
probably are.