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Financial Planning. Saving/ Investing Time Value of Money. Show Me the Money!. Why does Time Value of Money Concept Work?. Compounding Compound Interest Idea of earning interest on interest. Compounding / Compound Interest. SUPERSIZE YOUR ACCOUNT. Example of Compounding.
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Financial Planning Saving/ Investing Time Value of Money
Why does Time Value of Money Concept Work? • Compounding • Compound Interest • Idea of earning interest on interest
Compounding / Compound Interest • SUPERSIZE YOUR ACCOUNT
Example of Compounding • You put $100 in an investment that earns 10% a year • $100 x .10 x 1 year = $10 • You would have $110 at end of one year But in year 2, you will earn 10% on the entire $110. So you actually earn $11 in year 2, bringing the balance up to $121.
Compounding • Like the energizer bunny …..just keeps going and going and going……. …..just keeps going and going and going…… .
Compounding any # of years • Formula A = P (1+i) A Amount in the account P Principal (amount originally invested) i Interest Rate (expressed as a decimal) N Number of Years Compounded
How much will you have after 5 years? • Amount = $100 (1+.10) • $161.05
Financial Pyramid • Risk • Growth • Saving • Protection
Stock • Ownership in a company • Price fluctuates daily
Mutual Fund • Basket of Stocks---lower risk than just owning 1 stock McDonalds Walmart JC Penny
Stock Market • The place where stocks are bought and sold.
Risk • The uncertainty that the anticipated return will be achieved.
Why invest then if there is a risk? • Potential for Reward!!!! • Higher the risk, the higher potential returns on your investments. • Lower the risk, the lower potential returns on your investments.
MORE RISK Penny stocks Growth Mutual Funds, Real Estate Savings Bonds, Money Markets Insured Checking accounts U.S. Savings Bonds Certificates of Deposit Protection
Risk of Investments • ALL investments involve some degree of risk.
If all investments carry some degree of risk, why do people seek them for the reward? Trying to grow that money tree!!!! Why? Inflation
Why take on risk? • Savings accounts and insured investments most likely will not keep pace with inflation.
Risk / Reward Tradeoff • Higher the risk- the higher potential for reward • Lower risk- the lower potential for reward
To Choosing Investments right for you • Is the risk /reward trade-off • Most people have different ideas about how much risk they should take with their money.
Conservative Want to keep it someplace safe More Aggressive Are willing to invest some place riskier Risk / Reward
Reward for taking on risk • RETURN ON INVESTMENT • Returns can be made up of income such as interest or dividends. • Dividends- share of the profits you receive for being a stockholder
Investments • Should be included in financial planning. • P.Y.F. – paying yourself first • Even if it is a little—b/c we learned the power of compounding interest
What if you don’t have enough have a lot of money to set aside?
Smart, Steady, Eddie • Doesn’t have a lot of money • He knows about something called • Dollar cost averaging • Practice of investing a fixed amount in the same investment at regular intervals, regardless of what the market is doing
Dollar Cost Averaging • Eddie knows it evens out the ups and downs of the market. • As the price of the investment rises, you simply end up purchasing fewer shares and when the price falls, you end up purchasing more shares.
In Summary • Recognize the risks and rewards to investing • Risks—uncertainty---you may lose your money or it may go down in value temporarily • Rewards-You may make $! • Compound Interest
In Summary Continued • Investing should be a part of an individual’s financial plan. • Can do by Dollar Cost Averaging
