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December 5, 2011

December 5, 2011. Objective: Students will examine the purpose of investing, including saving for retirement. If person A saves $24,000 for retirement and person B saves $72,000 toward retirement, and they both earn the same rate of return, which one will have more money at retirement?

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December 5, 2011

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  1. December 5, 2011 Objective: Students will examine the purpose of investing, including saving for retirement.

  2. If person A saves $24,000 for retirement and person B saves $72,000 toward retirement, and they both earn the same rate of return, which one will have more money at retirement? • Suppose person A and person B both invest $24,000, but person A invests it at age 25 and person B invests it at age 55. Again, if they both earn the same rate of return, who will have more money at age 65? Questions for Thought

  3. Two 23-year-old women who have just graduated from college and started their careers. • For the first two years after college neither woman saves any money toward retirement; both focus instead on establishing their careers and purchasing household items. • At age 25, Mia Saver starts to save money for retirement by investing $200 per month into an account paying 7% annual interest compounded annually. • Ima Spender continues to spend all of her money. From ages 25 to 35, Ima drives a nicer car than Mia and takes a more elaborate vacation each year. • When the women reach age 35, Mia Saver chooses to work only part time, so she does not invest any more money into her retirement fund. However, she leaves it invested in the account paying 7% annually. • At age 35, Ima Spender begins investing $200 per month toward retirement. Ima's account also pays a 7% rate of return compounded annually. Ima invests $200 per month for 30 years, until age 65. • http://www.dinkytown.net/java/CompoundSavings.html A Tale of Two Savers

  4. Mia Saver 7% Rate Ima Spender 7% Rate Who Will Have More?

  5. Compound interest arises when interest is added to the principal, so that from that moment on, the interest that has been added also itself earns interest. This addition of interest to the principal is called compounding. • Due to the power of compounding returns, a small investment made early in life can lead to a larger account balance than a larger investment made later in life. Compounding

  6. In order to define an interest rate fully, and enable one to compare it with other interest rates, the interest rate and the compounding frequency must be disclosed. • Since most people prefer to think of rates as a yearly percentage, many governments require financial institutions to disclose the equivalent yearly compounded interest rate on deposits or advances. • Remember Annual Percentage Yield (APY) for deposits and Annual Percentage Rate (APR) for loans Annual Percentage

  7. Get out of piece of paper and write your name at the top. • In one paragraph explain why it’s best to start saving early. • Make sure to include the effects of compounding in your answer. • When you are finished place your paper on TOP of the purple folder at the front of the room. Writing

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