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Bell Ringer: pg. 28 True/False. Adam started saving $50 per month when he turned 18, while Beth started saving $100 per month when she turned 24. They both earn 6% on their money. Beth will have more money by the time they both turn 30.
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Bell Ringer: pg. 28 True/False • Adam started saving $50 per month when he turned 18, while Beth started saving $100 per month when she turned 24. They both earn 6% on their money. Beth will have more money by the time they both turn 30. • A dollar today is worth less than a dollar in the future. • The higher the interest rate, the less time it takes to reach a savings goal.
Unit 3 - Investing: Making Money Work for You
Saving vs Investing • Saving: short term goals • money very safe • Earns a small amount of interest • Easy to get money when you need it • Investing: longer term goals • No guarantee money will grow • Normal for investments to rise and fall in • value over time • Long-run can earn more than savings
Savings and Investments Unique Investment Features Unique Savings Features Common Features What are some features common to both investments and savings? 3-A
The Advantage of Starting Early • “You” invest $2,000 every year in an account that earns 7% each year for 10 years • You let your money sit – still earning 7% - until age 65 • Total Investment = $20,000 • “Your Sister” waits until she is 31 – did the same thing you did - $2,000 @ 7% for 35 years until age 65 • Total Investment = $70,000 • Who has more money? • You = $361,418Your Sister = $276,474
Time Value of Money • The more money you have to save ore invest, the more money you are likely to earn • The higher the rate of interest you earn, the more money you are likely to have • The sooner you invest your money, the more time it has to make new money
Amount Saved Per Week Value After 10 Years Investing Weekly at 5% Interest $ 7.00 $ 4,720 $ 14.00 $ 9,440 $ 21.00 $ 14,160 $ 28.00 $ 18,880 $ 35.00 $ 23,600 3-B 1
Interest • Earned Interest – payment you receive for allowing a financial institution to use your money • Simple Interest – a “simple” fee paid to you on your principal • Interest = Principal x interest rate x time • Example: • You open a savings account with $1,000 at a 3% simple APR. What will you earn in interest in the first year? • $1,000 x .03 x 1 = $30 interest earned every year
Compound Interest • ***One of the MOST POWERFUL principals in personal finance! *** • Earning interest on interest • Each time your interest compounds, it gets added back to your account and becomes part of your principal • Example: • $1,000 x .05 x 1 = $50 interest in year one • $1,050 x .05 x 1 = $52.50 interest earned in year two • What will you start with in year 3?
Compounding • You can use this formula to calculate compound interest: • A = P (1 + i) • A = amount in the account • P = principal • I = interest rate • N = number of years compounded • How much will you have after 5 years if you put $100 principal in account earning 10% n
Answers to Exercise 3B Interest Rate 1 Year 2 Years 4 Years 6 Years 4% $10.40 $10.82 $11.70 $12.65 ? ? 8% $10.80 $11.66 $13.60 $15.87 ? ? ? ? 3-G 1 2 3 4 5 6
72 Years Needed to Double Investment = Interest Rate 72 = Interest Rate Required Years Needed to Double Investment Rule of 72 3-H
Bell Ringer: pg. 28 • 1. Adam started saving $50 per month when he turned 18, while Beth started saving $100 per month when she turned 24. They both earn 6% on their money. Beth will have more money by the time they both turn 30. • FALSE – Although they both invested $7,200 over the years, the power of compound interest was working longer for Adam, so he will have more money when they turn 30.
Bell Ringer: pg. 28 • 2. A dollar today is worth less than a dollar in the future. • FALSE. A dollar is worth more today than a dollar in the future because of inflation.
Bell Ringer: pg. 28 • The higher the interest rate, the less time it takes to reach a savings goal. • TRUE. The higher the rate, the faster the money will grow, and the sooner you will reach a savings goal.