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Personal Finance

Personal Finance. The magic of compounding. Review of yesterday…. Why do we need to set goals? What is meant by pay yourself first? What is an opportunity cost and how does it apply to Personal Finance? What amount should working adults save out of each paycheck?. Today’s Discussion.

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Personal Finance

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  1. Personal Finance The magic of compounding

  2. Review of yesterday… • Why do we need to set goals? • What is meant by pay yourself first? • What is an opportunity cost and how does it apply to Personal Finance? • What amount should working adults save out of each paycheck?

  3. Today’s Discussion • The Magic of Compounding • The Rule of 72

  4. Einstein on Compounding • “the greatest mathematical discovery of all time.”

  5. Compounding Growth • How your money grows over time • Think of a snowball rolling down a mountain • Amount of growth is based on: • How much money you invest • How long you set aside your money • How much your invested money grows each year (return)

  6. Examples – The $100 investment(no compounding, simple interest) Interest = P X R X T $10 = $100 X .10 X 1 P = Principle R = Rate T = Time

  7. Examples – The $100 investmentGrowth over long term

  8. Linear Savings ($100 a year w/ no growth) vs. Compound Investing

  9. Calculating Compound Growth • Where • P = Principle • r = annual return (stated as decimal) • n = number of times compounded (4 = quarterly) • t = number of years

  10. Sample Calculation - Compounding • An amount of $1,500.00 is deposited in a bank paying an annual return of 4.3%, compounded quarterly. Find the balance after 6 years.

  11. Compounding CalculationNow You Try  • An amount of $1,000.00 is deposited in a stock account earning an average annual return of 12.4%, compounded quarterly. Find the balance after 10 years.

  12. The moral of the story! • To create wealth and live without financial worry you must • SAVE MONEY! • Take advantage of the miracle of compounding by investing in stocks, bonds, and other high growth methods

  13. Growth Rates • How fast your money grows (percentage) • Generally, the more risky an investment the higher POTENTIAL return • Bank savings account: 0 – 3% • Money market account: 2 – 5% • Average stock market return: 10 – 12% • Exceptional stock market return: 13+ %

  14. Compounding at different rates of growth - $100 initial investment Note the dramatic difference between a 5% return and an 11% return…

  15. Amount Invested – Growing a $1,000 investment Add your age to each Year listed to see how compounding can work in your lifetime…i.e., add 17 to year 10. You could grow your initial $1,000 to $3,395 by the time you turn 27.

  16. The Rule of 72 • Trick to see how long it will take for your money to double at a given growth rate. • Take the average annual growth rate and divide 72 by that number • Example: 11% return rate • 72/11 = 6.5 • 6.5 years for your money to double

  17. Rule of 72…You Try  • How long will it take your money to double if you earn a 8% return? Answer: 72 / 8 = 9 Years

  18. Amount Invested – $100 each year (or 27 cents a day!) @ 11% Notice how much quicker your nest egg grows with consistent savings…(it took us 40 years to reach $6,500 with one investment of $1,000).

  19. The incredible power of time…who finishes with the most money at age 65? Bob Kristie Begins investing at age 15 $1,000 in stock market each year Earns 11% return Stops investing at age 30 Total invested = $15,000 • Starts investing at age 35 • $5,000 in stock market each year • Earns 11% return • Stops investing at age 65 (30 years) • Total invested = $150,000

  20. The incredible power of time….

  21. In summary • Power of compounding depends on • How much you invest • How regularly you invest • What the growth rate is • How long you let your money grow

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