Unit 3 - Investing: Making Money Work for You

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Unit 3 - Investing: Making Money Work for You. What do you think?. 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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Unit 3 - Investing:

Making Money Work for You

What do you think?
• 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
• The smaller the down payment someone makes on a car, the less interest the owner pays for a car loan.
What do you think? - Answers
• 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. (Compound interest worked longer for Adam)
• False - A dollar today is worth less (more) than a dollar in the future (Inflation)
• True - The higher the interest rate, the less time it takes to reach a savings goal (Faster Money Grows)
• False - The smaller the down payment someone makes on a car, the less interest the owner pays for a car loan. (Principal amount accruing interest is smaller)
Discussion
• Which strategies do you use now to save or invest your money?
• Which do you think is better use of your money – saving or investing? Why?
When It comes to Investing Risk and Reward go together.

The more risk to take the higher the potential reward – When it comes to investing, the risk is that you loose your money

Its all about your tolerance for risk vs. your desire for the highest return (reward). As an investor you are either

Conservative – Very Risk Averse willing to take very little risk

Average – willing to take some risk for some reward

Aggressive – willing to take high risks for potential high rewards

Risk / Reward
Saving = Investing
• Saving is what people do to meet short-term goals.
• Safe (FDIC Insured) in a savings account earning a small amount of interest
• Investing means you are setting your money aside for long-term goals
• There is no guarantee that the money you invest will grow, over time investment rise and fall in value
• RISK / REWARD
Exercise 3A – Ways to save and invest

Save

Invest

________________

________________

________________

________________

• ________________
• ________________
• ________________
• ________________
Time Value of Money
• Refers to the relationship among time, money and rate of interest
• Inflation – rise in cost of goods and services over time
Time value of Money
• Earned Interest – payment you receive for allowing a financial institution or corporation to use your money
• The more money you have to save or invest the more money you will 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

Interest Rate

1 Year

2 Years

4 Years

6 Years

4%

\$10.40

\$10.82

\$11.70

\$12.66

?

?

8%

\$10.80

\$11.66

\$13.60

\$15.87

?

?

?

?

Show me the money!
• Compound Interest – idea of earning interest on interest already earned
• A = P(1+i)n
• *Assignment 3-1*
The Price of Procrastination
• The more time you have to invest the more money you are likely to end up having
• By waiting to invest you’re paying an opportunity cost
• Saving for your goals involves delayed gratification

72

Years Needed to

Double Investment

=

Interest Rate

72

=

Interest Rate

Required

Years Needed to

Double Investment

3-H

The Rule of 72Doubling your money
• Compounding – concept that your money is making more money while you sleep
• Divide 72 by rate of interest or # of years
• 72 / 6% interest = 12 years to double the investment
• 72 / 4 years = 18% interest to double the investment
Exercise 3C
• What interest rate would be necessary to double a \$100 investment in 24 years?
• How many years would it take to double \$100 if it earned interest at a rate of 8% per year?
• What interest rate would be necessary to double a \$100 investment in 11 years?
• How many years would it take to double \$100 if it earned 7.75% interest per year?
• What interest rate would be necessary to double a \$100 investment in 24 years?
• 72 / 24 = 3%
• How many years would it take to double \$100 if it earned interest at a rate of 8% per year?
• 72 / 8 = 9 years
• What interest rate would be necessary to double a \$100 investment in 11 years?
• 72 / 11 = 6.55%
• 4. How many years would it take to double \$100 if it earned 7.75% interest per year?
• 72 / 7.75 = 9.29 years
• When people hear investment they think of the stock market (the place where stocks are bought and sold) plus they think about loosing all of their money
• All investment have some degree of risk
• Risk/reward trade off is the principle that an investment must offer higher potential returns to compensate for the increased potential risk

Commo- dities

Penny

Stock

Speculative

Stock / Bonds /

Mutual Funds

Collectibles

Blue-Chip

Common

Stock

Growth

Mutual

Funds

Real

Estate

Balanced

Mutual

Funds

Preferred

Stock

Convertible

Bonds

Municipal Bonds

or Mutual Funds

Money Market

Accounts

or Mutual Funds

Corporate Bonds

or Mutual Funds

Insured Savings /

Checking Accounts

U.S. Savings

Bonds

Certificates

of Deposit

Treasury

Issues

FinancialPlanningPyramid

Highest Risk

Highest Earnings

Lower Risk

Lower Earnings

3-J

• Dividend – Share of the profits you receive as a stockholder
• Capital gain – difference between purchase and sale price when the sale price is greater than the purchase price
• Capital loss - difference between purchase and sale price when the sale price is less than the purchase price
• Rate of return – annual percentage return on investment – tell you how fast your money is growing
Income Investments

Savings account

U.S. Savings Bond

Federal government pays interest to investors for loaning it money

Bond – formal agreement where the borrower can use your money for a set period of time and the lender will get paid interest

Can be held for up to 30 years - Penalty for cashing in early

• Often the first banking product people use
• Earn a small amount of interest
• Federal Government guarantees safety of money up to \$250,000
• Liquid asset
Income Investments

Certificates of Deposit (CDS)

Money market deposit accounts

Offered by bank & credit unions

Work like a checking account

May have a limited number of checks you can write per month

Pay a higher rate of interest than savings accounts due to higher minimum balances

Insured by the Federal Government

• Bank/Credit Unions version of a savings bond
• Set period of time
• The longer the term the higher the interest
• Penalty for cashing in early
Income Investments

Money Market Mutual Funds

Corporate and Government Bonds

Pay the highest interest rates

A bond’s potential return is referred to as a yield

US bonds (treasury bonds) safer since backed by Government

But Corporate bonds offer higher interest rates

Range from 2-30 years, longer the time the larger the interest rate

• Investment company takes your money and invests it into a diversified group of securities
• Stable way to save your money but No guarantee
• Not insured by Federal Government
• Earn higher rate of interest than Money market deposit accounts
Growth Investments

Stocks

Real Estate

Investors buy property – land or buildings hoping to generate a profit

Many forms of investment – malls, apartment complex, farmland, undeveloped land etc.

Not a liquid asset because it is difficult to sell

• You own a part of the company
• Investors who buy stock are called shareholders
• Riskier investment because you can loose more money
• Generally liquid asset
Growth Investments

Collectibles

Mutual Funds

Take money from many investors and uses it to make growth or income investments based on a investment objective

Offer investors an affordable way to own shares of many stocks

Professionally managed

• Items relatively rare in number
• Paintings, sculptures, other works of art, baseball cards, antiques etc
• Don’t make a profit/loss until item is sold
• High risk due to small market for collectibles
• Diversification – reducing investment risk by putting money in several types of investments
• By spreading your money around you are reducing the impact that a drop in any one investment’s value can have on your overall investment portfolio
• PYF even if it a small amount at first cause the little money can build up quickly
• Dollar cost averaging – practice of investing a fixed amount in the same investment at regular intervals, regardless of what the market is doing

\$1,000.00

\$1,000.00

\$20.00

50.00

\$19.39*

51.66

Dollar Cost Averaging

One-Time Investment

Dollar-Cost Averaging

Shares

Purchased

Shares

Purchased

Amount

Invested

Share

Price (\$)

Amount

Invested

Share

Price (\$)

\$1,000.00

\$20.00

50.00

\$100.00

\$20.00

5.00

\$100.00

\$19.50

5.13

\$100.00

\$19.25

5.19

\$100.00

\$19.75

5.06

\$100.00

\$19.20

5.21

\$100.00

\$18.90

5.29

\$100.00

\$18.00

5.56

\$100.00

\$18.60

5.38

\$100.00

\$19.78

5.06

\$100.00

\$20.90

4.78

* Average Share Price