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Time Value of Money

Time value of money- money paid in future is not equal to money paid today

Time Value of Money Magic!

Year 20

Interest Earned: $111.07

Amount Savings is Worth: $386.97

Year 15

Interest Earned: $79.19

Amount Savings is Worth: $275.90

Initial Savings: $100.00 at 7% interest

Year 1

Interest Earned: $7.00

Amount Savings is Worth: 107.00

Year 10

Interest Earned: $56.46

Amount Savings is Worth: $196.72

Year 5

Interest Earned: $33.26

Amount Savings is Worth: $140.26

Year 50

Interest Earned: $845.46

Amount Savings is Worth: $2945.70

How do you choose to save money over spend money?

Pay Yourself First!

- Set aside money for saving before spending any money
- Save then spend!

- Creates a habit
- Saving is not what is left at end of month

Why?

To successfully practice “pay yourself first”…

Set goals!

Goal-

End result of something a person intends to accomplish

Financial Goal-

Specific objectives to be accomplished through financial planning

What are you willing to give up to obtain the item you want to purchase?

This is a trade-off!

Trade-off - giving up one thing for another

Every decision you make involves a trade-off!

What is a trade-off to saving money for the future?

Being more financially secure in the future by saving money is a trade-off to spending money in the present

In order to choose saving money over spending money…

“Pay Yourself First”

To successfully practice this strategy…

Set financial goals

Examine trade-offs

Examine current spending

Simple Interest vs. Compound Interest

Simple Interest

Compound Interest

- Interest earned on the principal investment

- Earning interest on interest

Principal is the original amount of money invested or saved

Simple Interest Equation: Step 1

$1,000 invested at 7% interest rate for 5 years

Simple Interest Equation: Step 2

$1,000 invested at 7% interest rate for 5 years

Compound Interest Equations

There are two methods for calculating

compound interest

- Single sum of money
- Money invested only once at the beginning of an investment
- Equal number of investments spread over time
- Equal amounts of money are invested multiple times (once a month, once a year, etc.)

Compound Interest Equation – Single Sum

P (1+ r)n = A

Amount Investment is Worth

Principal (1 + Interest Rate)Time Periods =

$1,000 invested at 7% interest rate compounded yearly for 5 years

1,000 (1+ .07)5 = $1403.00

Compound Interest Equation - Multiple Investments in Equal Amounts

$1,000 invested every year at 7% annual interest rate for 5 years

Time Value of Money Math Practice #1

Sara deposited $600.00 into a savings account one year ago. She has been earning 1.2% in annual simple interest. Complete the following calculations to determine how much Sara’s money is now worth.

Step One:

.012

1

600.00

7.20

Step Two:

600.00

607.20

7.20

Time Value of Money Math Practice #2

Tim’s grandparents have given him $1500.00 to invest while he is in college to begin his retirement fund. He will earn 2.3% interest, compounded annually. What will his investment be worth at the end of four years?

What is the equation?

$1,500 (1+ .023)4

Time Value of Money Math Practice #2

Step One:

.023

1.023

1

Step Two:

4

1.023

1.095

Step Three:

1500

1642.50

1.095

Time Value of Money Math Practice #2

What will Tim’s investment be worth at the end of four years?

$1642.50

Time Value of Money Math Practice #3

Nicole put $2000.00 into an account that pays 2% interest and compounds annually. She invests $2000.00 every year for five years. What will her investment be worth after five years?

What is the equation?

Time Value of Money Math Practice #3

Step Four:

.104

.02

5.2

Step Five:

10,400.00

2000

5.2

What will Nicole’s investment be worth at the end of five years?

$10,400.00

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