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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… to purchase?

“Pay Yourself First”

To successfully practice this strategy…

Set financial goals

Examine trade-offs

Examine current spending

Simple Interest vs. to purchase? 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 to purchase?

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

Simple Interest Equation: Step 2 to purchase?

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

Compound Interest Equations to purchase?

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 to purchase?

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 Amounts

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 #1 Amounts

How much is Sara’s investment worth after one year?

$607.20

Time Value of Money Math Practice #2 Amounts

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 Amounts

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 Amounts

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

$1642.50

Time Value of Money Math Practice #3 Amounts

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 Amounts

Step One:

1.02

1

.02

Step Two:

5

1.104

1.02

Step Three:

1.104

1

.104

Time Value of Money Math Practice #3 Amounts

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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