Chapter 1: Learning Objectives. Use the building blocks to achieve financial success. Understand how the economy affects your personal financial success. Apply economic principles when making financial decisions. Perform time value of money calculations.
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“The biggest barrier to achieving financial success is to live like you are rich before you are!”
GOOD MONEY HABITS => ACHIEVE GOALS => FINANCIALLY HAPPY
Building Blocks to Success
What is the preferred stage of the economic cycle?
Unemployment, GDP, Production, Sales
The Stock Market is a LEADING INDICATOR
CPI: measures changes in prices of goods
***Does your income keep up with inflation?***
we ask ourselves… “is it worth it?”
The extra satisfaction we enjoy from “1 more”
The added cost we incur from “1 more”
FUTURE VALUE = COMPOUNDING
PRESENT VALUE = DISCOUNTING
Ex: $1000 put into an account that earns 5% annually:
At end of year one: INTERST = $1000 x .05 x 1 = $50At end of year two: INTEREST = $1050 x .05 X 1 = $52.50At end of year three:
When we keep our saved money AND the interest it has earned in an account, it grows faster:
“The way to build wealth is to make money on your money, not simply to put money away. Compounding over time is what really builds wealth.”
Future Value = Compounding: Finding the value of an asset at some time in the futureEx: What is the future value of $1000 invested for 4 years earning 8% interest?
FV SINGLE AMOUNT
The effects of compounding are greatest over time!
This chart shows the importance of higher rates and more time! Pg. 19
How long will it take for my initial investment to double?
The RULE of 72:
What if we ADD to our savings each year?
I know the amount I need in the future… what do I have to put away now
to reach that goal?
PV SINGLE AMOUNT
0.5083 (factor) x 20,000 (principal) = $10,166
Ex: When I retire, I need to have $30,000 per year for the next 20 years. If I can earn 7% on my investment, what amount should be put away now in order to achieve this?
PV OF AN ANNUITY
10.5940 (factor) x 30,000 = $317,820
Tax advantage: paying with
Employer’s Retirement Plan
Employer’s Matching Contributions
Starting Early is a must! See example pg. 25
So Many Advantages!