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Choosing to Save

Choosing to Save. My Wish List. Brainstorm a personal wish list for yourself now and in the future. . My Wish List. Your wish list can include anything of monetary value as well as personal goals. What does this statement mean to you?. “Today’s self has an impact on future self”.

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Choosing to Save

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  1. Choosing to Save

  2. My Wish List Brainstorm a personal wish list for yourself now and in the future. My Wish List Your wish list can include anything of monetary value as well as personal goals.

  3. What does this statement mean to you? “Today’s self has an impact on future self”

  4. Saving vs. Investing Investing Savings Portion of current income not spent on consumption Purchase of assets with the goal of increasing future income

  5. Savings vs. Investing Money saved is used to pay for: Money invested is used to pay for: • Emergencies • Large Purchases • Higher Education • Retirement

  6. Liquidity Assets: Everything an individual owns with monetary value. Liquidity: How quickly and easily an asset can be converted to cash. Examples of Assets Cash Clothing Houses Electronics Savings Accounts Automobiles Furniture Make a list of your assets.

  7. Liquid Assets In most cases, investments are not as liquid as savings. Savings are known as liquid assets, because they are easily accessible in emergency situations. Of your assets, which are the most liquid?

  8. Why are Saving & Investing Important? Investing Savings Provides the foundation for financial security Enhances and helps build wealth

  9. Wealth Wealthis a measurement of how much a person or household owns once all debts have been paid

  10. Level of Living & Standard of Living Savings and investing help pay for a level of living in the present and reach a standard of living in the future Level of Living Standard of Living A higher level of living that an individual or household sets to reach, through income increases and wealth accumulation The amount of money needed to pay for the necessities and comforts currently enjoyed PRESENT FUTURE

  11. How is Wealth Measured? Net worth statement - Describes an individual or family’s overall financial condition on a specified date • The components include: • Assets – Everything a person owns with monetary value • Liabilities – Debts (what is owed to others) • Net Worth – the amount of money left when liabilities are subtracted from assets (indicates wealth)

  12. The Choices You Make Today Impact Your Future! Saving and investing… Decrease Liabilities Increase Assets Increased Wealth!

  13. Financial Life Cycle Stage 3: Wealth Distribution Stage 2: Wealth Accumulation Stage 1: Wealth Protection There is a typical financial life cycle pattern that applies to most people

  14. Stage One: Wealth Protection • Includes saving • Focuses on building financial security • 10-20% of net income • At least 6 months of expenses saved in liquid assets

  15. Stage Two: Wealth Accumulation • Includes investing • Focuses on wealth accumulation • Stage one (saving) should be a prerequisite to stage 2 (investing) • 10-20% of net income

  16. Stage Three: Wealth Distribution • Consumption of wealth • Usually during retirement

  17. Financial Life Cycle Stage 3: Wealth Distribution Stage 2: Wealth Accumulation Stage 1: Wealth Protection Varies for every individual: • amount of time it takes to move through the financial life cycle • amount of money needed in liquid assets

  18. Financial Life Cycle Stage 3: Wealth Distribution Stage 2: Wealth Accumulation Stage 1: Wealth Protection Identify someone you knowthat is in each of the three financial life cycle stages.

  19. True or False? Identify if each statement is true or false… They are both true. Now we are going to learn how!

  20. Time Value of Money Money paid out or received in the future is not equivalent to money paid out or received today Three factors affect how an investment will grow.

  21. Interest Rate Interest is the price of money. Interest rate is the percentage rate paid on the money invested or saved Are you earning interest on any money?

  22. How Do Interest Rates Affect Time Value of Money? MoreMoney Interest Rate

  23. Definitions Return is the profit or income generated by savings and investing. Unearned income is income derived from sources other than employment, such as interest.

  24. Simple Interest vs. Compounding Interest Simple Interest Compounding Interest • Interest earned on the principal investment • Earning interest on interest Principal is the original amount of money invested or saved

  25. Simple Interest Equation: Step 1 $1,000 invested at 7% interest rate for 5 years

  26. Simple Interest Equation: Step 2 $1,000 invested at 7% interest rate for 5 years

  27. Compounding Interest Equations There are two equations for compounding 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 is invested multiple times (once a month, once a year, etc.)

  28. Compounding Interest Equation – Single Sum P (1+ i)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 = $1402.55

  29. Compounding Interest Equation- Equal Number of Investments $1,000 invested every year at 7% annual interest rate for 5 years

  30. Compounding vs. Simple interest Why? By reinvesting the interest earned, the interest payment keeps growing as interest is compounded on interest Simple Interest = $1,350 Compounding Interest for a Single Sum = $1,402.55

  31. Single Sum vs. Investments Over Time Compounding Interest for a Single Sum = $1402.55 Compounding Interest for Investments Over Time = $5750.74 To make the most of your money, utilize compounding interest and continue to invest!

  32. Compounding Interest • The number of times interest is compounded has an effect on return • Interest compounding frequently will yield higher returns

  33. Time The longer an individual invests, the more time their investment has to compound interest and increase in value.

  34. A Little Goes a Long Way • Sally Saver puts away $3,000 per year for 10 years, at age 22. She earns 10% on her investment. • Sally invests a total of $30,000 and has earned $1,205,063 by the age of 65 • Ed Uninformed waits until he is 28 and contributes $3,000 at 10% for 37 years • Ed invests a total of $111,000 and accumulates $1,079,856 by the age of 65

  35. Amount of Money The larger the amount of money invested, the larger the return on investment will be

  36. Amount of Money Amount of Money Larger Return

  37. Maximizing Your Return • Time: • Invest for as long as possible! • Amount of Money: • Invest as much as possible, as often as possible! • Interest: • Invest at the highest interest rate possible! • Use compounding interest that compounds as frequently (annually, semi-annually, quarterly, monthly, daily) as possible!

  38. Smart Investing Which would you choose? An investment earning compounding interest An investment earning simple interest OR

  39. Smart Investing Which would you choose? An investment earning an interest rate of 2% An investment earning an interest rate of 2.1% OR

  40. Smart Investing Which would you choose? An investment with an interest rate compounded monthly An investment with an interest rate compounded yearly OR

  41. Wish List Refer to your wish list. How will you receive these items? Set Goals! Goal setting helps you think about your future self.

  42. Goals

  43. SMART Goals • Financial goals should be SMART goals

  44. Setting SMART Goals • In order to set SMART goals the following must be considered: • Trade-offs • Opportunity Cost • Spending Plans

  45. Trade-offs Trade-off - Giving up one thing for another Every decision inevitably involves a trade-off What is a trade-off to earning more money in the future by saving and investing? • Spending money in the present

  46. Your Trade-offs What trade-offs will you have to make in order to receive any of the items on your wish list?

  47. Opportunity Cost Opportunity cost of a decision is the value of the next best alternative that must be forgone. • Allows you to analyze the consequences of choices to decide which trade-offs to make

  48. Opportunity Cost In regards to money, the opportunity cost is the best alternative of what one could have done instead of choosing to spend, save or invest. The value of spending money in the present What is the opportunity cost of saving and investing money?

  49. Your Opportunity Costs What are the opportunity costs of your trade-offs?

  50. Trade-offs & Opportunity Costs By analyzing trade-offs and the opportunity cost of those trade-offs, goals become more attainable and realistic

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