nefe high school financial planning program unit three – investing: making money work for you unit...

NEFE High School Financial Planning ProgramNEFE High School Financial Planning ProgramUnit Three – Investing: Making Money Work for You

Unit 3 - Investing: Unit 3 - Investing: Making Money Work for YouMaking Money Work for You


What do you think?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? - AnswersWhat 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)


DiscussionDiscussion

• 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?


RISK / REWARDRISK / REWARD

When It comes to Investing Risk and Reward go together. 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 moneyThe 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 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 riskConservative – Very Risk Averse willing to take very little risk

Average – willing to take some risk for some rewardAverage – willing to take some risk for some reward

Aggressive – willing to take high risks for potential high rewardsAggressive – willing to take high risks for potential high rewards


Saving = Investing Saving = Investing

Saving is what people Saving is what people do to meet short-term do to meet short-term goals.goals.

Safe (FDIC Insured) in a Safe (FDIC Insured) in a savings account earning savings account earning a small amount of a small amount of interestinterest

Investing means you are Investing means you are setting your money aside setting your money aside for long-term goalsfor long-term goals

There is no guarantee There is no guarantee that the money you that the money you invest will grow, over invest will grow, over time investment rise and time investment rise and fall in valuefall in value

RISK / REWARDRISK / REWARD


Exercise 3A – Ways to save and investExercise 3A – Ways to save and invest

Save Save

•________________________________

•________________________________

•________________________________

•________________________________

Invest Invest

•________________________________

•________________________________

•________________________________

•________________________________


Time Value of Money Time Value of Money

Refers to the relationship among time, Refers to the relationship among time, money and rate of interestmoney and rate of interest

• Inflation – rise in cost of goods and Inflation – rise in cost of goods and services over timeservices over time


Time value of Money Time value of Money

• Earned Interest – payment you receive for Earned Interest – payment you receive for allowing a financial institution or allowing a financial institution or corporation to use your money corporation to use your money

• The more The more moneymoney you have to save or invest the you have to save or invest the more money you will earnmore money you will earn

• The higher the The higher the rate of interest rate of interest you earn, the more you earn, the more money you are likely to havemoney you are likely to have

• The sooner you invest your money the more The sooner you invest your money the more timetime it it has to make new money has to make new money


Interest = Principal x Interest Rate x Time

$3 = $100 x .03 x 1 year


Answers to Exercise 3BAnswers to Exercise 3B

8%

4% $10.40 $10.82

Interest Rate 1 Year 2 Years 4 Years 6 Years

? ? ? ?

??

$10.80 $15.87$13.60$11.66

$12.66$11.70


Show me the money!Show me the money!

• Compound Interest – idea of earning Compound Interest – idea of earning interest on interest already earnedinterest on interest already earned

A = P(1+i)A = P(1+i)nn

*Assignment 3-1**Assignment 3-1*


The Price of ProcrastinationThe Price of Procrastination

• The more time you have to invest the The more time you have to invest the more money you are likely to end up more money you are likely to end up havinghaving

• By waiting to invest you’re paying an By waiting to invest you’re paying an opportunity costopportunity cost

• Saving for your goals involves delayed Saving for your goals involves delayed gratification gratification


Rule of 72Rule of 72Doubling your moneyDoubling your money

3-H3-H

7272Interest RateInterest Rate

==Years Needed toYears Needed to

Double InvestmentDouble Investment

7272 Interest RateInterest RateRequiredRequired==

Years Needed toYears Needed toDouble InvestmentDouble Investment


The Rule of 72The Rule of 72Doubling your moneyDoubling your money

• Compounding – concept that your money Compounding – concept that your money is making more money while you sleepis making more money while you sleep

• Divide 72 by rate of interest or # of yearsDivide 72 by rate of interest or # of years• 72 / 6% interest = 12 years to double the 72 / 6% interest = 12 years to double the

investmentinvestment• 72 / 4 years = 18% interest to double the 72 / 4 years = 18% interest to double the

investmentinvestment


Exercise 3CExercise 3C

1.1. What interest rate would be necessary to What interest rate would be necessary to double a $100 investment in 24 years?double a $100 investment in 24 years?

2.2. How many years would it take to double How many years would it take to double $100 if it earned interest at a rate of 8% per $100 if it earned interest at a rate of 8% per year?year?

3.3. What interest rate would be necessary to What interest rate would be necessary to double a $100 investment in 11 years?double a $100 investment in 11 years?

4.4. How many years would it take to double How many years would it take to double $100 if it earned 7.75% interest per year?$100 if it earned 7.75% interest per year?


Exercise 3C AnswersExercise 3C Answers

1.1. What interest rate would be necessary to double a $100 What interest rate would be necessary to double a $100 investment in 24 years?investment in 24 years?

72 / 24 = 3%72 / 24 = 3%

2.2. How many years would it take to double $100 if it earned How many years would it take to double $100 if it earned interest at a rate of 8% per year? interest at a rate of 8% per year?

72 / 8 = 9 years72 / 8 = 9 years

3.3. What interest rate would be necessary to double a $100 What interest rate would be necessary to double a $100 investment in 11 years?investment in 11 years?

72 / 11 = 6.55%72 / 11 = 6.55%

4. How many years would it take to double $100 if it earned 4. How many years would it take to double $100 if it earned 7.75% interest per year?7.75% interest per year?

72 / 7.75 = 9.29 years72 / 7.75 = 9.29 years


Risky BusinessRisky Business• When people hear investment they think of When people hear investment they think of

the the stock market (the place where stocks are stock market (the place where stocks are bought and sold) bought and sold) plus they think about plus they think about loosing all of their moneyloosing all of their money

• All investment have some degree of riskAll investment have some degree of risk

• Risk/reward trade off is the principle that an Risk/reward trade off is the principle that an investment must offer higher potential returns investment must offer higher potential returns to compensate for the increased potential riskto compensate for the increased potential risk


FinancialFinancialPlanningPlanningPyramidPyramid

PennyStock

Commo- dities

CollectiblesSpeculative Stock / Bonds /Mutual Funds

RealEstate

Blue-ChipCommonStock

GrowthMutual Funds

High-GradeConvertible

Bonds

High-GradePreferred

Stock

BalancedMutual Funds

High-GradeCorporate Bondsor Mutual Funds

High-GradeMunicipal Bondsor Mutual Funds

Money MarketAccounts

or Mutual Funds

Certificatesof Deposit

U.S. SavingsBonds

Insured Savings / Checking Accounts

TreasuryIssues

Highest RiskHighest RiskHighest EarningsHighest Earnings

Lower Lower RiskRisk

Lower Lower EarningsEarnings

3-J


Risky Business Vocabulary Risky Business Vocabulary

• Dividend – Share of the profits you receive as a Dividend – Share of the profits you receive as a stockholderstockholder

• Capital gain – difference between purchase and Capital gain – difference between purchase and sale price when the sale price is greater than the sale price when the sale price is greater than the purchase pricepurchase price

• Capital loss - difference between purchase and Capital loss - difference between purchase and sale price when the sale price is less than the sale price when the sale price is less than the purchase pricepurchase price

• Rate of return – annual percentage return on Rate of return – annual percentage return on investment – tell you how fast your money is investment – tell you how fast your money is growinggrowing


Income InvestmentsIncome Investments

Savings accountSavings account

•Often the first banking Often the first banking product people useproduct people use•Earn a small amount of Earn a small amount of interestinterest•Federal Government Federal Government guarantees safety of money guarantees safety of money up to $250,000up to $250,000•Liquid assetLiquid asset

U.S. Savings BondU.S. Savings Bond•Federal government pays Federal government pays interest to investors for loaning interest to investors for loaning it moneyit money

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

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



Certificates of Deposit Certificates of Deposit (CDS)(CDS)

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

Money market deposit accountsMoney market deposit accounts

•Offered by bank & credit unionsOffered by bank & credit unions•Work like a checking accountWork like a checking account•May have a limited number of May have a limited number of checks you can write per monthchecks you can write per month•Pay a higher rate of interest Pay a higher rate of interest than savings accounts due to than savings accounts due to higher minimum balanceshigher minimum balances•Insured by the Federal Insured by the Federal GovernmentGovernment



Money Market Mutual FundsMoney Market Mutual Funds

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

Corporate and Government BondsCorporate and Government Bonds

•Pay the highest interest ratesPay the highest interest rates

•A bond’s potential return is A bond’s potential return is referred to as a referred to as a yieldyield

•US bonds (treasury bonds) US bonds (treasury bonds) safer since backed by safer since backed by GovernmentGovernment

•But Corporate bonds offer But Corporate bonds offer higher interest rateshigher interest rates

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


Growth InvestmentsGrowth Investments

StocksStocks

•You own a part of the You own a part of the companycompany•Investors who buy stock Investors who buy stock are called are called shareholdersshareholders•Riskier investment because Riskier investment because you can loose more moneyyou can loose more money•Generally liquid assetGenerally liquid asset

Real EstateReal Estate

•Investors buy property – Investors buy property – land or buildings hoping to land or buildings hoping to generate a profitgenerate a profit•Many forms of investment – Many forms of investment – malls, apartment complex, malls, apartment complex, farmland, undeveloped land farmland, undeveloped land etc. etc. •Not a liquid asset because Not a liquid asset because it is difficult to sellit is difficult to sell


Growth InvestmentsGrowth Investments

CollectiblesCollectibles

•Items relatively rare in Items relatively rare in numbernumber•Paintings, sculptures, other Paintings, sculptures, other works of art, baseball cards, works of art, baseball cards, antiques etcantiques etc•Don’t make a profit/loss Don’t make a profit/loss until item is solduntil item is sold•High risk due to small High risk due to small market for collectiblesmarket for collectibles

Mutual FundsMutual Funds

•Take money from many Take money from many investors and uses it to investors and uses it to make growth or income make growth or income investments based on a investments based on a investment objectiveinvestment objective•Offer investors an Offer investors an affordable way to own affordable way to own shares of many stocksshares of many stocks•Professionally managedProfessionally managed


Many baskets of eggsMany baskets of eggs• Diversification – reducing investment risk Diversification – reducing investment risk

by putting money in several types of by putting money in several types of investmentsinvestments

• By spreading your money around you are By spreading your money around you are reducing the impact that a drop in any one reducing the impact that a drop in any one investment’s value can have on your investment’s value can have on your overall investment portfolio overall investment portfolio


Smart, Steady EddieSmart, Steady Eddie

PYF even if it a small amount at first cause PYF even if it a small amount at first cause the little money can build up quickly the little money can build up quickly

Dollar cost averaging – practice of investing Dollar cost averaging – practice of investing a fixed amount in the same investment at a fixed amount in the same investment at regular intervals, regardless of what the regular intervals, regardless of what the market is doingmarket is doing

Dollar Cost AveragingDollar Cost Averaging

AmountAmountInvestedInvested

Share Price ($)

SharesPurchased

$1,000.00 $20.00 50.00

AmountAmountInvestedInvested

Share Price ($)

SharesPurchased

$100.00 $20.00 5.00

$100.00

$100.00

$100.00

$100.00

$100.00

$100.00

$100.00

$100.00

$19.50

$19.25

$19.75

$19.20

$18.90

$18.00

$18.60

$19.78

5.13

5.19

5.06

5.21

5.29

5.56

5.38

5.06

$1,000.00$1,000.00 $20.00$20.00 50.0050.00 $19.39*$19.39* 51.6651.66

$100.00 $20.90 4.78

One-Time Investment Dollar-Cost Averaging

$1,000.00$1,000.00

* Average Share Price* Average Share Price

nefe high school financial planning program unit three – investing: making money work for you unit...

Documents

money work

investing saving

time value of money

time slide

savings goal faster

value risk reward slide

high risks

smaller slide