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Chpt 8.2b Investing/Retirement ppt notesTaking care of your future wealth

What is the difference between saving and investing?

Saving is a portion of current income not spent on consumption used to pay for:

____________ and Large Purchases

Investing is a purchase of assets with the goal of increasing future income. Used to pay for:

Higher Education and ________________

Saving vs.

Definition:

is setting aside present income for future use. Is the portion of ____________ not spent on consumption.

Primary Purpose:

To make money available for __________needs

Reasons for Savings and Investing:

To prepare for ___________recurring expenses To prepare for major purchases for future purchases To achieve financial __________ for retirement

Investing

Definition:

Is purchasing assets that earn interest over time Investments are assets purchased with the goal of increasing income.

Primary Purpose:

To make a ________ over time

Reasons for Savings and Investing:

To prepare for emergencies and _______ expenses To prepare for major purchases for future purchases To achieve financial goals for retirement

Chpt 8.2 Investing and Savings – ppt notes [Type text] [Type text]

Saving vs. Investing Cont.

Saving and Investing Options

Why is Saving and Investing Important?

Serves different purposes but are essential

Saving: provides the foundation or __________ _________

Investing: Enhances and helps build _____________

Helps pay for a level of living and reach a desired standard of living


Summary of Rules for Saving/Investing

View saving and investing as a fixed expense

Rule of Saving: Pay ____________ first; take a portion of earnings for saving/investing before spending any of your paycheck

70-20-10 Saving and Investing Rule: For any money earned, spend 70%, save 20%, and invest 10%

How much money should be saved and invested?

Recommended: At least __________ months’ worth of expenses in liquid assets

Reasons individuals fail to Save/Invest

Not being able to meet current needs and wants

Not being aware of how much needs to be saved for __________ goals

Over-relying on ________ for emergencies

Over-relying on job security and insurance

Steps to Create a Personal Investing Plan

9 steps

1- My investment goals are2- By ____time, I will obtain $______3- I have $___________ available to invest by date _________4- Possible investment alternatives5- Risk factors for each alternative6- Investment decision7- Final decision8- Continue _________ choices


Investment Fundamentals

Difference in return is a major distinction between savings and investing.

Successful investors begin to live off earnings, without spending wealth itself.

Preparations for Investing

Why People invest

– Achieve financial goals– Increase current income– Gain __________ and financial _____________– Have funds available for retirement

Preparations for Investing

Prerequisites to Investing

– Live within _____________– Continue savings program– Establish lines of credit– Carry adequate insurance– Establish investment goals

Getting Money to Start an Investing Program

Pay yourself first

Participate in elective savings programs

– Payroll deduction– electronic transfer

Make a special effort to save one or two months a year

Take advantage of __________________

– Invest __________of your tax refund

Value of Having a Long-Term Investing Program

Many people don’t start investing because they only have a small ___________to investbut....

Small amounts invested regularly become large amounts over time

Factors That Affect Investment Decisions

________ - minimal risk of loss


Risk - uncertainty about the outcome

– inflation risk– interest rate risk– business failure risk– market risk

Income From Investments

Safest– CDs– _______________ ___________– T-bills

Higher potential income– municipal bonds– corporate bonds– preferred stocks– mutual funds– _________ _____________

Investment Growth and Liquidity

Growth

– increase in value– _____________ _____________– growth stocks retain earnings– bonds, mutual funds and real estate

______________

– ease and speed to convert an asset to cash

Investment Pyramid

Rule of 72 – 8th Wonder

Albert Einstein The Rule Of 72 ____________Interest - Not E=mc2 - Greatest Discovery


Albert Einstein is credited with discovering the compound interest rule of 72. Referring to compound interest, Albert Einstein is quoted as saying:

"It is the greatest mathematical discovery of all time"

Rule of 72 Formula

Investing for the Future

When it comes to investing, whether you have a stock account, mutual funds, a retirement account or cash, it´s nice to have a general idea of how long it will take you to earn money.

Interest earnings are the main component of investment income, and the lower your annual percentage yield, the slower your investment portfolio will build wealth for you

However, there is a "rule´ you can use to help you evaluate how quickly an investment is likely to work for you.

It is called the ______ ____ ___________ and it can help you figure compound interest.

What is the Rule of 72

• The rule of 72 is a mathematical formula for calculating compound interest.

Why does it matter?

• If you are socking away your money in a __________ __________, you will want to know how much money you will have in the account in five or ten years.

How Does it Work?


To find the Interest you need to double your money in a specific time, the formula is?

Common Savings Accounts

Here are some fairly common approximations of other types of investment accounts that can give you an idea of how long it would take you to double your money:

___________ savings account: Average interest rate is 4.5%. 72/4.5=16 years to double your money.

___________ __________ account: Average annual percentage yield is 5.15%. 72/5.15=13.98 or 14 years to double your money.

Start Saving Today

Imagine that you open an account with $1,000.00. This account gives you 3% interest every year.

Each month, you add $100.00 into your account.

So not only have you earned $30.00 interest on your initial $1,000.00 deposit at the end of the year, but by the end of the year, you have saved an additional $1,200.00, which you will also earn interest on (it will vary depending upon your bank's policy on when deposits were made, but figure around $30.00).

So, at the end of the year, by starting with $1,000.00 and adding $100.00 per month, you will have $2,260.00.


But, as stated before, the real money comes by adding to the account each month.

If you put $1,000.00 into an account with 3% interest, and then add $100.00 a month, you will have approximately $15,000.00 in __________ years.

In twenty years, you will have approximately $35,000.00.

The Power of Compounding – Interest Examples

Time exerts the __________influence on your investment portfolio than any other force.

Through the power of compounding, a small amount of money over time can grow into a substantial sum.

________ is an investor’s best friend. Investments can increase in value over time – and the longer the time frame, the greater the value. This is achieved through returns that are earned, but not spent.

When the return is reinvested, you earn a return on the return and a return on that return and so on.

Therefore it is important to start saving early in order to benefit from the power of compounding returns.

Investment Growth Compounding

2) The younger you are when you start investing, the more you will benefit from compounding.

Let’s say you begin investing at age 25, putting $200 a month in a tax-deferred retirement plan earning 9%.

Your friend starts investing in the same plan at 45, but puts away twice as much money as you – $400 a month.

assuming you invest 10,000, and the interest rate is 12% a year, the step by step calculation is as follows:

Year 1. 10,000 x 12% = $11,200

Year 2. 11,200 x 12% = $12,544

Year 3. 12,544 x 12% = $14,049

Year 4. 14,049 x 12% = $15,735

Year 5. 15,725 x 12% = $17,623

Year 6. 17, 623 x 12% = $19,738 or approximately 20,000

Calculating Compound Interest

Compound interest means that the ____________ will include interest calculated on interest.

For example, if an amount of $5,000 is invested for two years and the interest rate is 10%, compounded yearly:


At the end of the first year the interest would be ($5,000 * 0.10) or $500

In the second year the interest rate of 10% will applied not only to the $5,000 but also to the $500 interest of the first year.

Thus, in the ______ __________the interest would be (0.10 * $5,500) or $550.

Unless simple interest is stated one assumes interest is compounded.

When compound interest is used we must always know how often the interest rate is calculated each year.

Generally the interest rate is quoted annually. e.g. 10% per annum.

Compound interest may involve calculations for more than once a year, each using a new principal (interest + principal).

The first term we must understand in dealing with compound interest is conversion period.

Conversion period refers to how often the interest is calculated over the term of the loan or investment. It must be determined for each year or fraction of a year.

e.g.: If the interest rate is compounded semiannually, then the number of conversion periods per year would be two. If the loan or deposit was for five years, then the number of conversion periods would be ten.

Compound Interest Formula


So at the end of five years Alan would earn $ 4,499.48 ($14,499.48 – $10,000) as interest.

Note: How to calculate 1.449948,

(1 + 0.01875)^20 = multiply 1.01875 twenty (20) times

1.01875 x 1.01875 x 1.01875 x 1.01875 x 1.01875 x 1.01875 x 1.01875 x 1.01875 x 1.01875 x 1.01875 x 1.01875 x 1.01875 x 1.01875 x 1.01875 x 1.01875 x 1.01875 x 1.01875 x 1.01875 x 1.01875 x 1.01875 (you will find the number is used 20 times)

If he had invested this amount for five years at the same interest rate offering the simple interest option, then the interest that he would earn is calculated by applying the following formula:

S = P(1 + rt),

P = 10,000

r = 0.075

t = 5

Thus, S = $10,000[1+0.075(5)]

= $ 13,750

Comparison Simple vs Compound

Here, the __________ that he would have earned is $3,750.

A comparison of the interest amounts calculated under both the method indicates that Alan would have earned $749.48($4,499.48 – $3,750) more under the compound interest method than under the simple interest method.

Time Value of Money

Investor A invests $2,000 a year for 10 years, beginning at age 25.

Investor B waits 10 years, then invests $2,000 a year for 31 years.

Compare the total ______________ and the total value at retirement of the two investments

There is nothing embarrassing about using a financial professional to help select specific investment products.


There should be conscious need to check out their financial _____________ just as diligently as they would research and picking a stock or mutual fund.

Key Things to Consider

________ tolerance. The greater the risk one is willing to assume to make money the more money to be made.

Time horizon. Number of years to invest – and how long one has to achieve one’s key short-, medium-, and long-term goals– will be one of the major ways to choose investment products.

________– investors shouldn’t put all of their eggs into jus one or even two baskets. Investors seek the dual goal's of growth and safety by distributing their investments among major asset classes; stocks, bonds and cash or cash equivalents.

Contributing to 401(k) plans help employees prepare for financial secure future especially since some employers often match employee contributions.

Its never too soon to start a regular investing plan to take advantage of the tax deferral and compounding that a 401(k) plans offer.

Selecting What is best for YOU

Between 1926 and 2008 the average annual market return on stocks was 9.62 percent; bonds 5.9 percent and cash 3.7 percent

Investing in all three categories helps shelter against major losses.

__________ allocation – financial plans are like fingerprints. Every person needs a financial plan that is suited to his or specific needs. The right mix of stocks, bonds, and cash is ideal asset allocation scheme.

Review and __________the Plan as Needed. Your plan is an ongoing process. It is a tool to help you reach your financial goals. Review and modifying is essential to the effectiveness of the overall plan.

Employer-Sponsored Program

Contributing to 401(k) plans help employees prepare for financial secure future especially since some employers often match employee contributions.

It’s never too soon to start a regular ________plan to take advantage of the tax deferral and compounding that a 401(k) plans offer.

Three ways to grow your wealth quickly

1- Invest in stocks2- Own a ____________3- Own ____________ or real estate


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