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Bell Ringer What are the three rules for investing?

1. Start Early

Give money time to grow

2. Buy and hold

Leave your money invested

3. Diversify

Don’t put your eggs all in one basket

Bell Ringer Using the simple interest equation, figure out how

much interest you would earn in the following scenario:

You invested 500 in a 2% interest account for 10 years

Interest = 500 x .02 x 10

Interest = $100

Bell Ringer Using the compound interest calculator, figure out

how much interest you would earn in the following scenario:

You invested 500 in a 2% interest account for 10  years.

Interest = $109.50

How much more would you earn if you added 100 annually to the investment above?

Interest = $226.37

How long would it take you to double your money if you had an account that gave you 3% interest?

# of years = 72 divided by 3

# of years = 24

American’s save too little US Bureau of Labor Statistics reports

that we spend on average 97% of our disposable income.

What is disposable income? It is after-tax income. What we

actually bring home as a paycheck. For teens it may be money from

allowance, money received as a gift or money earned doing odd jobs.

In other words we only save 3.%

Disposable Income and Saving

Disposable income = consumption + saving

Money Brought Home = What is spent on goods and services + what is saved.

Saving = disposable income – consumption

What is saved = money brought home – what is spent on goods and services.

Pay Yourself First What do you think it means to “Pay Yourself First”?

A person saves before spending money on goods and services

What are some reasons why people save? to gain the satisfaction of purchasing a special gift to make large purchases (car, house, college, etc) to meet emergencies that might arise because the money will be matched by someone

Starting Early - AnnaYear Beginning

BalanceAddition to Principal

Return Ending Balance

0 0 2,080 88.40 2,168.40

1 2,168.40 2,080 272.71 4,521.11

2 4521.11 2,080 474.69 7,073.81

3 7,073.81 2,080 689.67 9,843.48

4 9,843.48 2,080 925.10 12,848.58

5 12,848.58 2,080 1,180.53 16,109.11

20 104,900.72 2,080 9,004.96 115,985.68

25 170,583.24 2,080 14,587.98 187,251.22

30 269,347.21 2,080 22,982.91 294,410.12

35 417,854.31 2,080 35,606.02 455,540.33

40 641,158.01 2,080 54,586.83 697,824.84

45 976,930.11 2,080 83,127.46 1,062,137.57

Starting Late - ShawnYear Beginning

BalanceAddition to Principal

Return Ending Balance

0 0 0 0 0

5 0 0 0 0

10 0 2,080 88.40 2,168.40

15 12,848.58 2,080 1,180.53 16,109.11

20 32,168.43 2080 2,822.72 37,071.15

25 61,281.85 2080 5,292.00 68,590.85

30 104,900.72 2080 9,004.96 115,985.68

35 170,583.24 2080 14,587.98 187,251.22

40 269,347.21 2080 22,982.91 294,410.12

45 417,854.31 2080 35,606.02 455,540.33

Answers How much money did Anna invest in 45 years?

$93,600

What was Anna’s savings (ending balance?)

$1,062,137.57

How much money did Shawn’s invest in 45 years?

$72,800

What was Shawn’s savings (ending balance?)

$455,540.33

Rule #2: Buy and Hold In order to leave money in savings or investments,

you have to do these things:

Spend less than you receive. How? Perhaps you could….

Earn more by improving your formal education or job skills.

Spend less by using a budget to keep track of where your money is going.

Become connected to financial institutions. How? Open and maintain accounts at mainstream

financial institutions – banks, credit unions, and brokerages.

Manage your credit responsibly. How? Limit the number of credit cards you have. Limit your purchases to what you can pay

off each month. Apply for loans when you are confident that your

current income, will allow you to repay the loan.

Rule #3: DiversifyDon’t Put All Your Eggs in One Basket

If you put all your money in one stock and a disaster occurs -- it will hit you hard.

With your money spread out across a variety of assets you are not hurt as badly when any one asset does poorly.

Mutual funds provide one means by which investors can easily diversify.

Pools investor’s money

Allows people in effect to own small amounts of many different assets

Enable investors to avoid the risk that comes from owning any one asset

Forms of Saving and Investing Savings Accounts

Provide a small but steady return.

Certificates of deposit (CD’s)

Lending money to a bank for a certain amount of time. Very safe, but instant access carries a penalty.

Bonds

Lending money to a corporation or government for a certain amount of time, with a promise of higher returns than those offered by bank savings accounts and CD’s.

Stocks

Part ownership in a company, offering higher risks, and potentially higher returns than some other investments.

Real Estate

The risk and benefits of being a landlord.

Risks and Rewards

Bonds

Certificates of Deposit

Savings Accounts

Highest Risk – Highest Potential Return or Loss

Lowest Risk – Lowest Potential Return or Loss

Advantages and Disadvantages of Alternative Forms of Saving and Investing

Savings Accounts

Pro – safe investment

Con – small return

Certificates of Deposit

Pro – safe investment

Con – penalty if you withdraw the money early; small return

Bonds

Pro – safe investment

Con – return on money takes many years

Advantages and Disadvantages of Alternative Forms of Saving and Investing

Stocks

Pro – chance of higher return

Con – higher risk

Real Estate

Pro – almost always good investment with chance of a high return

Con – duties that come with a landlord; small chance of loss (if a landfill opens up near your property; market tanks, etc)

Vocabulary for Investing(what you should consider before you invest)

1. Liquidity – the ease with which savings or investments can be turned into cash

2. Risk – the chance of losing some or all of the money invested

3. Return – Earnings from an investment