1. Unit 3 – Inves ting
○ S aving vs . Inves ting
○ Time Value of Money
○ Inves tment Options
○ Ris k and Reward of Inves ting
2. “ What Do You Think? ”
True or Fals e
Adam started saving $50/month when he turned 18,
while Beth started saving $100/month when she turned
24. They both earn 6% on their money. Beth will have
more money by the time they both turn 30.
False
A dollar today is worth less than a dollar in the future.
False
The higher the interest rate, the less time it takes to
reach a savings goal. True
The smaller the down payment someone makes on a car,
the less interest the owner pays for a car loan.
False
3. S aving vs . Inves ting
Why it’s important to save and invest
your money?
What is the difference between saving
and investing?
Investing:
You will be less tempted to spend your
money.
Your money will make money for you
(interest).
4. S aving vs . Inves ting
Last unit we talked about “PYF”
(Paying Yourself First), but what do
you do with that money?
Invest it so that it makes you more
money!
5. S aving vs . Inves ting
Saving – what people do to meet short-
term goals.
Safe
Earns a small amount of interest
Easy to access
Investing – setting money aside for long-
term goals.
Might not grow because they rise and fall in
value over time.
In the long run they earn a lot more than
savings accounts.
6. Ways to S ave and Inves t
Brainstorm at least 3 ways that you
know people save money to use later.
Example: stash money in a dresser
drawer
Brainstorm at least 3 ways people
invest money for future income and
profit.
Example: buy shares of stock
7. The A dvantage of S tarting E arly
The Impact of Time on the Value of
Money
Did You Know?
Figure 3-1
8. Time Value of Money
A dollar is not always worth a dollar.
Sometimes it’s worth more, sometimes
less.
The value of a dollar changes
dramatically depending on when you
get it and what you do with it.
Relationship among time, money,
and rate of interest.
9. Time Value of Money
Say you have $100 today. If you keep it in
your dresser drawer for a year, you will still
have $100 in a year. In a year, $100 may
buy less than it does now because of
Inflation.
A rise in the cost of goods and services over
time.
Inflation decreases the spending power of
each dollar you have.
Think back to what a candy bar cost when you
were in elementary school.
Ask your parents how much gas cost when they
started driving!
10. Time Value of Money
Now, say you put that $100 into a
savings account that pays 3% interest
a year. A year later you will have $103
because of earned interest.
Earned interest is the payment you receive for
allowing a financial institute or corporation
use your money.
Interest = Principal ($) x Interest Rate x Time
? = $100 x 3% (0.3) x 1 yr
11. Time Value of Money
The more money you have to save or
invest, the more money you are likely to
earn.
The higher the rate of interest you earn,
the more money you are likely to have.
The sooner you invest your money, the
more time it has to make new money,
making it likely that you could earn much
more as a result.
12. The Power of C ompounding
Time value of money works because of
compounding.
Compound interest earns you interest on
your interest
A = P (1 + i) ^ n
A is the amount in the account
P is the principal ($ invested)
i is expressed as a decimal
n is the number of years compounded
13. The Power of C ompounding
Assume you have $10 to invest. Using the
two interest rates below, 4% and 8%,
determine the compound value of your
$10 for each of the time periods listed.
$11.70 $12.66
$10.80 $11.66 $13.60 $15.87
A = P (1 + i) ^ n
14. The Price of Procras tination
The more time you have to invest, the more
money you are likely to end up having.
By waiting to invest, you’re paying an
opportunity cost.
How much less money would you have if you waited 10
years to invest $100 per month at 8%, versus starting
to do it right now? A = P (1+i) ^ n
A = $100 (1+.08)^10
= $215.89 vs. $0
While saving for your goals involves delayed
gratification, procrastinating in saving for your
goals is really delayed gratification.
15. The Rule of 72:
Double Your Money
You can see how long it will take to
double your money by dividing 72 by the
interest rate.
Your grandparents give you $200 for your
birthday and you want to use it to start saving
for your own car. If you put the money into an
account that earns 6% interest a year, how
long will it take to grow $400?
72 / 6 = 12
So, in 12 years your money will have doubled
to $400.
16. The Rule of 72:
Double Your Money
What if your dad tells you about an
account where you could earn 9% a year
on your money?
72 / 9 = 8
What if 8 years is too long to wait and you
want that $400 in four years instead?
72 / 4 = .18
With only 4 years to invest, your money
will double if you can find an investment
that earns 18%.
17. The Impac t of Higher Returns
What interest rate would be necessary to double
a $100 investment in 24 years? 72 / 24 = 3%
How many years would it take to double $100 if
it earned interest at a rate of 8% per year?
72 / 8 = 12.5 years
What interest rate would be necessary to double
a $100 investment in 11 years? 72 / 11 = 6.55%
How many years would it take to double $100 if
it earned 7.75% interest per year?
72 / 7.75 = 9 years
18. Ris ky B us ines s
Risk is the uncertainty that the anticipated
return will be achieved. All investments involve
some degree of risk.
Reward is your return on investment.
The risk/reward trade-off is the principle that
an investment must offer higher potential
returns to compensate for the increased potential
unpredictability.
The greater the risk you take with your money, the
higher the potential returns on your investments.
The lower the amount of risk you take, the lower the
potential returns will likely be.
20. Ris ky B us ines s
Return can be made up of income such as
interest or dividends (a share of the profits you
receive as a stockholder) and capital gains (growth
stock prices).
The rate of return (rate of interest) determines
how fast your money is growing.
If you bought Stock Z for $10 per share in 2000,
then sold it for $25 per share in 2005, your profit
or capital gain is $15 per share.
If you bought Stock Z for $25 per share in 2005,
then sold it for $15 per share in 2009, your capital
loss is $10 per share.
21. Income vs . Growth
Inves tments
Income means you get paid, in cash,
for owning the account or investment.
Set aside money for a few months or a
few years - less risky than growth
investments – value tends to fluctuate
less, providing steadier returns over time.
24. Income vs . Growth
Inves tments
Income means you get paid, in cash, for
owning the account or investment.
Set aside money for a few months or a few years -
less risky than growth investments – value tends
to fluctuate less, providing steadier returns over
time.
Growth means they buy and hold an
investment with the hope that it will increase
in price, over time.
Longer periods of time, several years or even
decades - earn higher returns than income
investments – fluctuates more, higher long-term
returns.
27. Divers ification:
S pread Your Money A round
Reduce investment risk by putting
money in several different types of
investments.
By spreading your money around,
you’re reducing the impact that a drop
in any one investment’s value can have
on your overall investment portfolio.
28. Divers ification
You get $100 and decide to put $50
into both a money market account and
a stock. Five years later, the stock
company collapses from a scandal, and
the stock you invested in is worthless.
You’ve now lost $50, but you would
have lost the entire $100 if you hadn’t
split your investment between the
money market account and the stock.
29. Dollar C os t A veraging
The practice of investing a fixed amount
in the same investment at regular
intervals, regardless of what the market is
doing.
Eliminates worrying about investing at the
“right” or “wrong” time.
Evens out the ups and downs of the market.
As the price of the investment rises, you
simply end up purchasing fewer shares and
when the price falls, you end up purchasing
more.
30. Dollar C os t A veraging
Say Eddie decides to invest $50 into ABC Mutual Fund every month.
At the end of the year, Eddie would own
43.21 shares purchased at varying prices.
More shares were purchased when the
mutual fund share price was low. Fewer
shares were bought when the share price
was high.
Since he got 43.21 shares for $600 during
the year, he paid only $13.89 per share.
If you look at the price per share he paid
each month, the average monthly price was
$14.20 a share. So, by using dollar cost
averaging, Eddie received a discount of
about 31 cents on every share he
purchased.
If Eddie had waited until December when he
had all $600 saved and was ready to invest,
he would have only been able to buy 36.47
shares at that price.
31. Vocabulary
Saving
Short-term goals, safe, earn small amount of interest, easy
access to money
Investing
Longer-term goals, no guarantee money will grow,
investments rise and fall in value over time, usually make
more than savings account in long run
Time Value of Money
Relationship among time, money, and rate of interest
Inflation
A rise in the cost of goods and services over time
Earned Interest
Payment you receive for allowing a financial institution or
corporation to use your money
Compound Interest
Earning interest on interest
32. Vocabulary
Rule of 72
How long it’ll take to double your money (divide 72 by the
interest rate)
Stock Market
Place where stocks are bought and sold
Dividends
A share of the profits you receive as a stockholder
Capital Gains
Investor buys a stock and sells it later at a higher price
Capital Loss
Investor ends up selling a stock at a lower price
Rate of Return
Annual percentage return on an investment
Diversification
Reducing investment risk by putting money in several
different types of investments
