Financial Planning
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Transcript of Financial Planning
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Financial Planning
Saving/ InvestingTime Value of Money
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Show Me the Money!
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Why does Time Value of Money Concept Work?
• Compounding
• Compound Interest
– Idea of earning interest on interest
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Compounding / Compound Interest
•SUPERSIZE YOUR ACCOUNT
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Example of Compounding
• You put $100 in an investment that earns 10% a year$100 x .10 x 1 year = $10You would have $110 at end of one year
But in year 2, you will earn 10% on the entire $110. So you actually earn $11 in year 2, bringing the balance up to $121.
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Compounding
• Like the energizer bunny
…..just keeps going and going and going…….…..just keeps going and going and going…….
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Compounding any # of years• Formula
A = P (1+i)A Amount in the accountP Principal (amount originally invested)i Interest Rate (expressed as a decimal)
N Number of Years Compounded
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How much will you have after 5 years?
• Amount = $100 (1+.10)
• $161.05
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Financial Pyramid• Risk• Growth• Saving• Protection
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Stock
• Ownership in a company
• Price fluctuates daily
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Mutual Fund
• Basket of Stocks---lower risk than just owning 1 stock
McDonalds Walmart
JC Penny
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Stock Market
• The place where stocks are bought and sold.
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Risk
• The uncertainty that the anticipated return will be achieved.
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Why invest then if there is a risk?
• Potential for Reward!!!!• Higher the risk, the higher potential returns on
your investments.
• Lower the risk, the lower potential returns on your investments.
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Penny stocks
Mutual Funds,
Real Estate
Bonds, Money Markets
Insured Checking accounts
U.S. Savings Bonds
Certificates of Deposit
MORE RISK
Growth
Savings
Protection
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Risk of Investments
• ALL investments involve some degree of risk.
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If all investments carry some degree of risk, why do people seek them for the
reward?
Trying to grow that money tree!!!! Why?
Inflation
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Why take on risk?
• Savings accounts and insured investments most likely will not keep pace with inflation.
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Risk / Reward Tradeoff
• Higher the risk- the higher potential for reward
• Lower risk- the lower potential for reward
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To Choosing Investments right for you
• Is the risk /reward trade-off
• Most people have different ideas about how much risk they should take with their money.
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Risk / Reward
• Conservative– Want to keep it someplace safe
• More Aggressive– Are willing to invest some place riskier
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Reward for taking on risk
• RETURN ON INVESTMENT
• Returns can be made up of income such as interest or dividends.– Dividends- share of the profits you receive for
being a stockholder
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DividendsPart of the return on your investment!
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Risk Versus RewardExercise
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Investments
• Should be included in financial planning.
• P.Y.F. – paying yourself first– Even if it is a little—b/c we learned the power of
compounding interest
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What if you don’t have enough have a lot of money to set aside?
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Smart, Steady, Eddie
• Doesn’t have a lot of money
• He knows about something called – Dollar cost averaging
• Practice of investing a fixed amount in the same investment at regular intervals, regardless of what the market is doing
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Dollar Cost Averaging
• Eddie knows it 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 shares.
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• DOLLAR COST AVERAGING EXERCISE WITH STEADY EDDIE.
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In Summary
• Recognize the risks and rewards to investing
• Risks—uncertainty---you may lose your money or it may go down in value temporarily
• Rewards-You may make $!– Compound Interest
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In Summary Continued
• Investing should be a part of an individual’s financial plan.– Can do by Dollar Cost Averaging
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Questions?