Savings & Investments HOW TO BECOME A MILLIONAIRE.
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Transcript of Savings & Investments HOW TO BECOME A MILLIONAIRE.
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Savings & Investments
HOW TO BECOME A MILLIONAIRE.
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Savings & Investments What do you guys “invest” to earn an
income? YOUR TIME! This unit we will focus on investing your
money for an additional income.
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Savings & Investments How many of you do not have enough
money to save or invest? The MOST IMPORTANT
MONEY/FINANCIAL SKILL TO REMEMBER…
PAY YOURSELF FIRST!!! KEY TO FINANCIAL SUCCESS
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Savings & Investments The first thing to do with your paycheck
is to PAY YOURSELF. Before bills, payments, shopping, etc… If you have a lot of payments, a good
start to pay yourself is 5% of your paycheck.
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Savings and Investments Some of you may feel you still do not
make enough to save. There are programs that help Bank of America’s “Keep the Change”
Program.
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Savings & Investments The big difference between Savings and
Investments is TIME. SAVINGS is usually money set aside for
short-term goals
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Savings Savings accounts
are usually very safe but earn a small amount of money.
You should “shop” around at banks to see which bank offers the highest interest.
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Savings The GOOD thing
about savings, is you can get your money out whenever you want.
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Investing When you INVEST, you set your money
aside for future income, benefits, or profit to meet long-term goals. EX: Retiring (Long-term…30-40 years)
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Investing When you invest,
there are NO guarantees you will make money.
The EARNINGS or LOSSES are much greater than compared to a Savings account.
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Investing The higher the
risk you take investing, the greater the potential for high returns
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Key Investment Principles
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Key Investment Principles Time: We already talked about time. Example:
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Key Investment Principles Risk and Return Investments are definitely more risky However, with higher risk comes higher
reward The reverse is also true!!!
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Key Investment Principles Rate of Return: How fast your money grows. This is critical with investing THERE IS NO DIFFERENCE
BETWEEN INTEREST RATE AND RATE OF RETURN.
The higher the interest rate, the higher return you’ll have.
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Key Investment Principles Diversification: Reduction of investment risk by
spreading your invested dollars among several different investments.
Other words: “Don’t put all your eggs in one basket.”
Have money in savings, stocks, mutual funds, CD’s etc…
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Key Investment Principles Diversification cont… Example You have $100 You put $50 in stock A and $50 in stock
B. Stock A crashes and is now worth
nothing…you lost $50 instead of the whole $100.
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Key Investment Principles Inflation Occurs when the price of goods and
services rise/increase. Usually raises 3 – 4% per year Skateboard, hamburger, purse, tennis
shoes now all cost more. REMEMBER: A DOLLAR TODAY IS
WORTH MORE THAN A DOLLAR TOMORROW
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Key Investment Principles Inflation cont… Example 1971, stamp cost 8 cents Today, stamps cost 42 cents That’s a 525% increase!!! That’s an average of 13% per year
increase
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Key Investment Principles Because of inflation, you could lose
money while saving it!!! Example: You want a candy bar today
that costs $1 Instead you put a dollar in a savings
account that has a rate of return of 2%. Next year that account has $1.02 in it. Because of inflation, that candy bar
costs $1.03 now
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Key Investment Principles Example cont… Inflation went up higher than your
return!!! This is not uncommon When this happens, it’s equivalent to
losing money.
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Key Investment Principles
Candy Bar Inflation of 3% Today $1 candy bar cost
$1 2nd year = $1.03 3rd = $1.09 10th = $1.34 20th = $1.81
Savings Account Rate of Return of 2% Today $1 in savings is $1. 2nd year = $1.02 3rd = $1.04 10th = $1.22 20th = $1.49
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Choices Stock
Simulation!!!
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Choices When people think of investing, they
think of stocks. Many more options!!!
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Time Value of Money
You ALL have a GREATER amount of one resource RIGHT NOW than you will EVER HAVE at any point in your life.
TIME!!! The YOUNGER you start, the WEALTHIER
you will BE.
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The Earlier you Start, The Earlier you can Stop. The sooner you
invest for retirement, the sooner you can stop working and retire.
TIME IS MONEY
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Time Value of Money Time Value of Money- is the
relationship between time, money, and rate of return (interest rate), and their effect on earnings growth.
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Time Value of Money TIME: The more time you have to save,
the more MONEY you will have at the end of the period.
MONEY: The more money you have to save, the more you will have at the end.
RATE OF RETURN: The higher interest rate, the more money you will have.
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Time Value of Money A dollar TODAY is worth more than a
dollar TOMORROW. For example: If you invest $1 today, in
two years it may be worth $1.15 The 15 cents is called Earned Interest.
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Time Value of Money Earned Interest- The payment you
receive for allowing a financial institution or corporation to use your money.
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Time Value of Money If you all started to put the maximum
amount into an IRA, ($5,000/year) by the time you are 59 1/2 years old, you will have around…
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Time Value of Money
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Compounding When your money works for you, it
grows in value or compounds. Compounding - (compound interest),
is the idea of earning interest on interest.
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Compounding Example: Assume you have $100 in an
account earning 10% interest per year. At the end of that one year you will have
$110. How much will you have at the end of
the second year?
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Compounding You will have $121
Don’t forget that your interest is making interest.
In year 2 you still have your $100 working for you at 10%.
But you now also have the interest you made ($10) working for you at 10%.
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Compounding Your $100 will make your $10 every
year if it’s locked in at 10% interest. However, your earned interest, since it
is increasing every year, will gradually make you more money every year.
3rd year you will have $133.10
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COMPOUNDING PROBLEMS