Financial Planning

Saving/ InvestingTime Value of Money

Show Me the Money!

Why does Time Value of Money Concept Work?

• Compounding

• Compound Interest

– Idea of earning interest on interest

Compounding / Compound Interest

•SUPERSIZE YOUR ACCOUNT

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.

Compounding

• Like the energizer bunny

…..just keeps going and going and going…….…..just keeps going and going and going…….

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

How much will you have after 5 years?

• Amount = $100 (1+.10)

• $161.05

Financial Pyramid• Risk• Growth• Saving• Protection

Stock

• Ownership in a company

• Price fluctuates daily

Mutual Fund

• Basket of Stocks---lower risk than just owning 1 stock

McDonalds Walmart

JC Penny

Stock Market

• The place where stocks are bought and sold.

Risk

• The uncertainty that the anticipated return will be achieved.

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.

Penny stocks

Mutual Funds,

Real Estate

Bonds, Money Markets

Insured Checking accounts

U.S. Savings Bonds

Certificates of Deposit

MORE RISK

Growth

Savings

Protection

Risk of Investments

• ALL investments involve some degree of risk.

If all investments carry some degree of risk, why do people seek them for the

reward?

Trying to grow that money tree!!!! Why?

Inflation

Why take on risk?

• Savings accounts and insured investments most likely will not keep pace with inflation.

Risk / Reward Tradeoff

• Higher the risk- the higher potential for reward

• Lower risk- the lower potential for reward

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.

Risk / Reward

• Conservative– Want to keep it someplace safe

• More Aggressive– Are willing to invest some place riskier

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

DividendsPart of the return on your investment!

Risk Versus RewardExercise

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

What if you don’t have enough have a lot of money to set aside?

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

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.

• DOLLAR COST AVERAGING EXERCISE WITH STEADY EDDIE.

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

In Summary Continued

• Investing should be a part of an individual’s financial plan.– Can do by Dollar Cost Averaging

Questions?