Saving Money Saving Money

The Why, When, and HowThe Why, When, and How

PretestPretest

1.1. True or False:True or False: Only those who are Only those who are financially well off can save.financially well off can save.

2.2. True or False:True or False: The best place to save The best place to save money is at your local bank.money is at your local bank.

3.3. True or False:True or False: You should set aside You should set aside savings before you pay your bills.savings before you pay your bills.

4.4. True or False:True or False: The two biggest factors in The two biggest factors in building wealth are time and the amount building wealth are time and the amount of money you save.of money you save.

Learning OutcomesLearning Outcomes

Identify the three basic Identify the three basic reasons for saving reasons for saving moneymoney

Define emergency fund Define emergency fund and compound interestand compound interest

Demonstrate how Demonstrate how compound interest workscompound interest works

Identify the best place to Identify the best place to save your moneysave your money

You can and should SaveYou can and should Save

You should save You should save money before you money before you pay your billspay your bills

Savings is a prioritySavings is a priority Three major reasons Three major reasons

why every person why every person (regardless of their (regardless of their income) should saveincome) should save

Term: Emergency FundTerm: Emergency Fund

Emergency fund: this money is saved and Emergency fund: this money is saved and then set aside for emergencies onlythen set aside for emergencies only

Most financial planners recommend saving Most financial planners recommend saving 3-6 months worth of your salary3-6 months worth of your salary

Others add that you should have $1,000 Others add that you should have $1,000 cash available at all timescash available at all times

Why should you have an emergency fund?Why should you have an emergency fund?

11stst Reason to save: Plan for the Reason to save: Plan for the UnexpectedUnexpected

Accidents will happen. Accidents will happen. Cars will break down. Cars will break down. Unexpected illnesses Unexpected illnesses occur.occur.

When an emergency When an emergency happens the money is happens the money is therethere

Called “a rainy day fund”Called “a rainy day fund” When it is used it is When it is used it is

quickly replaced againquickly replaced again

22ndnd Reason to Save: Buying Large Reason to Save: Buying Large PurchasesPurchases

Some items are expensive to purchaseSome items are expensive to purchase CarsCars College education for your childCollege education for your child Home repairsHome repairs

A savings plan will mean you can pay for A savings plan will mean you can pay for these items in full. You will not need to get these items in full. You will not need to get a loan and pay interest.a loan and pay interest.

33rdrd Reason to Save: Builds Wealth Reason to Save: Builds Wealth

Saving money builds Saving money builds wealthwealth

Instead of paying Instead of paying interest you receive interest you receive interest interest

Compound InterestCompound Interest

Compound interest: is interest paid on Compound interest: is interest paid on interest previously earnedinterest previously earned

It is credited daily, monthly, semi-annually, It is credited daily, monthly, semi-annually, or annually depending on the accountor annually depending on the account

It is calculated on both the money you put It is calculated on both the money you put in (the principal) and any interest you in (the principal) and any interest you previously earnedpreviously earned

5 minute Video Clip5 minute Video Clip

Listen as Dave Listen as Dave Ramsey, a famous Ramsey, a famous financial expert, financial expert, explains compound explains compound interest in terms of interest in terms of purchasing a carpurchasing a car

Video Clip: Drive Free Video Clip: Drive Free Retire RichRetire Rich

How does compound interest workHow does compound interest work Imagine you save $1,000 and earn 10% Imagine you save $1,000 and earn 10%

interest on itinterest on it Your interest at the end of the year is $100Your interest at the end of the year is $100 Your second year you now have $1,100 in Your second year you now have $1,100 in

your accountyour account Assuming you are still earning 10% the Assuming you are still earning 10% the

return on your investment the second year return on your investment the second year is $110.is $110.

Your third year you invest $1,210 and see Your third year you invest $1,210 and see a return of $121a return of $121

The Story of BenThe Story of Ben

Ben saves $167 a monthBen saves $167 a month He invests $2,000 a year beginning at age He invests $2,000 a year beginning at age

19 and stopping at age 2619 and stopping at age 26 He invested only $16,000 (8 years He invested only $16,000 (8 years

multiplied by $2,000)multiplied by $2,000)

The Story of ArthurThe Story of Arthur

Arthur also saves $167 a monthArthur also saves $167 a month Arthur starts saving at age 27 and stops at Arthur starts saving at age 27 and stops at

age 65age 65 He invests 2,000 a month until he is 65, He invests 2,000 a month until he is 65,

which means he invests $78,000 total.which means he invests $78,000 total.

The Story of Ben and ArthurThe Story of Ben and Arthur

Who will have a bigger Who will have a bigger returnreturn or or interest interest yieldyield on their investment—Ben or Arthur? on their investment—Ben or Arthur?

Look at the “Ben and Arthur” worksheetLook at the “Ben and Arthur” worksheet

Powerful IllustrationPowerful Illustration

Ben invested only $16,000 yet made Ben invested only $16,000 yet made $2,288,996$2,288,996

Arthur invested more money but started Arthur invested more money but started laterlater

Rule of thumb: the earlier you save the Rule of thumb: the earlier you save the more return you will see later onmore return you will see later on

Assumption in this illustrationAssumption in this illustration

Assumes an annual interest rate of 12%Assumes an annual interest rate of 12% Most banks average a 4-6% annual Most banks average a 4-6% annual

interest rate interest rate For a higher rate of return you need to For a higher rate of return you need to

invest in the stock marketinvest in the stock market

Post-testPost-test

1.1. True or False:True or False: Only those who are Only those who are financially well off can save.financially well off can save.

2.2. True or False:True or False: The best place to save The best place to save money is at your local bank.money is at your local bank.

3.3. True or False:True or False: You should set aside You should set aside savings before you pay your bills.savings before you pay your bills.

4.4. True or False:True or False: The two biggest factors in The two biggest factors in building wealth are time and the amount building wealth are time and the amount of money you save.of money you save.

Post Test AnswersPost Test Answers

1.1. FalseFalse

2.2. FalseFalse

3.3. True True

4.4. TrueTrue

SummarySummary You can and should save You can and should save

moneymoney At your age you have At your age you have

great power to build great power to build wealthwealth

It is better to save it with It is better to save it with a company that has a a company that has a high annual interest ratehigh annual interest rate

Tomorrow we’ll discuss Tomorrow we’ll discuss this—the difference this—the difference between saving and between saving and investinginvesting