Unit 3 Saving & Investing

A Little Can Add Up

• Save this each week … at % interest … in 10 years you’ll have• $7.00 5% $4,720• 14.00 5% $9,440• 21.00 5% $14,160• 28.00 5% $18,880• 35.00 5% $23,600

• You can buy … two fast food meals or one movie ticket (and a candy bar) or save $7.00 this week.

• You can buy … two small cheese pizzas or one large pepperoni pizza, delivered or one new CD or save $14.00 this week.

• What can you give up to save for your financial goals?

Types of Savings Accounts

• statement account• Depositor receives monthly statements.• Accounts are usually accessible through 24-hour automated

teller machines (ATMs).• Interest rates are lower at banks and savings than at credit

union. • Funds are easily accessible.

• interest-earning checking account• Combines benefits of checking and savings.• Depositor earns interest on any unused money in his/her

account.

Choosing a Savings Account

• Interest Rate: • All money earned comes from this factor.

• Balance Requirements • Some accounts require a certain balance before paying any

interest.

Truth in Savings Act

• The Truth in Savings Act (Federal Reserve Regulation DD) requires financial institutions to disclose the following information on savings account plans they offer:• Fees on deposit accounts• The interest rate• Other terms and conditions• Truth in Savings defines the year as 365 days rather than 360, 366,

or some other number.

Certificate of Deposit

• what they are and how they work• Bank pays a fixed amount of interest for a fixed amount of

money during a fixed amount of time.

• benefits• No risk, Simple, No Fees, and offers high interest rates than

savings accounts.

• trade-offs• Restricted access to your money• Withdrawal penalty if cashed before expiration date (penalty

might be higher than the interest earned)

Simple Interest

• Principal (Dollar Amount)* Interest Rate * Length of Time = Amount Earned

• Example• If you had $100 in a savings account that paid 6% Simple

Interest, during the first year you would earn $6.00• The account would continue to grow at $6.00 per year

despite the accumulated interest.

Compound Interest

• Interest is paid on original amount of deposit, plus any interest earned. • (Original Amount + Earned Interest) * Interest Rate * Length of Time

= Amount Earned

• Example: • If you had $100 in a Savings Account that paid 6% interest

compounded annually, the first year you would earn $6.00 in interest. • $100 * .06 * 1 = $6.00• $100 + $6 = $106.00

• Year 2• $106 * .06 * 1 = $6.36• $106 + $6.36 = $112.36

Compound Interest

• EASY Formula

• Future Value of Money = Principal * (1+Interest Rate)² (number of years it is compounding)

© Family Economics & Financial Education – Revised November 2004 – Saving Unit – Rule of 72Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at

the University of Arizona

The Rule of 72

The most important and simple rule to financial

success.

1.14.3.G1

© Family Economics & Financial Education – Revised November 2004 – Saving Unit – Rule of 72Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at

the University of Arizona

Rule of 72

72 = Years to

Interest Rate

double investment (or debt)

The answers can be easily discovered by knowing the Rule of 72 The time it will take an investment (or debt) to

double in value at a given interest rate using compounding interest.

1.14.3.G1

© Family Economics & Financial Education – Revised November 2004 – Saving Unit – Rule of 72Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at

the University of Arizona

Albert Einstein

“It is the greatest mathematical

discovery of all time.”

Credited for discovering the mathematical equation for

compounding interest, thus the

“Rule of 72”72 / Years to double investment = Interest Rate Required

72/Interest Rate = Years to double a sum of money

1.14.3.G1

© Family Economics & Financial Education – Revised November 2004 – Saving Unit – Rule of 72Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at

the University of Arizona

What the “Rule of 72” can determine How many years it will take an investment

to double at a given interest rate using compounding interest.

How long it will take debt to double if no payments are made.

The interest rate an investment must earn to double within a specific time period.

How many times money (or debt) will double in a specific time period.

1.14.3.G1

© Family Economics & Financial Education – Revised November 2004 – Saving Unit – Rule of 72Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at

the University of Arizona

Things to Know about the “Rule of 72”The “Rule of 72” Is only an approximation The interest rate must remain constant The equation does not allow for

additional payments to be made to the original amount

Interest earned is reinvested Tax deductions are not included within

the equation

1.14.3.G1

© Family Economics & Financial Education – Revised November 2004 – Saving Unit – Rule of 72Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at

the University of Arizona

Doug’s Certificate of Deposit

Invested $2,500 Interest Rate is 6.5%

72 = ____ years to double investment

Doug invested $2,500 into a Certificate of Deposit earning a 6.5% interest rate. How

long will it take Doug’s investment to double?

1.14.3.G1

© Family Economics & Financial Education – Revised November 2004 – Saving Unit – Rule of 72Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at

the University of Arizona

Another ExampleThe average stock market return

since 1926 has been 11%

Therefore, every ______ years an individual’s investment in the stock

market has doubled

72 = _______ years to double investment

1.14.3.G1

© Family Economics & Financial Education – Revised November 2004 – Saving Unit – Rule of 72Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at

the University of Arizona

Jessica’s Credit Card Debt

$2,200 balance on credit card 18% interest rate

72 = ____ years to double debt

Jessica has a $2,200 balance on her credit card with an 18% interest rate. If Jessica chooses to not make any payments and does not receive late charges, how long

will it take for her balance to double?

1.14.3.G1

© Family Economics & Financial Education – Revised November 2004 – Saving Unit – Rule of 72Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at

the University of Arizona

Rhonda’s Treasury Note

72 =______ years

% to double investment

Age Investment

22 $2,500

Rhonda is 22 years old and would like to invest $2,500 into a U.S. Treasury Note earning 7.5%

interest. How many times will Rhonda’s investment double before she withdraws it at age 70?

1.14.3.G1

© Family Economics & Financial Education – Revised November 2004 – Saving Unit – Rule of 72Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at

the University of Arizona

Another Example $500 invested at age 18 7% interest How many times will investment double before

age 65?

72 =______ years

to double investment

Age Investment

18 $500

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© Family Economics & Financial Education – Revised November 2004 – Saving Unit – Rule of 72Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at

the University of Arizona

TaxesA person can choose to invest into two

types of accounts:Taxable Account – taxes charged to

earned interestTax Deferred Account – taxes are

not paid until the individual withdraws the money from the investment

Bonds

• What Are They• A bond is an “IOU,” certifying that you loaned money to a

government or corporation and outlining the terms of repayment.

• How They Work• Buyer may purchase bond at a discount. The bond has a fixed

interest rate for a fixed period of time. When the time is up, the bond is said to have “matured” and the buyer may redeem the bond for the full face value.

• Types• Corporate, Municipal, Federal Government (Safest)

Mutual Funds

• What Are They• Professionally managed portfolios made up of stocks, bonds, and

other investments.

• How They Work• Individuals buy shares, and fund uses money to purchase stocks,

bonds, and other investments.• Profits returned to shareholders monthly, quarterly, or semi-

annually in the form of dividends.

• Advantages• Allow small investors to take advantage of professional account

management and diversification normally only available to large investors.

Stocks

• What Are They• Stock represents ownership of a corporation. Stockholders own

a share of the company and are entitled to a share of the profits as well as a vote in how the company is run.

• How Earnings Are Made• Company profits may be divided among shareholders in the

form of dividends. Dividends are usually paid quarterly.• Larger profits can be made through an increase in the value of

the stock on the open market.

Stocks

• Advantages• If the market value goes up, the gain can be considerable.• Money is easily accessible.

• Disadvantages• If market value goes down, the loss can be considerable.• Selecting and managing stock often requires study and the help

of a good brokerage firm

Real Estate

• Ways To Invest• Buy a house, live in it, and sell it later at a profit.• Buy property and rent it.• Buy land and hold it until it rises in value.

• Advantages• Excellent protection against inflation.

• Disadvantages• Can be difficult to convert into cash.

Retirement Plans

• What Are They And How They Work• Plans that help individuals set aside money to be used after

they retire.• Federal income tax not immediately due on money put into a

retirement account, or on the interest it makes.• Income tax paid when money is withdrawn.

Retirement Plans

• Types of Retirement Plans • Individualized Retirement Plan (IRA)• Roth IRA• 401 (K)

Avoiding Investment Fraud

• Types• Illegal pyramids, insider trading, and unlicensed investment

brokers• High-risk “penny” stocks and fraudulent securities• Fraudulent franchises and business opportunities

Avoiding Investment Fraud

• Steps to Avoid• Become informed before investing• Talk with others who have made similar investments• Obtain information from state and federal regulatory agencies• Never buy over the phone without first investigating the

situation• Avoid investments that seem “too good to be true”—they

probably are.