Savings and Investments Savings usually money you set

Savings and Investments

Savings: usually money you set aside for short-term goals. Invest: you set aside money to grow, and benefit from its maturity. Help meet long-term goals. Time value of money is the relationship between time, money, and rate of return (interest), and their effect on earnings growth. A dollar today can have greater value to you tomorrow if you invest it. Rate of Return: how fast your money grows. * You should always pay yourself first. * Amount saved is not as critical as developing a savings habit. * Determine if you want to be an “owner” or a “lender”

Lender: typical investments are savings accounts, U. S. savings bonds, and certificates of deposits. Financial institutes pay you to borrow your money. (low risk) Owner: typical investments include stocks. (I own a small piece of the company) Higher risk = greater return or your investment Lower the risk = the lower the return on your investment

Simple interest is interest paid one time a year at the end of the year on the average balance in a savings account. It is the amount you earn on just the principal deposited, not on any previous interest earned. Once you start saving you should look into how to get the best return on your money. For example you deposit $100 into an account that pays 6% interest. At the end of the year the bank will pay you $6 interest. $100 x. 06 = $6 Interest: the amount of money the bank pays you for the use of your money Principal: the amount of money deposited Time: the number of years or months for which interest is paid Interest Rate: the percentage of the principal paid for the use of your money.

Principal x Converting % and decimals: 5% =. 05 Rate x Time = Interest 8% =. 08 3 ½% = 3. 5 % =. 035 Principal x Rate $300. 00 x 3% or. 03 x x Time = Interest 1 = $9. 00

Compound Interest “the 8 th wonder of the world” – attributed to Albert Einstein If you leave your money into the savings account you will begin to earn interest on interest. The interest you make then becomes part of the principal and interest is then figured using the new amount. Most banks compound daily, sometimes stated as continuously.

Compound Interest: Interest earned on interest Year 1 2 3 Beginning Balance Interest Earned (5%) Ending Balance $100. 00 $5. 00 $105. 00 $5. 25 $110. 25 $5. 51 $115. 76 Interest can be compounded: Annually (every year) Semiannually (every six months) Quarterly (every three months) Monthly Daily

Rule of 72: The approximate frequency of how many years it would take to double your investment. The rule states that if an asset grows x% a year, its value will double in 72 ÷ x years.

72 ÷ Interest Rate = Years to Double Investment 72 ÷ Years to Double Investment = Interest Rate What interest rate would you need to double your investment in 6 years? 72 / 6 years = 12% How long would it take you to double your investment with an interest rate of 9%? 72 /. 09 = 800 (move two spaces for the decimal) 8 years

Example of Compound Annually at 6%: Year One $100. 00 Principal x 0. 06 Interest rate 6. 00 Interest first year $100. 00 Principal + 6. 00 Interest first year 106. 00 Principal end of first year Year Two $106. 00 Principal x 0. 06 Interest rate $6. 36 Interest first year $106. 00 Principal + 6. 36 Interest second year $112. 36 Principal end of second year

Example of Compounded Semiannually with 6% interest: (divide interest by 2) Year One $100. 00 x 0. 03 $ 3. 00 Principal Interest rate for ½ year Interest first ½ year $100. 00 + 3. 00 $103. 00 Principal Interest rate for ½ year Principal end of first ½ year $103. 00 Principal x 0. 03 Interest rate for ½ year $3. 09 Interest second ½ year $103. 00 + 3. 09 $106. 09 Principal Interest rate for second ½ year Principal end of first year

Year Two $106. 09 Principal x 0. 03 Interest rate for ½ year $ 3. 18 Interest , third ½ year $106. 09 Principal + 3. 18 Interest, third ½ year $109. 27 Principal end of 1 ½ years $109. 27 Principal x 0. 03 Interest rate for ½ year $ 3. 28 Interest, fourth ½ year $109. 27 Principal + 3. 28 Interest, fourth ½ year $112. 55 Principal end of second year

Depending on the annually, semiannually or quarterly you may have to divide by the time. Example: 8% quarterly you would have to divide by 4 which would make you use a rate of 2% Example: 8% semiannually you would have to divide by 2 which would make you use a rate of 4%

Compound Interest Formula: A = P (1 + r/n)nt A = Amount of Money P = Principle r = rate of interest n = number of periods interest is compounded T = Time – number of years money is left in