# The Stock Market The Stock Market How Does

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The Stock Market

The Stock Market How Does Money Grow Over Time?

How Does Money Grow Over Time? Objectives: Ø Define compound interest and explain the effect of compounding interest on a daily, monthly, quarterly, or annual basis. Ø Investigate various investment and saving opportunities. Ø Define and demonstrate comprehension of the following terms: saving, investing, compound interest, and diversification.

What is Risk? Vocabulary: Ø Ø 401(k) plan Diversification Interest Individual Retirement Account (IRA) Ø Certificate of Deposit (CD) Ø Compound Interest

What is Risk? Vocabulary: Ø Ø Ø Money Market Account Principal Rate of Return Rule of 72 Savings Account Simple Interest

How Does Money Grow Over Time? Two recent college graduates are talking about saving. Each has the opportunity to create a saving plan that will help him in the future…

How Does Money Grow Over Time? Bob want to open an IRA (Individual Retirement Account) to save money for his retirement when he turns 62 in 40 years…

How Does Money Grow Over Time? Sidney thinks a savings account is best. He thinks it is important to have access to his money over the years and will worry about retirement once his family is grown.

How Does Money Grow Over Time? They sought help from a financial advisor to decide which account is best. They learned:

How Does Money Grow Over Time? Ø In an IRA, you can invest in a wide variety of stocks, mutual funds and other investments. Ø Over the last 5 years the average rate of return on the IRA has been 5% per year. Ø The rate of return for an IRA is not guaranteed. They may earn 5% this year, 10% next year, and then lose 5% the year after.

How Does Money Grow Over Time? Ø A Certificate of Deposit has a guaranteed interest rate, but you cannot use the money for the duration of the CD Ø The duration of a CD can range from six months to more than 10 years. The longer you agree to let the bank keep your money the higher the interest rate.

How Does Money Grow Over Time? Ø A regular savings account has a guaranteed interest rate. Ø The interest rate is much lower than that of the CD, but you can withdraw the money at any time.

How Does Money Grow Over Time? Ø Which savings plan seems to be the best? Ø Which savings plan will earn each person the most money in 40 years at age 62?

How Does Money Grow Over Time? Simple Interest calculated at regular intervals solely on principal. Formula: P (principal) x I (interest rate) x T (time in years) Example: If you have $1000 in a savings account that pays 2 percent interest annually at the end of 3 years you would have $1, 060 [1, 000 x. 02 x 3 = 60]

How Does Money Grow Over Time? Compound Interest added to a principal at regular intervals so that each subsequent interest calculation is based on the original principal and the added interest. Formula FOR EACH COMPUNDING PERIOD: P (previous balance) x I (interest rate) x T (time in years)

How Does Money Grow Over Time? Compound Interest Example: If you invest $1, 000 at 2% interest, compounded annually, for 3 years, you earn $61. 20. Without compounding you earn only $60. 00. Year 1: 1, 000 x. 02 x 1 = 20 Year 2: 1, 020 x. 02 x 1 = 20. 40 Year 3: (1, 020 + 20. 40) x. 02 x 1 = 20. 80 Balance: $1, 020. 00 Balance: $1, 040. 40 Balance: $1, 061. 20

How Does Money Grow Over Time? Rule of 72 A way to calculate how long it will take an investment to double given a specific interest rate. Formula : 72/R (interest rate) = T (length of time in years it takes for an investment to double) Example for interest rate of 4%: 72 / 4 = 18 years

How Does Money Grow Over Time? Do Activity Sheet 1

How Does Money Grow Over Time? Based on the results above, which savings vehicle yields the best results for retirement? Why? The best results would have to be the IRA, Scenario 3, because from the ages of 22 – 62 its balance is the highest ($16, 153).

How Does Money Grow Over Time? Assume the interest rate for the Savings Account remained at 2%, the interest rate for the CD remained at 4%, and the interest rate of the IRA remained at 5%. Using the Rule of 72, how many years would it take for each savings type to double? Savings Account (2%) 72 / 2 = 36 years CD (4%) 72 / 4 = 18 years IRA (5%) 72 / 5 = 14. 4 years

How Does Money Grow Over Time? Definitions: Ø 401(k) plan: A retirement savings plan funded by employee contributions and (often) matching contributions from the employer. Contributions are taken from pre-tax salary and the funds grow tax-free until withdrawn. Ø Diversification: Spreading investment funds through a variety of savings and investments to reduce risk.

How Does Money Grow Over Time? Definitions: Ø Interest: The fee charged for using another's money or credit. It is expressed as a percentage rate over a period of time. For example, “My bank now pays 5 percent interest per year on my savings account. ”

How Does Money Grow Over Time? Definitions: Ø Individual Retirement Account (IRA): An individual retirement account (IRA) allows a person, whether covered by an employersponsored pension plan, 401 (k) or not, to save money for use in retirement, deferring taxes on the account's earnings until the person begins to withdraw from the account. Funds in an IRA may be invested in a broad variety of investment vehicles.

How Does Money Grow Over Time? Definitions: Ø Certificate of Deposit (CD): A special form of deposit offered by banks that generally pays compound interest for a fixed period of time.

How Does Money Grow Over Time? Definitions: Ø Compound Interest: Interest added to a principal at regular intervals so that each subsequent interest calculation is based on the original principal and the added interest. For example, if you have $100 in a savings account that pays 5 percent interest; with interest you receive 5 percent interest or $5 once—at the end of the year. If your bank pays compound interest each month, you will have $105. 12 at the end of the year.

How Does Money Grow Over Time? Definitions: Ø Money Market Account: A special savings account that usually pays interest rates comparable to those offered by money market mutual funds. These accounts also offer checkwriting privileges. Ø Principal: A sum of money owed as a debt or placed in a savings instrument, on which interest is calculated.

How Does Money Grow Over Time? Definitions: Ø Rate of Return: Your annual income on an investment. Ø Rule of 72: A way to calculate how long it will take an investment to double given a specific interest rate. The formula is 72/interest rate=length it time it takes (at a given interest rate) for an investment to double.

How Does Money Grow Over Time? Definitions: Ø Savings Account: A deposit account at a bank or similar institution that earns interest. Ø Simple Interest: Interest calculated at regular intervals solely on principal. For example, if you have $100 in a savings account that pays 5 percent interest annually at the end of 3 years you would have earned $115.