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Investing/Retirement

Investing/Retirement. Taking care of your future wealth. What is the difference between saving and investing?. Investing. Saving. Purchase of assets with the goal of increasing future income. Portion of current income not spent on consumption. Used to pay for:. Used to pay for:.

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Investing/Retirement

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  1. Investing/Retirement Taking care of your future wealth

  2. What is the difference between saving and investing? Investing Saving Purchase of assets with the goalof increasing future income Portion of current income not spent on consumption Used to pay for: Used to pay for: • Emergencies • Large Purchases • Higher Education • Retirement

  3. Saving vs. Investing

  4. Saving vs. Investing Cont.

  5. Saving and Investing Options • Savings Options • Savings accounts • Money market accounts • Certificates of deposit • Savings bonds • Investing Options • Individual retirement accounts (IRAs) • Stocks • High Yield Bonds (aka Junk Bonds) • Mutual funds

  6. Why are saving and investing important? Serve different purposes but both are essential Investing Saving Provides the foundation for financial security Enhances and helps build wealth

  7. Why are saving and investing important? Help pay for a level of living and reach a desired standard of living Level of Living Standard of Living Money needed to pay for the necessities and comforts currently enjoyed Higher level of living that person wishes to reach PRESENT FUTURE

  8. Summary of Rules for Saving/Investing • View saving and investing as a fixed expense • Rule of Saving: Pay yourself first; take a portion of earnings for saving/investing before spending any of your paycheck • 70-20-10 Saving and Investing Rule: For any money earned, spend 70%, save 20%, and invest 10%

  9. How much money should be saved and invested? At least six months worth of expenses in liquid assets Household with $2,000 per month of expenses = at least $12,000 in savings ($2,000 x 6 months) Save 10-20% of net income every month until appropriate amount of savings is reached

  10. How much money should be saved and invested? INVESTING Make sure an appropriate amount of savings is accessible Redirect goals from saving to investing Continue to invest 10-20% of net income every month

  11. Reasons individuals fail to Save/Invest • Not being able to meet current needs and wants • Not being aware of how much needs to be saved for future goals • Over-relying on credit for emergencies • Over-relying on job security and insurance

  12. Steps to Create a Personal Investing Plan Step 1 My investment goals are: ____________________ ____________________ Step 2 By ___________, I will have obtained $_______. Step 3 I have $__________ available to invest. Date _____________ Step 9 Continue evaluating choices. Step 4 Possible investment alternatives: 1._________________ 2._________________ 3._________________ 4._________________ Step 8 Final decision 1._______________ 2._______________ Step 6 Projected return on each alternative 1.__________ 2.__________ 3.__________ 4.__________ Step 5 Risk factors for each alternative 1.____________________ 2.____________________ 3.____________________ 4.____________________ Step 7 Investment decision 1._______________ 2._______________ 3._______________

  13. Difference in return is a major distinction between savings and investing. Successful investors begin to live off earnings, without spending wealth itself. Investment Fundamentals ATTENTION!

  14. Achieve financial goals Increase current income Gain wealth and financial security Have funds available for retirement Preparations for Investing WHY PEOPLE INVEST:

  15. Live within means Continue savings program Establish lines of credit Carry adequate insurance Establish investment goals Preparations for Investing PREREQUISITES TO INVESTING:

  16. Getting Money to Start an Investing Program • Pay yourself first • Participate in elective savings programs • Payroll deduction • electronic transfer • Make a special effort to save one or two months a year • Take advantage of windfalls • Invest half of your tax refund

  17. Value of Having a Long-Term Investing Program • Many people don’t start investing because they only have a small amount to investbut.... • Small amounts invested regularly become large amounts over time

  18. Factors That Affect Investment Decisions • Safety - minimal risk of loss • Risk - uncertainty about the outcome • inflation risk • interest rate risk • business failure risk • market risk

  19. Income From Investments • Safest • CDs • savings bonds • T-bills • Higher potential income • municipal bonds • corporate bonds • preferred stocks • mutual funds • real estate

  20. Investment Growth and Liquidity • Growth • increase in value • common stock • growth stocks retain earnings • bonds, mutual funds and real estate • Liquidity • ease and speed to convert an asset to cash

  21. CommoditiesJunk bondsOptions High Quality Rentalproperty Stocks Mutual funds Government Corporatebonds Utility stocks Securities MoneyMarket Savings Accounts CDs Cash Investment Pyramid High risk Lowrisk

  22. Rule of 72 – 8th Wonder Albert Einstein The Rule Of 72 Compound Interest - Not E=mc2 - Greatest Discovery Albert Einstein is credited with discovering the compound interest rule of 72. Referring to compound interest, Albert Einstein is quoted as saying: "It is the greatest mathematical discovery of all time"

  23. Investing for the Future When it comes to investing, whether you have a stock account, mutual funds, a retirement account or cash, it´s nice to have a general idea of how long it will take you to earn money. Interest earnings are the main component of investment income, and the lower your annual percentage yield, the slower your investment portfolio will build wealth for you.

  24. However, there is a "rule´ you can use to help you evaluate how quickly an investment is likely to work for you. It is called the Rule of 72, and it can help you figure compound interest.

  25. Rule of 72 • What is the rule of 72? • The rule of 72 is a mathematical formula for calculating compound interest. • Why does it matter? • If you are socking away your money in a savings account, you will want to know how much money you will have in the account in five or ten years.

  26. How Does it Work? All that you have to do is divide 72 by the interest rate.For the interest rate, don't use percentages or decimals...use 5 for 5% instead of .05. 72/ Interest Rate = Years

  27. The Rule of 72 works as follows If we want to know how long it will take for our money to double, just divide 72 by the interest rate. So for example, if the interest rate is 10% 72 ÷ 10 = 7.2 years So it will take just over 7 years to double our money. If the interest rate is 8%, to double our money it will take 72 ÷ 8 = 9 years

  28. To find out what interest you need to double your money in a specific year We can use the Rule of 72 the other way around too. Say we have a 15 year time span and we want to double our money in that time. What interest rate do we need so that the money will double? Answer: 72 ÷ 15 = 4.8%

  29. Common Savings Accounts Here are some fairly common approximations of other types of investment accounts that can give you an idea of how long it would take you to double your money: Online savings account: Average interest rate is 4.5%. 72/4.5=16 years to double your money. Money market account: Average annual percentage yield is 5.15%. 72/5.15=13.98 or 14 years to double your money.

  30. Start Saving Today Imagine that you open an account with $1,000.00.  This account gives you 3% interest every year. Each month, you add $100.00 into your account.

  31. So not only have you earned $30.00 interest on your initial $1,000.00 deposit at the end of the year, but by the end of the year, you have saved an additional $1,200.00, which you will also earn interest on (it will vary depending upon your bank's policy on when deposits were made, but figure around $30.00).  So, at the end of the year, by starting with $1,000.00 and adding $100.00 per month, you will have $2,260.00.

  32. The thing to remember about compound interest is that you don't earn just $30.00 interest each year on the $1,000.00 you deposited. After the first year, you will have $1,030.00 in your account because of the interest. The second year, you are earning $30.90 interest on this $1,030.00, bringing your account to $1,060.90.

  33. But, as stated before, the real money comes by adding to the account each month. If you put $1,000.00 into an account with 3% interest, and then add $100.00 a month, you will have approximately $15,000.00 in ten years. In twenty years, you will have approximately $35,000.00.

  34. The Power of Compounding – Interest Examples Time exerts the greatest influence on your investment portfolio than any other force. Through the power of compounding, a small amount of money over time can grow into a substantial sum. Compounding is an investor’s best friend. Investments can increase in value over time – and the longer the time frame, the greater the value. This is achieved through returns that are earned, but not spent.

  35. When the return is reinvested, you earn a return on the return and a return on that return and so on. Therefore it is important to start saving early in order to benefit from the power of compounding returns.

  36. Examples of Compounding 1) This involves calculating interest for terms longer than one year. How it works is that the interest earned on the previous year is worked out and added to the amount invested. So the investor ends up receiving interest on interest already earned.

  37. Investment Growth - Compounding • The example to the right shows how an initial investment of $1,000 grows to $31,409 over a period of time.

  38. 2) The younger you are when you start investing, the more you will benefit from compounding. Let’s say you begin investing at age 25, putting $200 a month in a tax-deferred retirement plan earning 9%. Your friend starts investing in the same plan at 45, but puts away twice as much money as you – $400 a month.

  39. assuming you invest 10,000, and the interest rate is 12% a year, the step by step calculation is as follows: Year 1. 10,000 x 12% = $11,200 Year 2. 11,200 x 12% = $12,544 Year 3. 12,544 x 12% = $14,049 Year 4. 14,049 x 12% = $15,735 Year 5. 15,725 x 12% = $17,623 Year 6. 17, 623 x 12% = $19,738 or approximately 20,000 - See more at: http://www.personalmoneytips.com/blog/knowing-financial-terms/rule-of-72/#sthash.53lSZo1n.dpuf

  40. At age 65, you will both have invested a total of $96,000, but your investment would have grown to $884,000, while your friend’s investment would be worth only $268,000. The reason your investment has grown so much more than your friend’s – even though you both invested the same amount of money – is because of 20 extra years of compounding.

  41. Calculating Compound Interest Compound interest means that the interest will include interest calculated on interest. For example, if an amount of $5,000 is invested for two years and the interest rate is 10%, compounded yearly: At the end of the first year the interest would be ($5,000 * 0.10) or $500 In the second year the interest rate of 10% will applied not only to the $5,000 but also to the $500 interest of the first year. Thus, in the second year the interest would be (0.10 * $5,500) or $550.

  42. Unless simple interest is stated one assumes interest is compounded. When compound interest is used we must always know how often the interest rate is calculated each year. Generally the interest rate is quoted annually. e.g. 10% per annum.

  43. Compound interest may involve calculations for more than once a year, each using a new principal (interest + principal). The first term we must understand in dealing with compound interest is conversion period.

  44. Conversion period refers to how often the interest is calculated over the term of the loan or investment. It must be determined for each year or fraction of a year. e.g.: If the interest rate is compounded semiannually, then the number of conversion periods per year would be two. If the loan or deposit was for five years, then the number of conversion periods would be ten.

  45. Compound Interest Formula: S = P(1+i)^n Where S = amount P = principal i = Interest rate per conversion period n = total number of conversion periods

  46. Example: • Alan invested $10,000 for five years at an interest rate of 7.5% compounded quarterly • P = $10,000 • i = 0.075 / 4, or 0.01875 • n = 4 * 5, or 20, conversion periods over the five years

  47. Therefore, the amount, S, is:S = $10,000(1 + 0.01875)^20= $ 10,000 x 1.449948= $14,499.48

  48. So at the end of five years Alan would earn $ 4,499.48 ($14,499.48 – $10,000) as interest. Note: How to calculate 1.449948, (1 + 0.01875)^20 = multiply 1.01875 twenty (20) times 1.01875 x 1.01875 x 1.01875 x 1.01875 x 1.01875 x 1.01875 x 1.01875 x 1.01875 x 1.01875 x 1.01875 x 1.01875 x 1.01875 x 1.01875 x 1.01875 x 1.01875 x 1.01875 x 1.01875 x 1.01875 x 1.01875 x 1.01875 (you will find the number is used 20 times)

  49. If he had invested this amount for five years at the same interest rate offering the simple interest option, then the interest that he would earn is calculated by applying the following formula: S = P(1 + rt), P = 10,000 r = 0.075 t = 5 Thus, S = $10,000[1+0.075(5)] = $ 13,750

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