Investing Money

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Investing Money
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What does it mean to invest money?

• Investing means putting your money where it can
  make more money by earning higher rates of
  return.
• Money should be invested to help you achieve your
  intermediate and long-term financial goals.
• Investing is riskier than savings, however, the
  longer the time period that you have before you
  need the money, the more risk you can assume.
• Investments will potentially earn a significantly
  higher return than traditional methods of savings
  and help your money outpace the rate of
  inflation.

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Important Investing Principles

• We are going to examine six important investing
  principles before we learn about different types
  of investments.
• These principles are
• Pay Yourself First
• Risk versus Return
• The Time Value of Money (earned interest and
  compound interest)
• Diversification
• Dollar Cost Averaging
• The Rule of 72

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The Pay Yourself First Rule (Investing)

• Whenever you receive money you should immediately
  invest a certain amount to meet intermediate
  financial goals (2-5 years) and long-term
  financial goals (over 5 years).
• As with the pay yourself first rule for savings,
  this is arguably the single most important factor
  in helping you achieve your financial goals.

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Risk versus Return (Investing)

• An important thing to understand when discussing
  investing is risk versus return.
• The lower the risk that an individual assumes the
  less the potential return.
• The higher the risk that an individual assumes
  the higher the potential return.
• The shorter the time period until the investment
  money is needed the more conservative the
  investment should be.
• The longer the time period until the investment
  money is needed the more aggressive or risky the
  investment can be.
• Understanding this rule will be helpful when
  deciding what the most appropriate type of
  investment is to help you reach your long-term
  financial goals.

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Time Value of Money

• Time value of money refers to the relationship
  between time, money, and the rate of interest.
• On the next few slides we are going to discuss
  the difference between earned interest and
  compound interest and how they relate to the time
  value of money.

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Earned Interest

• Earned interest is the payment you receive for
  allowing a financial institution or corporation
  to use your money.
• The bank compensates you for the use of your
  money by paying you interest.
• Interest Principal x interest rate x time
• This is the interest for calculating earned
  interest (sometimes called simple interest).

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Earned Interest Example

• Principal 1,000
• Interest rate 10
• Time 1 year
• 1,000 x .10 x 1 year
• 100.00
• Total amount 1,100

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Compound Interest

• Compound interest is the most powerful force in
  the universe. Albert Einstein
• Compound interest is the interest that is earned
  on interest.
• The formula for calculating compound interest is
  A P (1 i) n
• We will calculate an example on the next slide.

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Compound Interest

• A the amount in the account
• P the principal (the original amount of the
  investment)
• i the interest rate
• n the number of years compounded
• 1,000 (1 .10)5
• A 1,610.51

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Compound Interest Problems

• Use your calculator and the formula from the
  previous slides to calculate the value of the
  following investment scenarios.
• We are going to calculate compound interest on an
  annual basis.

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Problem 1

• Diana invests 500 today in an account earning
  7. How much will it be worth in
• 5 years?
• 10 years?
• 20 years?

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Problem 1 Answers

• 500(1.07)5
• 500 x 1.403 701.28
• 500(1.07)10
• 500 x 1.967 983.50
• 500(1 .07)20
• 500 x 3.870 1935.00

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Problem 2

• Diana finds an account that earns 10. How much
  will her 500.00 be worth at the new rate in
• 5 years?
• 10 years?
• 20 years?

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Problem 2 Answers

• 500 (1.10)5
• 500 x 1.610 805
• 500 (1.10)10
• 500 x 2.594 1297
• 500 (1.10)20
• 500 x 6.727 3363.50

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Diversification of Your Investments

• Diversification is reducing investment risk by
  putting money in several different types of
  investments.
• By spreading your money around, youre reducing
  the impact that a drop in any one investments
  value can have on your overall investment
  portfolio.
• This follows the old saying about not putting
  all of your eggs in one basket.

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Dollar Cost Averaging

• This is the practice of investing a fixed amount
  in the same investment at regular intervals,
  regardless of what the market is doing.
• This is another key investment principle to know
  because it eliminates having to worry about
  investing at the right or wrong time.
• Dollar cost averaging evens out the ups and downs
  of the market. As the price of the investment
  rises, you simply end up purchasing fewer shares
  and when the price falls, you end up purchasing
  more.

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The Rule of 72

• Mathematicians say that you can see how long it
  will take you to double your money simply by
  dividing 72 by the interest rate.
• An example of this would be if you were earning
  6 interest on your investments.
• 726 12
• This means that you would double your money in 12
  years if the interest rate that you are earning
  is 6.

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Types of Investments

• We are going to talk about some of the most
  common methods of investing. These include
• Stocks
• Bonds
• Mutual funds
• Real estate
• Collectibles

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Continued

• We will spend time discussing each of these
  methods of investing.
• The first of these that we will discuss is
  investing in stocks.