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Choosing to Save

“Take Charge of Your Finances” Advanced Level

Personal Finance Objective 8.01

© Family Economics & Financial Education – Revised May 2011 – Savings Unit – Choosing to Save – Slide 2Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

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My Wish List

MY WISH LIST

Brainstorm a personal wish list for yourself.

Brainstorm a personal wish list for yourself.

Include anything of monetary value

© Family Economics & Financial Education – Revised May 2011 – Savings Unit – Choosing to Save – Slide 3Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

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“TODAY’S SELF HAS AN IMPACT ON FUTURE SELF”

What does this statement mean to you?What does this statement mean to you?

© Family Economics & Financial Education – Revised May 2011 – Savings Unit – Choosing to Save – Slide 4Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

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What is the difference between saving and investing?

Portion of current income not spent on consumption

SavingPurchase of assets

with the goal of increasing future

income

Investing

•Emergencies•Large Purchases

Used to pay for: •Higher Education

•Retirement

Used to pay for:

© Family Economics & Financial Education – Revised May 2011 – Savings Unit – Choosing to Save – Slide 5Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

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What is an Asset?

Make a list of your assetsMake a list of your assets

Examples of Assets

Cash

Automobiles

Houses

Furniture

Assets- everything an individual owns with monetary value

ClothingElectronics

Savings Accounts

© Family Economics & Financial Education – Revised May 2011 – Savings Unit – Choosing to Save – Slide 6Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

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What is Liquidity?Liquidity- how quickly and easily an

asset can be converted to cash

Less Liquid

More Liquid

Investments Savings Tools

© Family Economics & Financial Education – Revised May 2011 – Savings Unit – Choosing to Save – Slide 7Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

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Liquid Assets

SavingsTools

Would any of your assets provide cash to fund an emergency?

Brainstorm: What items are liquid? (can be easily turned into cash)

Would any of your assets provide cash to fund an emergency?

Brainstorm: What items are liquid? (can be easily turned into cash)

Accessible in emergencies

LiquidAssets

© Family Economics & Financial Education – Revised May 2011 – Savings Unit – Choosing to Save – Slide 8Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

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Saving Investing

Why are saving and investing important?

Provides the foundation for

financial security

Enhances and helps build

wealth

Serve different purposes but both are essential

© Family Economics & Financial Education – Revised May 2011 – Savings Unit – Choosing to Save – Slide 9Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

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What is wealth and how is it measured?

Net worth statement - describes a person’s overall financial condition on a

specified date

Wealth - measurement of how much a person owns once all debts have been

paidWhy do you think wealth is not just your assets?

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© Family Economics & Financial Education – Revised May 2011 – Savings Unit – Choosing to Save – 10Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

Who is Wealthier?

Juanita’s Net Worth Statement

Assets

Home $60,000

Retirement $24,000

Automobile $8,000

Total Assets $92,000

Liabilities

College loan $6,000

Mortgage $35,000

Total Liabilities $41,000

Net Worth $51,000

Juanita - earns $35,000 per year Alexis – earns $100,000 per year

Alexis’ Net Worth StatementAssets

Home $75,000

Retirement $35,000

Automobile $8,000

Total Assets $118,000

Liabilities

College loan $10,000

Automobile loan $4,000

Credit card debt $20,000

Mortgage $65,000

Total Liabilities $99,000

Net Worth $19,000

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© Family Economics & Financial Education – Revised May 2011 – Savings Unit – Choosing to Save – 11Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

Net Worth Calculation

• Todd has a home worth $120,000 with a mortgage of $72,000. Current value of his car is $16,000 but he owes the bank $2500. Todd has $35,700 in his 401K retirement account. His current credit card balance is $1250.

• Calculate Todd’s current Net Worth.

© Family Economics & Financial Education – Revised May 2011 – Savings Unit – Choosing to Save – Slide 12Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

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The Choices You Make Today Impact Your Future!

INCREASED WEALTH!

SAVING AND INVESTING…

INCREASE ASSETS

DECREASELIABILITIES

Why is it important to increase wealth?Why is it important to increase wealth?

© Family Economics & Financial Education – Revised May 2011 – Savings Unit – Choosing to Save – Slide 13Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

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Why are saving and investing important?

Money needed to pay for the necessities and comforts

currently enjoyed

Higher level of living that person wishes to reach

Level of Living Standard of Living

PRESENT FUTURE

Help pay for a level of living and reach a desired standard of living

© Family Economics & Financial Education – Revised May 2011 – Savings Unit – Choosing to Save – Slide 14Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

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How much money should be saved and invested?

SAVINGSRecommended

Amount

Example

How

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

© Family Economics & Financial Education – Revised May 2011 – Savings Unit – Choosing to Save – Slide 15Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

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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

© Family Economics & Financial Education – Revised May 2011 – Savings Unit – Choosing to Save – Slide 16Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

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Saving vs. Investing Activity-

Does the characteristic describe saving or investing?

Characteristic:BUILDS WEALTH

Saving or Investing:INVESTING

© Family Economics & Financial Education – Revised May 2011 – Savings Unit – Choosing to Save – Slide 17Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

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Saving vs. Investing Activity

Characteristic:

USED TO PAY FOR EMERGENCIES

Saving or Investing:SAVING

© Family Economics & Financial Education – Revised May 2011 – Savings Unit – Choosing to Save – Slide 18Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

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Saving vs. Investing Activity

Characteristic:PROVIDES THE FOUNDATION

FOR FINANCIAL SECURITY

Saving or Investing:SAVING

© Family Economics & Financial Education – Revised May 2011 – Savings Unit – Choosing to Save – Slide 19Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

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Saving vs. Investing Activity

Characteristic:LESS LIQUID

Saving or Investing:INVESTING

© Family Economics & Financial Education – Revised May 2011 – Savings Unit – Choosing to Save – Slide 20Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

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True or False?Identify if each statement is true or false…Identify if each statement is true or false…

□

If Janie makes a one time investment of $500 at age 20 in a tool that earns the historic 12% average, by age 60 the $500 will become $46,525.

□

If Samuel invests $3,000 annually from ages 22-31 (a total of $30,000 invested) in a tool earning 10% interest, he will have $1.2 million dollars by age 65.

They are both true. The time value of money makes this possible!

They are both true. The time value of money makes this possible!

© Family Economics & Financial Education – Revised May 2011 – Savings Unit – Choosing to Save – Slide 21Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

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What is the Time Value of Money?

Money paid out or received in the future is not equivalent to money paid out or

received today

Money paid out or received in the future is not equivalent to money paid out or

received today

Factors that make the time value of money possible:

Factors that make the time value of money possible:

© Family Economics & Financial Education – Revised May 2011 – Savings Unit – Choosing to Save – Slide 22Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

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What is Interest?

Interest - the price of money

Interest rate - percentage rate paid on money saved

Compounding interest – earning interest on interest

© Family Economics & Financial Education – Revised May 2011 – Savings Unit – Choosing to Save – Slide 23Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

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How Do Interest Rates Affect Time Value of Money?

$1,000 invested for 5 yearsInterest Rate (compounding) Amount Investment is

Worth1% $1,051.013% $1,159.275% $1,276.287% $1,402.559% $1,538.62

Interest Rate

Larger Return

Return- profit generated by saving and investingReturn- profit generated by saving and investing

© Family Economics & Financial Education – Revised May 2011 – Savings Unit – Choosing to Save – Slide 24Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

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TimeLarger Return

How Does Time Affect the Time Value of Money?

© Family Economics & Financial Education – Revised May 2011 – Savings Unit – Choosing to Save – Slide 25Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

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A Little Goes a Long Way

Ed waits until he is 28 and contributes $3,000 at 10% for

37 years

Sally puts away $3,000 per year for 10 years, at age 22. She earns 10% on

her investment

Sally invests a total of $30,000 and has earned $1,205,063

by the age of 65

Ed invests a total of $111,000 and accumulates

$1,079,856 by the age of 65

© Family Economics & Financial Education – Revised May 2011 – Savings Unit – Choosing to Save – Slide 26Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

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MoneyLarger Return

How Does Money Affect the Time Value of Money?

Principal - original amount of money saved

or invested

© Family Economics & Financial Education – Revised May 2011 – Savings Unit – Choosing to Save – Slide 27Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

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Amount of Money

7% interest compounded annually for 5 years

Amount of Principal Investment Return

$100.00 $40.26

$1,000.00 $402.55$10,000.00 $4,025.52

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© Family Economics & Financial Education – Revised May 2011 – Savings Unit – Choosing to Save – 28Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

Year 5Interest Earned: $33.26Amount Investment is Worth: $140.26

Year 10Interest Earned: $56.46Amount Investment is Worth: $196.72

Year 15Interest Earned: $79.19Amount Investment is Worth: $275.90

Year 20Interest Earned: $111.07Amount Investment is Worth: $386.97

Year 50Interest Earned: $845.46Amount Investment is Worth: $2945.70

Time Value of Money Magic!

Initial Investment (Principal): $100.00 at 7% compounding interest

Year 1Interest Earned: $7.00Amount Investment is Worth: 107.00

© Family Economics & Financial Education – Revised May 2011 – Savings Unit – Choosing to Save – Slide 29Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

1.14.1.G1Maximize Your

Return!Invest for as

long as possible!

Invest as much as possible, as often

as possible!

Invest at the highest interest rate possible!

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© Family Economics & Financial Education – Revised May 2011 – Savings Unit – Choosing to Save – 30Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

How do I begin to save money?Follow this process…

Let’s learn the details of this process…

Make saving automatic

Consider what savings goals you want to reach

Evaluate the consequences of that goal:1.What trade-offs will you have to make?2.What is the opportunity cost of those trade-offs?3.How will the trade-offs made affect your spending plan?

Write a SMART goal

© Family Economics & Financial Education – Revised May 2011 – Savings Unit – Choosing to Save – Slide 31Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

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What savings goals do you

want to reach?

Goal - the end result of something a person intends to accomplish

Refer to your wish list.These items represent savings goals!

Refer to your wish list.These items represent savings goals!

Goal setting helps you think about your future self

Consider what savings goals you want to reach

© Family Economics & Financial Education – Revised May 2011 – Savings Unit – Choosing to Save – Slide 32Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

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Consequences of Goals

Do you currently have enough money to acquire all of the items on your wish

list?If not, what are you willing to give up in

order to acquire one of these items?

Do you currently have enough money to acquire all of the items on your wish

list?If not, what are you willing to give up in

order to acquire one of these items?

That is known as a trade-off!

Consider what savings goals you want to reach

Evaluate the consequences of that goal

© Family Economics & Financial Education – Revised May 2011 – Savings Unit – Choosing to Save – Slide 33Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

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Consequences of Goals- What is a Trade-off?

Trade-off -Giving up one thing for another

Every decision inevitably involves a trade-off

What is the value of this trade-off to you?

What is the value of this trade-off to you?

That is known as opportunity cost!

© Family Economics & Financial Education – Revised May 2011 – Savings Unit – Choosing to Save – Slide 34Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

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Consequences of Goals- What is Opportunity Cost?Opportunity cost - value of the next

best alternative that must be forgone when a trade-off is made

Allows you to analyze the consequences of choices to

decide which trade-offs to make

© Family Economics & Financial Education – Revised May 2011 – Savings Unit – Choosing to Save – Slide 35Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

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Consequences of Goals- Spending Plans

Spending plan - document used to record both planned and actual income and expenses over

a period of time

Income OR Expenses

To reach your savings goal you identified trade-offs that would be made. How will

these trade-offs affect your spending plan?

To reach your savings goal you identified trade-offs that would be made. How will

these trade-offs affect your spending plan?

Adjust your spending plan accordingly

© Family Economics & Financial Education – Revised May 2011 – Savings Unit – Choosing to Save – Slide 36Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

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Set SMART Goals

Write a SMART goal for one of the items on your wish list.

Write a SMART goal for one of the items on your wish list.

MY WISH LIST

Consider what savings goals you want to reach

Evaluate the consequences of that goal

Write a SMART goal

© Family Economics & Financial Education – Revised May 2011 – Savings Unit – Choosing to Save – Slide 37Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

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Make Saving and Investing

Automatic• Make your goal happen automatically• Pay yourself first - saving strategy that

means to set aside a predetermined portion of money for saving before any money is used for spending

Save then spend!

Make saving automatic

Consider what savings goals you want to reach

Evaluate the consequences of that goal

Write a SMART goal

© Family Economics & Financial Education – Revised May 2011 – Savings Unit – Choosing to Save – Slide 38Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

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How can saving and investing become automatic?

Automatic Transfers•Most depository institutions allow automatic transfers between accounts•Designated amount of money will be automatically moved into a saving or investing tool every month

© Family Economics & Financial Education – Revised May 2011 – Savings Unit – Choosing to Save – Slide 39Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

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How can saving and investing become automatic?

Payroll Deduction•Offered by most employers•Employees designate money from their paycheck be deposited into an account of their choice

© Family Economics & Financial Education – Revised May 2011 – Savings Unit – Choosing to Save – Slide 40Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

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SavingFinancial security and a positive level of living

Investing

Wealth accumulation and a desired

standard of living

Summary- What is the purpose of saving and

investing money and why is it important?

Think about your future self!Think about your future self!

© Family Economics & Financial Education – Revised May 2011 – Savings Unit – Choosing to Save – Slide 41Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

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Save 10-20% of net income in liquid assets until it equals at least 6 months of expenses

Continue to invest 10-20% of income to increase wealth

Utilize the time value of money to your greatest advantage

To practice smart saving and investing habits …

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© Family Economics & Financial Education – Revised May 2011 – Savings Unit – Choosing to Save – 42Funded by a grant from Take Charge America, Inc. to the Norton School of Family and Consumer Sciences at the University of Arizona

Choose to Save!Follow this process…

Make saving automatic

Consider what savings goals you want to reach

Evaluate the consequences of that goal:1.What trade-offs will you have to make?2.What is the opportunity cost of those trade-offs?3.How will the trade-offs made affect your spending plan?

Write a SMART goal