How Does $ grow over How Does $ grow over TimeTime

Mr. CoronadoMr. Coronado

Consumer Ed/C.A.HConsumer Ed/C.A.H

What does interest mean when What does interest mean when saving/investing?saving/investing?

Means the amount of $ you earn on the $ Means the amount of $ you earn on the $ you put to work by saving or investing.you put to work by saving or investing.

Different types of InvestmentsDifferent types of Investments Savings AccountsSavings Accounts Individual Retirement Accounts (IRA)Individual Retirement Accounts (IRA) Certificates of Deposit (CD)Certificates of Deposit (CD) Money market accountsMoney market accounts

Two types of InterestTwo types of Interest

Compound InterestCompound Interest Calculates initial Calculates initial

investment amount + investment amount + interest earned to that interest earned to that time.time.

Ex: Put 1,000 in CD Ex: Put 1,000 in CD for annual interest rate for annual interest rate of 4%of 4%

11stst yr=1,040, yr=1,040, 22ndnd yr= 1,081.60 yr= 1,081.60 33rdrd yr= 1,124.86 yr= 1,124.86

Simple InterestSimple Interest $ you investment $ you investment

earns is based on earns is based on principal (initial principal (initial investment amount)investment amount)

Ex: You put $1,000 in Ex: You put $1,000 in savings account for savings account for annual interest rate of annual interest rate of 4%4%

11stst yr=1040, yr=1040, 22ndndyr=1080, 3yr=1080, 3rdrd=1,120=1,120

Calculating compound & simple Calculating compound & simple interest. interest.

Compound InterestCompound Interest To calculate 2To calculate 2ndnd yrs yrs

gains, multiply gains, multiply previous yr total previous yr total (1,040) by interest (1,040) by interest rate of .04 and add to rate of .04 and add to previous total.previous total.

Simple InterestSimple Interest Calculate multiply Calculate multiply

interest rate (.04) by # interest rate (.04) by # of yrs and + result to of yrs and + result to princple ($1000)princple ($1000)

Rule of 72Rule of 72

Helps estimate how long it will take you to Helps estimate how long it will take you to 2x your $2x your $

Ex: If your investment were paying 3% Ex: If your investment were paying 3% interest rate, you would 2x your interest rate, you would 2x your investment in 24 years. (24x3=72)investment in 24 years. (24x3=72)

How should I invest my $?How should I invest my $?

““Don’t leave your eggs in one basket”Don’t leave your eggs in one basket” If you have the money you should If you have the money you should

diversify!diversify! Diversification Diversification

Spreading investment funds through a variety Spreading investment funds through a variety of savings & investments to reduce riskof savings & investments to reduce risk

Different Investment PlansDifferent Investment Plans

401(k) Plan401(k) Plan A Retirement savings A Retirement savings

plan funded by plan funded by employee and (often) employee and (often) matching matching contributions from the contributions from the employer.employer.

Contributions taken Contributions taken from pre-tax salary & from pre-tax salary & funds grow tax free funds grow tax free until withdrawnuntil withdrawn

Individual Retirement Individual Retirement Account (IRA)Account (IRA)

Allows person whether Allows person whether covered by employer or covered by employer or not to save $.not to save $.

Defers taxes on accounts Defers taxes on accounts earnings when persons earnings when persons withdraws $ (Penalty)withdraws $ (Penalty)

$ is taxed before invested $ is taxed before invested in account. in account.

Diff Investment Plans continedDiff Investment Plans contined

Certificate of Deposit Certificate of Deposit (CD)(CD)

A special form of deposit A special form of deposit offered by banks that offered by banks that generally pays compound generally pays compound interest for a fixed period interest for a fixed period of time. of time.

(Short time frame)(Short time frame) (IRA not short time limit)(IRA not short time limit)

Money Market AccountMoney Market Account A special savings account A special savings account

that usually pays interest that usually pays interest rates comparable to rates comparable to those offered by money those offered by money market mutual funds.market mutual funds.

These accounts also offer These accounts also offer check-writing priveleges.check-writing priveleges.