Investing/Retirement - PowerPoint Presentation

Slide1

Investing/Retirement

Taking care of your future wealthSlide2

What is the difference between saving and investing?

Portion of current income not spent on consumption

Saving

Purchase of assets with the goal

of increasing future income

Investing

Emergencies

Large Purchases

Used to pay for:

Higher Education

Retirement

Used to pay for:Slide3

Saving vs. Investing

Saving

Investing

Definition

Saving

is setting aside present income for future use.

Savings

is the portion of income not spent on consumption.

Investing

is purchasing assets that earn interest over time.

Investments

are assets purchased with the goal of increasing income.

Primary purpose

To make money available for future needs

To make a profit over time

Reasons for saving and investing

To prepare for emergencies

*

To pay recurring expenses

To prepare for major purchases

*

To prepare for future purchases

To achieve financial goals

*

To prepare for retirement

Interest earnings

A bonus or side-benefit

The main focusSlide4

Saving vs. Investing Cont.

Saving

Investing

Return

Usually earns lower rates of interest

Usually earns higher rates of interest

Liquidity

Money may be withdrawn at any time

Money may not be easily accessible

Volatility

Usually not volatile; rates are fixed

Rate of return and value may change suddenly and significantly

Risk

Usually little risk of losing money

Usually more risk, but risks may be necessary to make a profitSlide5

Saving and Investing Options

Savings Options

Savings accounts

Money market accountsCertificates of depositSavings bonds

Investing OptionsIndividual retirement accounts (IRAs)StocksHigh Yield Bonds (aka Junk Bonds)Mutual fundsSlide6

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

essentialSlide7

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 livingSlide8

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%Slide9

How much money should be saved and invested?

SAVINGS

Recommended 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 reachedSlide10

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 monthSlide11

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 emergenciesOver-relying on job security and insuranceSlide12

Steps to Create a Personal Investing Plan

Step 1

My investment goals are:

____________________

____________________

Step 2

By ___________, I will

have obtained $_______.

Step 3I have $__________available to invest.Date _____________Step 4Possible investment alternatives:1._________________2._________________3._________________4._________________

Step 5Risk factors for each alternative1.____________________2.____________________3.____________________4.____________________Step 6Projected return on each alternative1.__________2.__________3.__________4.__________

Step 7Investment decision1._______________2._______________3._______________Step 8Final decision1._______________2._______________

Step 9Continue evaluating choices.Slide13

Investment Fundamentals

Difference

in return is a major distinction between savings and investing.

Successful investors begin to live off earnings, without spending wealth itself.

ATTENTION!Slide14

Preparations for Investing

Achieve financial goals

Increase current income

Gain wealth and financial security

Have funds available for retirement

WHY PEOPLE INVEST:Slide15

Preparations for Investing

Live within means

Continue savings program

Establish lines of credit

Carry adequate insuranceEstablish investment goals

PREREQUISITES TO INVESTING:Slide16

Getting Money to

Start an Investing Program

Pay yourself first

Participate in elective savings programs

Payroll deductionelectronic transferMake a special effort to save one or two months a yearTake advantage of windfallsInvest half of your tax refundSlide17

Value of Having a

Long-Term Investing Program

Many people don’t start investing because they only have a small amount to invest

but

....Small amounts invested regularly become large amounts over timeSlide18

Factors That Affect

Investment Decisions

Safety - minimal risk of loss

Risk - uncertainty about the outcome

inflation riskinterest rate riskbusiness failure riskmarket riskSlide19

Income From Investments

Safest

CDs

savings bondsT-bills

Higher potential incomemunicipal bondscorporate bondspreferred stocksmutual fundsreal estateSlide20

Investment Growth and Liquidity

Growth

increase in value

common stockgrowth stocks retain earnings

bonds, mutual funds and real estate Liquidityease and speed to convert an asset to cashSlide21

Investment Pyramid

Commodities

Junk bonds

Options

Rental

property

Utility

stocks

Government

Securities

Corporate

bonds

CDs

Money

Market

Savings

Accounts

Cash

High Quality

Stocks

Mutual funds

High risk

Low

riskSlide22

Rule of 72 – 8th

Wonder

Albert Einstein

The Rule Of 72Compound 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"Slide23
Slide24

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. Slide25

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.Slide26

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.Slide27

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 = YearsSlide28

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 yearsSo 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 yearsSlide29

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%Slide30

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.Slide31

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.Slide32

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.Slide33

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.Slide34

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. Slide35

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. Slide36

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.Slide37

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. Slide38

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.Slide39

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.Slide40

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% = $14,049Year 4. 14,049 x 12% = $15,735Year 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.dpufSlide41

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.Slide42

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 $500In 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.Slide43

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.Slide44

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. Slide45

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.Slide46

Compound Interest Formula:

S

=

P(1+i)^nWhereS

= amountP = principali = Interest rate per conversion periodn = total number of conversion periodsSlide47

Example:

Alan

invested $10,000 for five years at an interest rate of 7.5% compounded quarterly

P = $10,000i = 0.075 / 4, or 0.01875n = 4 * 5, or 20, conversion periods over the five yearsSlide48

Therefore, the amount, S, is:

S = $10,000(1 + 0.01875)^20

= $ 10,000 x 1.449948

= $14,499.48Slide49

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)Slide50

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 = 10,000r = 0.075

t = 5Thus, S = $10,000[1+0.075(5)]= $ 13,750Slide51

Comparison Simple vs Compound

Here, the interest that he would have earned is $3,750.

A comparison of the interest amounts calculated under both the method indicates that Alan would have earned $749.48($4,499.48 – $3,750) more under the compound interest method than under the simple interest method.Slide52
Slide53

Time Value of Money

Investor A

invests $2,000 a year for 10 years, beginning at age 25.

Investor B waits 10 years, then invests $2,000

a year for 31 years. Compare the total contributions and the total value at retirement of the two investments.Slide54

There is nothing embarrassing about using a financial professional to help select specific investment products.

There should be conscious need to check out their financial professional just as diligently as they would research and picking a stock or mutual fund. Slide55

key things to consider

Risk tolerance

. The greater the risk one is willing to assume to make money the more money to be made.

Time horizon. Number of years to invest – and how long one has to achieve one’s key short-, medium-, and long-term goals– will be one of the major ways to choose investment products.Diversification

– investors shouldn’t put all of their eggs into jus one or even two baskets. Investors seek the dual goal's of growth and safety by distributing their investments among major asset classes; stocks, bonds and cash or cash equivalents. Slide56

Selecting What is best for YOU

Between 1926 and 2008 the average annual market return on stocks was 9.62 percent; bonds 5.9 percent and cash 3.7 percent

Investing in all three categories helps shelter against major losses.Slide57

Asset allocation

– financial plans are like fingerprints. Every person needs a financial plan that is suited to his or specific needs. The right mix of stocks, bonds, and cash is ideal asset allocation scheme.

Review and modify the Plan as Needed

. Your plan is an ongoing process. It is a tool to help you reach your financial goals. Review and modifying is essential to the effectiveness of the overall plan.Slide58

Employer-Sponsored Program

Contributing to 401(k) plans help employees prepare for financial secure future especially since some employers often match employee contributions.

Its never too soon to start a regular investing plan to take advantage of the tax deferral and compounding that a 401(k) plans offer.

Initial Asset AllocationSlide59

Three ways to grow your wealth quickly

Invest

in stocks

Own a business

Own property or real estate