Investing Money
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.
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
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.
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.
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.
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).
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
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.
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
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.
Problem 1
 Diana invests $500 today in an account
earning 7%. How much will it be worth in:
5 years?
10 years?
20 years?
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
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?
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
Diversification of Your
Investments
 Diversification is reducing investment risk by
putting money in several different types of
investments.
 By spreading your money around, you’re
reducing the impact that a drop in any one
investment’s value can have on your overall
investment portfolio.
 This follows the old saying about “not putting
all of your eggs in one basket.”
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.
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.
 72÷6= 12
 This means that you would double your money
in 12 years if the interest rate that you are
earning is 6%.
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
Continued
 We will spend time discussing each of
these methods of investing.
 The first of these that we will discuss is
investing in stocks.