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Time Value of Money

Time Value of Money. Time value of money- money paid in future is not equal to money paid today. Factors affecting the Time Value of Money. Time Value of Money Magic!. Year 20 Interest Earned: $111.07 Amount Savings is Worth: $386.97. Year 15 Interest Earned: $79.19

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Time Value of Money

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  1. Time Value of Money Time value of money- money paid in future is not equal to money paid today

  2. Factors affecting the Time Value of Money

  3. Time Value of Money Magic! Year 20 Interest Earned: $111.07 Amount Savings is Worth: $386.97 Year 15 Interest Earned: $79.19 Amount Savings is Worth: $275.90 Initial Savings: $100.00 at 7% interest Year 1 Interest Earned: $7.00 Amount Savings is Worth: 107.00 Year 10 Interest Earned: $56.46 Amount Savings is Worth: $196.72 Year 5 Interest Earned: $33.26 Amount Savings is Worth: $140.26 Year 50 Interest Earned: $845.46 Amount Savings is Worth: $2945.70

  4. How do you choose to save money over spend money? Pay Yourself First! • Set aside money for saving before spending any money • Save then spend! • Creates a habit • Saving is not what is left at end of month Why?

  5. To successfully practice “pay yourself first”… Set goals! Goal- End result of something a person intends to accomplish Financial Goal- Specific objectives to be accomplished through financial planning

  6. What are you willing to give up to obtain the item you want to purchase? This is a trade-off! Trade-off - giving up one thing for another Every decision you make involves a trade-off! What is a trade-off to saving money for the future? Being more financially secure in the future by saving money is a trade-off to spending money in the present

  7. In order to choose saving money over spending money… “Pay Yourself First” To successfully practice this strategy… Set financial goals Examine trade-offs Examine current spending

  8. Simple Interest vs. Compound Interest Simple Interest Compound Interest • Interest earned on the principal investment • Earning interest on interest Principal is the original amount of money invested or saved

  9. Simple Interest Equation: Step 1 $1,000 invested at 7% interest rate for 5 years

  10. Simple Interest Equation: Step 2 $1,000 invested at 7% interest rate for 5 years

  11. Compound Interest Equations There are two methods for calculating compound interest • Single sum of money • Money invested only once at the beginning of an investment • Equal number of investments spread over time • Equal amounts of money are invested multiple times (once a month, once a year, etc.)

  12. Compound Interest Equation – Single Sum P (1+ r)n = A Amount Investment is Worth Principal (1 + Interest Rate)Time Periods = $1,000 invested at 7% interest rate compounded yearly for 5 years 1,000 (1+ .07)5 = $1403.00

  13. Compound Interest Equation - Multiple Investments in Equal Amounts $1,000 invested every year at 7% annual interest rate for 5 years

  14. Time Value of Money Math Practice #1 Sara deposited $600.00 into a savings account one year ago. She has been earning 1.2% in annual simple interest. Complete the following calculations to determine how much Sara’s money is now worth. Step One: .012 1 600.00 7.20 Step Two: 600.00 607.20 7.20

  15. Time Value of Money Math Practice #1 How much is Sara’s investment worth after one year? $607.20

  16. Time Value of Money Math Practice #2 Tim’s grandparents have given him $1500.00 to invest while he is in college to begin his retirement fund. He will earn 2.3% interest, compounded annually. What will his investment be worth at the end of four years? What is the equation? $1,500 (1+ .023)4

  17. Time Value of Money Math Practice #2 Step One: .023 1.023 1 Step Two: 4 1.023 1.095 Step Three: 1500 1642.50 1.095

  18. Time Value of Money Math Practice #2 What will Tim’s investment be worth at the end of four years? $1642.50

  19. Time Value of Money Math Practice #3 Nicole put $2000.00 into an account that pays 2% interest and compounds annually. She invests $2000.00 every year for five years. What will her investment be worth after five years? What is the equation?

  20. Time Value of Money Math Practice #3 Step One: 1.02 1 .02 Step Two: 5 1.104 1.02 Step Three: 1.104 1 .104

  21. Time Value of Money Math Practice #3 Step Four: .104 .02 5.2 Step Five: 10,400.00 2000 5.2 What will Nicole’s investment be worth at the end of five years? $10,400.00

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