LET 3 Investing: Making your Money Work for You

Okay, let threes last um official curriculum lesson and I'm

gonna move through it relatively quickly.

We're gonna I'm gonna introduce you to the idea of

investing, investing and saving.

Remember from the budget class, we talked about Pay yourself

first. Pay yourself first, which means putting money aside for

your future financial goals.

We send ties to our financial goals lesson.

Okay, so the way we do that is by saving

and investing.

So we're gonna be talking about making our money work

for us.

So think about what's common between saving and investing.

It was common and what's unique to each.

Well, first of all, we should have a definition of

savings versus um investing.

So when you're saving, you're putting money aside for um

financially to meet some financial goals.

When you invest, you're buying something with the expectation that

you're going to get a return on that investment.

So there is a slight difference, a difference between those

two and there's some unique features we're going to talk

about. So we know that both of them deal with

financial institutions.

That's common feature you're gonna do with a Bank of

Federal Credit Union, a financial firm and investing firm.

So you're gonna be dealing with some kind of financial

institution in both cases.

Both cases, you got to put money in to get

something. And the other, something that's common between the two

is you're gonna get some kind of return on investment

are why they sometimes called return on investments.

Whether you put money into savings or to an investment

you want to return on investment.

Well, what's unique in terms of savings?

Well, it's going to be low risk, sometimes almost no

risk because if it's like a savings account, your money

is insured by the bank and but you're gonna have

lower earnings in the situation of investing.

We're gonna talk about a bunch of different investing options

are available, but you're gonna be looking at higher risk

and potential for higher returns, say potential for our return

because of that risk, you might not get the return

that you would expect.

So there are common factors and unique factors of both.

And again, investing means you're putting your money aside so

that it's available to use down the road later when

you're saving when you're investing.

Well, that's you're buying something in return, uh, in return,

expecting to get something as a return on that investment.

Okay, so let's move forward to show you a couple.

They like to show you a lively slides.

I cut several of the mount.

But for example, if you had $10,000 lump sum that

you could put aside And just leave it alone and

just let it collect interest.

You see if you could find an investment that gave

you 5%.

Well, in 10 years you've made $6,000.

Almost $60 $300 in 20 years.

You've made 26, you made $6,500.

You're at 26,533 off that initial 10,000.

Um if you could actually find an account that got

you a 12 interest um some kind of investment, I

mean you have $100,000 sitting aside after 20 years.

Um and that'd be nice to have.

Okay, so you look at how money makes you money

in this case, the higher the interest rate, the more

return on your investment In a similar fashion.

If you were able to put $1,000 away a year

Instead of $10,000 lump sum, but $1,000 away a year.

Still, if you could get a 12 interest return through

some kind of investment, You did it with $72,000 in

the bank from that initial uh it would be $20,000

in this case because the $1000 annually and then again

You make $13,000 just at five interest.

Okay, so you see where you're looking for return on

investment? Hey, how am I get, how can I make

my money make money.

Now? There's a, there's a rule that you can use

and I don't want to talk about, I'm gonna bring

it up right now.

The rule of 72, this might actually show up on

some kind of quiz or test or something.

The Rule 72 tells you how long What the interest

rate is and how long your money is going to

take, the double based on the interest rate.

Okay, so for example, if you know you had a

six interest rate 72 divided by six, is 12.

That's how many years it's going to take the double

for an investment to double.

Now, the reason we sometimes talk about this is if

you buy any kinds of of savings bonds, for example,

U. S.

Savings bonds, The way that they work is you would

buy them at half of the face value.

In other words, if it's a $200 savings bond, you

buy it for 100.

But then you have to wait for it to mature.

So you gotta wait, you gotta know how long it's

gonna take the double because it's not mature until it

gets to the $200 value.

So I know that in the The 90s when I

was investing in uh some set us savings bonds, I

was getting a six return.

I don't think you're getting that kind of return out,

but I was getting a six return.

And so I knew in 12 years that those savings

bonds would mature and I could then cash savings bonds

in it at $200 a piece.

So that's when this Rule 72 comes into play.

But any time you got money and you know, you

want to double it, you can use rule 72.

So let's say you got to $10,000 Say I need

I need 20 I want to have $20,000 available When

I graduate from college.

So you take 72, you divided by four.

And then whatever that answer is, um That's going to

tell you because that's, you know, that's how many years

you wanted to double, That's going to tell you the

interest rates you're gonna need.

So in this, in that case you're gonna need pretty

pretty substantial interest rate.

Listen, let me give you an example of a little

chart that kind of gives us this stuff.

So If I know that six years Is how many

years I want my $10,000 to become 20,000, then I

need a 12 rate.

So if you want, in four years, you're talking about

about 15 or 16 uh interest rate, right?

But in this case, You know, they're using the whole

numbers here.

So six times 12 is 72.

So 72 divided by 12 equals six years.

And if I could wait 24 years before it for

it to double, then I would just need a three

interest rate In 24 years.

That amount of money would double.

So that's what the rule 72 does for you, just

basically tells you, hey look if you know the interest

rate Divide 72 by that interest rate as a whole

number. So in other words don't decimal don't make it

a decimal.

Just if it's a 6% range two by 72 by

6, 12 years.

If you know how many years you need, hey, I

need this money in eight years, do I?

72 by eight?

Hey, you need a nine interest rate for that um

investment to double.

Okay. And savings bonds is one of the best examples

of when you might actually need that.

And just that okay, I'm just gonna show you a

couple of things real quick because we're, we are going

to be short on time as I summarize here, there's

a sample interest formula.

So if you want to, how much interest you're going

to get.

The principle is the amount that you put in the

interest rate is uh decimal numbers.

So in this play, in this case you're talking about,

you know point 55 percent interest and then time is

the number of years that you're going to invest it

and it tells you.

So in one year that's how much interest you gained

off that $500.

So that's a little formula you could use.

And here's a formula for compounded interest.

I'm gonna talk about comment pounded into a little bit

more. Used to use this formula.

You need a calculator that allows you to use the

power. You know, the a few different orders on the,

on the calculator, a few different functions that most of

the basic calculators I have sitting around a classroom don't

have. So, but anyway, if you want to know what

you're the final amount you're gonna have after however many

years T.

V. And the number of years.

Well then you gotta know how much you put in.

That's the p the R.

Is the annual interest rate.

What's the interest rates are getting on that and then

a number of years it's invested some number of years.

So this is going to show you hey this is

how I figure out what the interest rate is.

And the T.

Is really because I don't think this compound interest for

me that gives you a good definition with the T.

Is because the tea is actually um how often the

uh well that's the number of years.

The end is what we're talking about.

Is that the amount of the number of times in

his compound?

Okay. So T.

Is years and number of years compounded is what the

N. Is.

So I'm never gonna make you use this formula.

Don't worry about it.

Okay But just if you ever go on the you

can go on the internet you can find that form

that help you understand how you might figure out what

compound interest is.

Now? Why invest?

Why save money?

Why invest?

Well we have to because of inflation And inflation is

up right now in our economy.

So you have to understand how inflation works.

A bottom line is um when I was a teenager

sitting where you are, my $20 bought me a lot

more than your $20 does now.

Okay $20 now has less buying power.

Why? Because prices have gone up so much.

So that's what happens over time.

If you just have $20 sitting in your pocket it's

gonna lose value over time and that's why we invest

so that we can stay up ahead of inflation.

So for example if we have $1000 and we stash

in your drawer, Then 20 years from now it's gonna

basically by what would be $554 worth of stuff vs

$1,000 worth of stuff that could get now.

So money has, there's a time value for money And

here's an example of this, let's say a guy on

the left finds an investment where he gets 10 return

Guy in the middle, puts it in a good savings

account or a money market account.

It's a three return Down the right, puts his in

a puts it under the mattress so he gets zero

return. Well if you look at the comparison of after

two years, three years and in 10 years the big

difference in the amount of money that's going to be

available to these people.

Okay. So that $3,000 is gonna be worth a heck

of a lot more if you can find a 10

interest. That guy that second under his mattress.

Hey man, sorry.

But You you really didn't make any money.

You actually lost money in the deal.

And I think this is this is actually there's a

there's one mistake on this chart because that 10 years,

actually four years you have a lot more money than

night after 10 years.

Uh I should say four years.

Just a 10.

Okay, but that's just an example of how your interest

compounds because notice has the same 3010 in at 3%.

But your interest compounds in other words, your interests, your

interests makes interest.

So when you take the 10 after that first year,

you're taking 10 against 3300, not against the original 3000.

So, I hope that makes sense to you when we

talk about compound interest.

All right, Last thing I need to hit on is

our little financial planning pyramid.

Okay, here you see a bunch of different um financial

investment options, the things at the top of the highest

risk, but they have the potential for the highest earnings,

the stuff at the bottom as the lowest risk, but

you're going to get the lowest return.

So let's talk about some of the commodity.

When you talk about a commodity, you're talking about a

basic good used in commerce and that could be um

iron ore could be timber, could be pork, could be

corn, could be wheat, to be rice, could be um

any number of things.

That's a basic commodity sold in the market.

Why is that a risk?

Well, depending on if there's a great season or a

bad season, good weather, bad weather, some kind of typhoon

rolls through and destroys the crop.

It's going to change the supply and demand, which is

going to change the um the price per unit and

that's going to affect.

So if you invest in that it's going to be

affected. That's why it's a high risk investment.

Another high risk investment.

It's gonna be a new top of the pyramid is

penny stock.

Those are those companies that are real cheap because they're

just starting out.

So you're investing into a company.

You don't know if it's going to be successful.

So it's usually less than $5 a share for stock

for their stocks and they're normally not even exchanged in

on the New York Stock Exchange.

And collectibles collectibles.

I mean you might have a collectible doll.

Why is that a high risk?

Well weather could affect it, humidity could affect it, could

destroy the condition of it.

Your nieces and nephews could get their hands on it,

destroy it.

So when we talk about collectibles, we're talking about anything

that you think you purchase could be a painting, could

be a sculpture.

Could be so a dog collection stamp collection that you

think is going to earn money over time, but it's

got to be kept in mint condition or it won't

earn money.

I'm almost out of time.

So I do want to talk about uh you can

pause these real quick.

I'll flash them up and you can read them and

pause as you go through Because I'm gonna come back

and talk about mutual funds with the last 30 seconds

or so that I've got.

Because you see these different things on here and you

can look them up on the Internet to be more

comfortable with them and come and familiar with them.

But let's talk about mutual funds, mutual funds.

Why? Usually for new investors, that's a great way to

go because the mutual fund is a combination of different

investments. You've got a professional money manager, um, through a

financial firm.

UsA is an example, Merrill, lynch, Charles Schwab and that

money manager is going to invest in a bunch of

different things to try to meet your financial goals and

it's gonna be a cross section of investments.

So we're going to come.

LET 3 Investing: Making your Money Work for You

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