Saving = Investing
In Unit 2, you learned how important it is to yourself first. But what should you do with that money? You
could put in your dresser or under your mattress. While you may always know where is, it won’t be
doing anything except gathering dust. Instead, you should consider or even investing it.
Saving is what people usually do to meet short-term . Your money is very safe in a savings account, and
it is usually a small amount of interest. It’s also easy for you to get to money when you need it—
just go to your bank and make a . Investing means you’re setting your money aside for
longer-term goals. There’s no guarantee the money you invest will grow. In fact, it’s normal for investments
to and fall in value over time. But in the long run, investments can a lot more than you can usually
make in a savings account. Why saving and investing so important to your financial plan? For one, saving
or money for your financial goals makes you less tempted to spend it.It’s in totally different account
from the one you pay your everyday expenses. And it’s just sitting there burning a hole in your pocket. But
the best reason investing is that your money is actually making money for you. Any interest investment
gains you earn get you that much closer to your financial goals. you didn’t have to do anything
for it! But you’ll learn more about amazing money principle in the next section.
Did You Know? There’s a huge to investing early. Let’s say you start investing $2,000 everyyear when
you’re 18. put it into an account that grows by 7% each year, and continue invest the same amount for 10
years. Then you stop and just let money sit for the next 38 years, where it continues togrow at 7% year,
until you’re 65 years old.Now say your sister decides not to invest she turns 31.Then she puts $2,000 a year
into an account that also 7% a year—and does it for the next 35 years, until she turns . Who will have
more money? You will! About $85,000 more, in fact. After only $20,000, your account will beworth
$361,418. But even though she has invested ,000, your sister will have only $276,474. That’s because
you had the power of on your side. Figure 3-1 demonstrates this point. If you stick with investing
,000 per year from age 18 through age 65, you could end up with than $706,000!
The Time Value of Money Is a dollar always worth a ? It may seem like a silly question, but a dollar
is not always a dollar. Sometimes it’s worth more, sometimes less. How can that be? The of
a dollar changes dramatically depending on when you get it and what do with it. So time is a critical
variable in the exact value a dollar. Time value of money refers to the relationship among time, money,
rate of interest. Say you have $100 today. If you keep it in dresser drawer for a year, you will
still have $100 in a year. in a year, $100 may buy less than it does now because of , which
is a rise in the cost of goods and services over time. decreases the spending power of each dollar
you have. (Do you remember what candy bar cost when you were six years old?) But say you put
$100 into a savings account that pays 3 percent interest a year. Using following formula for simple
interest, a year later you will have $103 because earned interest: Earned interest is the payment you receive for
allowing a financial or corporation to use your money. You may not realize it, but your doesn’t
keep every dollar you deposit on hand. It may lend some of money to other bank customers or deposit it with a
government bank for . So the bank compensates you for that by paying you interest on your
account. Both of these examples demonstrate the time value of money and show much its
three elements—time, money, and rate of interest—can help you reach your goals. In short:
1 The more money you have to save or invest, more money you are likely to earn. 2 The higher the rate
of you earn, the more money you are likely to have. 3 The sooner invest your money, the more
time it has to make new money, making likely that you could earn much more as a result. Cool, huh? So
of how much or how little you have to save and invest, time truly on your side, helping you
make more money! Exercise 3B: The Power Compounding Let’s assume you have $10 you’re ready to
invest. Using the two rates in the table below, fill in the compound value of $10 for of the time
periods listed. For example, $10 growing at 4% is worth .40 after one year. For the second year, multiply
$10.40 by 4% and add result to $10.40, for a total of $10.82.