01-24-2011 PowerPoints

01-24-2011 PowerPoints - Important Course Activities...

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Unformatted text preview: Important Course Activities Complete Personal Finance Guidebook (pages 1 - 38) The Millionaire’s Retirement Plan Teams Team members might want to exchange contact information with each other Your First Investment Decision Each team will choose three stocks and and choose one of the following. QUIZ? Choose one: one: Futures: Energy, Grains, Meats, Metals, Foods Currency: Renminbi, Real, Ruble, Rupee, Peso 1 Your First Investment Decision – Cont’d Choose one: Bond: Treasury Bill, Treasury Bond / Note, Municipal Bond, Corporate Bond, Bond, Eurodollar Bond *ETF: Intermediate-Corporate Bond Intermediate- TWO VERY IMPORTANT WORDS IN INVESTING! What do you think they are? Hint - I and C (VCIT), Materials (VAW), REIT (VNQ), Financials (VFH), FTSE (VEU) * Vanguard ETFs Inflation Compounding INFLATION 2 Inflation $$ $ Time $ $ Would you rather receive a dollar today or dollar tomorrow? Today is worth more than tomorrow. What is the CPI? 3 Consumer Price Index The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. services Cost of living index Economic Indicator Consume Price Index • • • • Food and Beverages • • • • Medical Care – milk, coffee, cereal, fullservice meals – prescription drugs, medical supplies Housing Recreation – rent, bedroom furniture, fuel oil – televisions, sports equipment, pet products Apparel – men’s shirts, women’s dresses, jewelry Education and Communication – tuition, postage, telephone services Transportation – new vehicles, airfare, gasoline, insurance Other Goods and Services Team Exercise – haircuts, funeral expenses Producer Price Index What is the PPI? The Producer Price Index (PPI) is a measure of wholesale price levels. The PPI tracks prices of foods, metals, lumber, oil and gas, and many other commodities. US Bureau of Labor Statistics Economic Indicator 4 The BIG “ I ” Word Is? Guess the Price What is the lesson about INFLATION! Movie ticket INFLATION? Popcorn 1950 2000 2030* 50¢ $7.00 $22.70 10¢ 10¢ $3.00 $9.75 1950 2000 2030* Movie ticket Popcorn 50¢ $7.00 $22.70 10¢ $3.00 $9.75 *Assumes a 4% inflation rate until 2030. Sources: Average movie ticket prices from Academy of Motion Picture Arts and Sciences and the Motion Picture Association of America. Average popcorn prices from The American Drive-In Movie Theatre and Regal Cinemas. What was the average annual inflation rate over the last 10 years? US Inflation Rate 5 US Historical Inflation Rate Inflation vs. Deflation • Inflation: is an increase in the average level of prices • Deflation: is the decrease in the average level of prices Item of Note COMPOUNDING Please remember to always bring a calculator to class 6 “The most powerful force in the universe is compound interest” ALBERT EINSTEIN Compounding Formula r⎞ ⎛ FA = IA ⎜ 1 + ⎟ ⎝ 100 ⎠ n FA = Final Amount IA = Initial Amount r = Interest rate (percent) n = Number of periods (usually years) Understanding Compounding Suppose we have $1,000 and we know a place where we can get 10% return on our money. How much will we have in 1 year, 2 years and three years? Total Account = Pr incipal (money put in) + Interest (gain) Compounding Interest Start with a $1000 investment $1,000 $1,100 $1,210 $1,331 $1,464 $1,610 $1,771 $1,948 28 Year One Total Account = $1,000 + ($1,000 * 0.1) = $1,100 Year Two Total Account = $1,100 + ($1,100 * 0.1) = $1,210 Total Account = $1,210 + ($1,210 * 0.1) = $1,331 Year Three 7 Compounding Interest …… in 7.2 years the $1,000 investment in year one will “snowball” into $2,000 (10% investment return)! Does anyone know the rule of 72? The rule of 72 is the time it takes for your money to double. $1,948 $2,000 29 Final Amount - Ordinary Annuity FA = PPMT {[(1 + r )n – 1] /r} FA = Final Amount PPMT = Periodic Payment Amount r = Interest rate (decimal) n = Number of periods (usually years) The Opportunity for Growth $100 every two weeks can go a long way $325,434 $300,000 Contributions Account value value 200,000 $128,473 100,000 $78,000 $13,000 $16,004 After 5 years $26,000 $39,864 $52,000 0 After 10 years After 20 years After 30 years This hypothetical example does not illustrate the actual results of a particular investment. It is based on a $100 contribution every two weeks to the plan and an 8% average annual return, compounded every two weeks. Of course, your actual results may differ. The money you take out of your plan is subject to ordinary income tax and, if applicable, to an additional 10% federal tax penalty on early withdrawals. 8 Start as soon as possible Save $100 every two weeks now or wait three years? $325,434 $300,000 200,000 If you start today If you wait 3 years $249,143 100,000 0 In 5 years In 10 years In 20 years In 30 years This illustration assumes the hypothetical investment earns an 8% average annual return rate, compounded every two weeks. The return is shown for illustrative purposes only and is not intended to predict the return of any particular investment. Your actual results may differ. This example assumes the investor is paid every two weeks. AI-40263 9 ...
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