APMacro P2: PF Saving and Investing

power of comp
Money doesn’t grow on trees, but it can grow. It grows when you save and invest wisely. If you want to be wealthy, start by saving and investing regularly. Begin saving now and save as much as you can afford. Pay yourself first by putting money into a savings account, money market fund, or some other investment instrument every time you are paid. Because of the power of compounding, your money will grow big time. Compounding provides an incentive to save and invest early. The benefits of saving and investing when you are young can increase substantially over time when funds are allowed to compound. Compounding means that you earn interest on the interest earned in previous years. For example, if you save $2,000 and earn 8 percent in annual interest, you will have $2,160 at the end of the first year. You will have earned $160 in interest. The second year, however, you will earn more than $160 in interest because you will earn 8 percent of $2,160, not $2,000. This will come to $172.80 in interest, or $12.80 more than the first year. How much difference does this compounding make? If you save $2,000 a year at 8 percent annual interest from age 22 to age 65, you will have saved $86,000 over 43 years. How much money would you have at age 65? You would have a total of $713,899, or $627,899 more than you saved. Think of compound interest as the fertilizer that makes money grow.

We invest money in everything from rare coins to real estate because we expect a favorable financial return in the future. However, not all investments turn out as we hope and expect. Nearly every kind of investment involves some sort of risk. For example, the price of rare coins or houses can go down as well as up. Risk is inherent in all investments. Some risks are ones investors cannot control. Other risks can be managed. Generally, there is a strong relationship between risk and reward. The higher the potential reward an investment offers, the higher the risk of losses rather than gains. Given that relationship, there is no free lunch in investing. Investors who choose low risk may earn meager returns. Investors who seek higher returns through high-risk investments may suffer big losses. The key is to develop a risk/reward ratio with which you are comfortable. Therefore, in choosing what to invest in it is important to weigh the various risks against the potential rewards. Today, students will learn about the five types of risk, and compare the risks and rewards associated with several frequently-used investment vehicles.

1) Read Saving and Investing pp.125-126
2) 20.1 Benefits and Opportunity Costs of Spending and Saving p.137
3) 20.2 Tale of Two Savers pp.138-140
4) 20.3 Why It Pays to Save Early and Often p.141



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