18 Investment and Savings Planning18a compare the impact of simple interest vs. compound interest on savings 18b compare and contrast investment and savings options 18c explain costs and income sources for investments
To maximize the return on savings, consumers must compare methodsof interest calculation and payment.To analyze investment strategies, it is necessary to compare simple andcompound interest, use the rule of 72, and understand the time value ofmoney. 18a compare the impact of simple interest vs. compound interest on savings
What is principal, and what is interest? Principal -original capital deposited or invested interest -amount earned on the principal over time.
What is the difference betweensimple and compound interest? Simple interest is paid annually on the principal. Compound interest is paid periodically and is paid on the principal plus interest earned.
How is the rule of 72 used?The rule of 72 reveals how long it takes for an investment to double in value:72 ÷ interest rate = number of years it will take for the money to double.
What is the time value of money? The value of money today is greater than the value of the same amount of money in the future. The time value of money is the amount of money one would need to receive today to equal a certain sum in the future. For example, a lottery winner who wins $1 million has a choice of (1) receiving a certain amount of money every year until the total is $1 million or (2) receiving a sum today (present value), which when invested at current interest rates would yield $1 million (future value) over the same period of time.
18b compare and contrastinvestment and savings optionsConsumers have many savings and investment options.
What are some savings options? savings accounts certificates of deposit money market funds.
What are some investment options? stocks bonds government savings bonds treasury securities mutual funds real estate retirement plans.
How do these options compare based onfactors such as rick, reward, convenience,and liquidity? Factors used to compare savings and/or investment options include risk reward convenience liquidity.
18c explain costs and incomesources for investmentsMoney for investment can come from a variety ofsources.Each type of investment has costs to consider
What are some income sources forinvesting? savings gifts inheritances market gains.
What are some of the costs toconsider when investing?Costs to consider when investing include finance charges and fees opportunity costs.Risks to consider when investing include market losses interest rate risk.