Section 4C Savings Plans and Investments

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Section 4CSavings Plans and Investments

• Pages 246-268

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Savings Plans and Investments

• The Savings Plan Formula
• Planning Ahead with Savings Plans
• Total and Annual Returns
• Types of Investments
• Stocks
• Bonds
• Mutual Funds

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Savings Plans
Deposit a lump sum of money and let it grow
through the power of compounding (4B).
Deposit smaller amounts in an interest earning
account on a regular basis (4A) IRAs, 401(k),
Koegh, Pension Special Tax Treatment
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ex/pg246 You deposit 100 into a savings plan at
the end of each month. The plan has an APR of
12 and pays interest monthly.
End of . . . Prior balance Interest on Prior Balance End of month deposit New Balance
Month 1 0 0 100 100
Month2 100 .01x100 1 100 201
Month 3 201 .01x201 2.01 100 303.01
Month4 303.01 .01x303.01 3.03 100 406.04
Month5 406.04 .01x406.04 4.06 100 510.10
Month6 510.10 .01x510.10 5.10 100 615.20
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Is there a Savings Plan Formula?
WOW !!!
where A accumulated savings plan balance PMT
regular payment amount APR annual percentage
rate (decimal) n number of payment periods
per year Y number of years
This formula assumes the same payment and
compounding periods.
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Where did this formula come from?
Another way to figure accumulated value.
After 6 months
End of month1 payment is now worth 100 x (1.01)5
End of month2 payment is now worth 100 x (1.01)4
End of month3 payment is now worth 100 x (1.01)3
End of month4 payment is now worth 100 x (1.01)2
End of month5 payment is now worth 100 x (1.01)1
End of month6 payment is now worth 100
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After 6 months 100x(1.01)5100x(1.01)410
0x(1.01)3100x(1.01)2100x(1.01)1100 100
x ((1.01)5 (1.01)4 (1.01)3 (1.01)2 (1.01)
1)
Do you see a pattern?
After 10 months A 100 x ((1.01)9
(1.01)8 (1.01)7 (1.01)2 (1.01) 1)
After 55 months A 100 x ((1.01)54
(1.01)53 (1.01)52 (1.01)2 (1.01) 1)
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After N months A 100x
(1.01)N-1(1.01)N-2(1.01)N-3
(1.01)2(1.01)1
BN-1 BN-2 BN-3 B2 B1 1
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ex1/pg246-7 Use the savings plan formula to
calculate the balance after 6 months for an APR
of 12 and monthly payments of 100.
Calculator
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ex2/pg248 At age 30, Michelle starts an IRA to
save for retirement. She deposits 100 at the
end of each month. If she can count on an APR of
8, how much will she have when she retires 35
years later at age 65? Compare the IRAs value
to her total deposits over this time period.
Calculator
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ex2/pg248 At age 30, Michelle starts an IRA to
save for retirement. She deposits 100 at the
end of each month. If she can count on an APR of
8, how much will she have when she retires 35
years later at age 65? Compare the IRAs value
to her total deposits over this time period.
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ex2/pg248 At age 30, Michelle starts an IRA to
save for retirement. She deposits 100 at the
end of each month. If she can count on an APR of
8, how much will she have when she retires 35
years later at age 65? Compare the IRAs value
to her total deposits over this time period.
The accumulated value of the IRA is 229,613
The value of the deposits is 35 x 12 x 100
42,000
Compounding interest accounts for 229,613 -
42,000 187,613.
WOW!
The Power of Compounding
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ex3/pg250(Planning Ahead with Savings) You want
to build a 100,000 college fund in 18 years by
making regular, end of the month deposits.
Assuming an APR of 7, calculate how much you
should deposit monthly. How much of the final
value comes from actual deposits and how much
from interest?
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ex3/pg250(Planning Ahead with Savings) You want
to build a 100,000 college fund in 18 years by
making regular, end of the month deposits.
Assuming an APR of 7, calculate how much you
should deposit monthly. How much of the final
value comes from actual deposits and how much
from interest?
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ex3/pg250(Planning Ahead with Savings) You want
to build a 100,000 college fund in 18 years by
making regular, end of the month deposits.
Assuming an APR of 7, calculate how much you
should deposit monthly. How much of the final
value comes from actual deposits and how much
from interest?
The monthly payments are 232.18.
The value of the deposits is 18 x 12 x 232.18
50,151
The accumulated value of the fund is 100,000.
Compounding interest accounts for 100000 -
50151 49849.
WOW!
The Power of Compounding
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More Practice
47/246 Find the savings plan balance after 18
months with an APR of 6 and monthly payments of
600
49/246 You set up an IRA with an APR of 5 at age
25. At the end of each month you deposit 75 in
the account. How much will the IRA contain when
you retire at age 65? Compare the amount to the
total amount of deposits made over the time
period.
53/246 You intend to create a college fund for
your baby. If you can get an APR of 7.5 and
want the fund to have a value of 75,000 after 18
years, how much should you deposit monthly?
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• Homework
• Pages 265-269
• 48, 50, 52, 54