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Lesson 1
Objectives: In this lesson, you will learn the time value of money using an investment calculator. You will also be able to calculate the future value of money given a single investment of $1,000 or a monthly investment of $100. This lesson will illustrate that investing in the stock market, especially the S&P 500 Index, may be superior to investing in CDs, T-bonds, and bank accounts. This will be an eye-opening experience for you to witness the magic of the power of compounding.
Background: Factors that influence the future value of money include:
- Amount of initial money invested
- Amount of subsequent money invested monthly or yearly
- Rate of return or yield on investment
- Length of time the money is invested
Example
Single investment in stocks (S&P 500) with 12% annual return:
Goldie received shares of the S&P 500 Index funds from her grandparents, which were worth $3,000 when she was 21. She decided not to buy or sell the shares until she would retire at 65. How much will the S&P 500 investment be worth when Goldie reaches 65?
Click here to use the Investment Calculator to find the answer.
Note: Goldie will not have to pay income taxes every year until he sells the index funds.
Activities:
1. Single investment in stocks (S&P 500) with 12% annual return:
Brian received shares of the S&P 500 Index funds from his grandparents, which were worth $5,000 when he was 25. He decided not to buy or sell the shares until he would retire at 65. How much will the S&P 500 investment be worth when Brian reaches 65?
Click here to use the Investment Calculator to find the answer.
Note: Brian will not have to pay income taxes every year until he sells the index funds.
2. Single investment in a certificate of deposit (CD) yielding 5% per year:
Mary’s mother placed $5,000 in CDs under Mary’s name when Mary was 25. The account has earned 5% compounded annually. No money has been added or withdrawn from the account. How much will the money be worth when Mary retires at 65?
Click here to use the Investment Calculator to find the answer.
Note: Actually, Mary will get a lot less because she has to pay income taxes every year.
3. Fixed monthly investments in stocks with a 12% annual return:
At the age of 25, Tina started her first job and set up an automatic payroll deduction of $50 a month for her Individual Retirement Account (IRA). She also invested in the S&P 500 Index funds with the IRA account. She doesn’t have to pay any taxes on the investment until she withdraws the money for retirement. How much money will Tina be worth at 65?
Click here to use the Investment Calculator to find the answer.
Note: If you withdraw money from an IRA account before the age of 59½, you have to pay a 10% penalty fee.
4. Fixed monthly deposits in Treasury bonds yielding 6%:
After graduating from college at 25, Robert started saving $50 a month and purchased T-bonds at a 6% yield. He will leave his interest in the account until his retirement. How much money will Robert have at 65?
Click here to use the Investment Calculator to find the answer.
Note: Interest from T-bonds is free from income taxes.
5. Combined initial and monthly investments in stocks with 12% annual return:
Cindy’s parents placed $5,000 in a stock index funds account in Cindy’s name on her 25th birthday. She just got a job and decided to add $50 a month to the account. Cindy will not withdraw funds from the account until she is 65. How much will the account be worth?
Click here to use the Investment Calculator to find the answer.
Note: Cindy doesn’t have to pay income taxes until she starts selling shares and withdrawing money from the account.
6. Combined initial and monthly investments in bank account with 4% interest per year:
John’s mother works for Bank of America. She opens an account for John with an initial deposit of $5,000. John, at the age of 25, saves $50 per month in this account. Assuming he doesn’t have to take money out to pay taxes from the interest earned on his account, how much money will John have when he turns 65?
Click here to use the Investment Calculator to find the answer.
Note: Interest from bank account is not free from income taxes.
7. Combined initial and monthly investments in stocks with 12% annual return:
Sue’s parents invested $5,000 in stock index funds when Sue was born. They also put in $100 each month in the same account, accumulating 12% return on the investment. How much money will Sue’s parents have when Sue turns 18?
Click here to use the Investment Calculator to find the answer.
Will Sue have enough money to pay for a 4-year public college?
Will she have enough money for a private university?
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