[Music] [Applause] [Music] hello my name is thief ostego i'm a financial student ambassador for the society for financial education and professional development through the society i work with college students on building their personal money management skills with an emphasis on budgeting credit and debt management and investment welcome to fundamentals of personal money management this lesson is invest in credit and debt management in this lesson we'll examine the principles of investing the concept of compound interest and the different types of personal investment tool that can help grow your income finally we look at best practices for managing credit and debt i'm presenting this concept to you in general times for information on specific personal money management you should consult a qualified financial professional effective money management is an important skill because it helps you reach your financial goals it involves focusing financial resources to meet your current and future financial needs as well as your financial obligations one aspect of money management that will play a key role in meeting your needs at each stage of your life is investing investing involves committing some of your money into assets with the hope that it increases in value as a result you create wealth and income for your future when you are putting money into a financial vehicle you are seeking the benefit of the potential growth of your investments consider ways to start investing a small amount of money early so that through the power of compounding interest the value of your investments increase over time two of the most important concepts about investing are simple interest versus compound interest and how it factor into how your money grows [Music] simple interest is calculated and paid on just the principal or the money you deposited into the account in contrast compound interest is calculated and paid on both the principal a month plus all the previously accumulated interest earned think of it as building blocks simple interest is like adding onto the first break laid every time compound interest is more like adding new break to the last one you place at the very top the wall gets taller your money grows more substantially with compound interest money that is compounded is money at work when you open a savings account at a financial institution ask your representative if simple interest or compound interest will be paid on your account often money put away for savings at home loses the benefit of compounding but money put aside into a savings account earning interest that compounds frequently can make a huge difference as it increases its value over time let's look at an example if five thousand dollars were deposited for ten years earning six percent simple interest annually the account value in ten years would total eight thousand dollars but if the same amount of money were to end compound interest at the end of ten years the value would be eight thousand nine hundred and fifty four dollars almost a thousand dollars more in fact the amount will reach 9070 if instead of annual compounding the interest crediting method allow for quarterly compounding what does this mean it means that instead of interest being credited once a year interest will be credited on the accumulated balance every quarter making the amount end every three months slightly higher the frequency of compounding daily monthly quarterly or annually can make a big difference in this example the accumulated value in two more years will reach ten thousand dollars this is more than double the original amount any subsequent growth continues to benefit from earning on top of the old ending so that as the accounts get larger it grows exponentially when it comes to compounding the rule of 72 is a simple way to estimate how long it will take an investment to double given the fixed annual rate of interest by dividing 72 by the annual rate of return you can get a rough estimate of how many years it will take for a one-time initial investment to double in this case we'll divide 72 by six our interest rate to find that it'll take the original five thousand dollar investment twelve years to double this example assumed that not only the initial amount deposited but the amount accumulated will grow much larger if you continue to add more into the account depending on the length of time someone invests and the rate of return end on the money it becomes apparent that the accumulated earnings can exceed the principle by taking advantage of the power of compounding you can put in much smaller amounts in early years and let the work of compounding do the work of increasing the value of your account delaying or starting later in life simply may not give you enough time to take advantage of accumulated growth over time even doubling or tripling the amount contributed on a monthly basis may not allow enough time to catch up to the account value of someone who started early with much less and allowed the ns to keep growing now let's look at other types of investments which can also increase in value and create wealth and income for you these are stocks bonds and mutual funds stocks are securities that represent ownership in the company if the shares of stock increases the value of your ownership in the company increases bonds represent loans in which a company or government entity is essentially borrowing money and issuing you and i owe you promising to pay interest and to retain the amount that was borrowed at a future date mutual funds represent a combination of the two by purchasing shares in a grouping of stocks or bonds managed by an investment company despite the volatility historically the average return over a given period of time on investment assets outperformed what can be earned in safer interest-bearing accounts unlike a savings account that offers savings assets interest rates money invested in stocks bonds and mutual funds does not have defined interest rate when you invest instead they seek a rate of return on the investment there's no guarantee of what you end on your investment there is both the potential for gain or loss and there's no guarantee that money will grow this is what we refer to as risks when discussing investments investing involves a race reward relationship generally the lower your risk which is found in savings accounts and certificates of deposits the lower the return conversely high risk investment like stocks bonds and mutual funds offer a greater potential return on your investment investment vehicles such as stocks bonds and mutual funds tend to fluctuate in value based on various market related and economic factors while in most cases historical return in this type of investment represents high overall gains it should be expected that market or economic conditions may also result in negative rates of return or a lesser return than expected smart investing requires that you choose investments according to your time horizon and rex tolerance your time horizon relates to your life stage or the time you think you need the money rex tolerance relates to your ability to withstand changes in the value of your investment that may occur from time to time for example if you are investing for retirement that will not come onto 25 or more years in the future you can afford to invest in a more risk tolerant way taking a chance on high risk potentially high return financial vehicle or two [Music] even in years of negative return the account has time to recover and make up losses before funds are ever needed if on the other hand you know you need the money being invested in three to five years it makes sense to limit your rex exposure by making low risks low volatility investment while smart investment is by one aspect of your focus on the road to creating wealth the issue of credit and debt management are vitally important to your financial well-being and economic stability the mismanagement of credit and debt can drain your financial resources and limit your ability to make investments credit and debt management are those areas in which what you don't know can hurt you really applies credit is a powerful tool for wealth building it gives you the ability to acquire goals and services today but pay later credit can be used to pay for your education purchase a vehicle help fund the startup of a business or buy a home when you are granted credit or use a credit card you are essentially borrowing money and making a promise to repay it back usually with interest when you use credit to pay for expenses you are committing or giving up the future use of your money when applying for credit potential lenders will look for this top three factors they are called the three c's capacity character and collateral capacity look at your ability to pay the debt that you are seeking that is do you have the income and resources sufficient to pay back the loan and maintain the payments character is a consideration of your credit worthiness this refers to your reputation for paying bills when due by considering your past payment history with other lenders as an indication of your willingness and ability to honor agreements collateral is an asset pledge to the creditor until the debt obligation is paid example if you own your home it may be used as collateral to secure a loan management of credit is extremely important when it comes to your financial help because negative information on your credit report follows you for years well after an incident on late payment has occurred even if you are able to obtain credit the cost of credit is increased in the form of higher interest rates another issue most people may not be aware of until it's too late is how credit is used by others in making decisions unrelated to borrowing employers landlords banks service providers and insurance companies use your credit history as an objective assessment in determining whether to accept or deny applicants deny services or charge higher fees this can make a difference in what job you get where you are able to live or your access to choices in obtaining basic services prioritizing debt reduction now by adjusting your budget to pay more than your minimum payment can help you get on a better path to have more money to invest later money management is not simply about how you spend money it's about considering and making discipline choices despite having limited current resources carefully consider financial choices that you make now have an influence on how you are able to build a foundation for your future financial well-being thank you for the opportunity to share how investing credit and debt management are tools for long-term financial success for more information on this course and to assess related resources visit our website you