Investing, Savings, and Compounding for Financial Growth

Do You Want To Be a Millionaire?

Purpose Know the difference between savings and investing Learn about the miracle of compounding Understand how to start investing

Topics What is investing vs. savings? What is the miracle of compounding? Do I need to be rich to be an investor? Why does inflation matter? Questions and hopefully answers

Investing versus Savings Savings Amassing money. Typically money for a short-term goal (e.g., buy a car, buy a PlayStation, prom, vacation, concert) Investing Making your money multiply. Generally longer-term goals like retirement, college funds when you have children, house. Investments pay higher returns than savings, with some risk Checking account 0.5% Certificate of deposit 2% Treasury bill 3-4% Stock market 7% Roulette (pick red or black)--~100%

Two Types of Investments and Savings Roulette (ignore 0 and maybe 00) 36 numbers; half even, half odd, half red, half black Bet on a even/odd or red/black--$10 Win Get your $10 bet back plus $10 payout Lose Lose your $10 bet High return, high risk (50% chance of losing everything) Stock market Over the past 100 years, average annual return of ~7% Experts (including Warren Buffett) recommend to stay invested Days with large gains tend to follow days with heavy losses Market may lose 1/3 of its value (e.g., 2007), but recovered in six years, has exceed that 7% average annual return since, with recent return to the average Stay in medium-to-long term, have been able to count on 7% annual return Uncertainty is value tomorrow or in six months, could drop 1/3 Savings Pay <2% annually Most accounts are insured You can be certain that the money will be there when you want it

Miracle of Compounding How much does that weekday $4.50 Starbucks drink cost me over 50 years (retirement age)? ~$494,000 at 7% annual return ~$134,000 at 3% annual return ~$58,500, no interest principal interest balance

Miracle of Compounding1 More Example Remember COVID and how it spread? Pond with algae on it. Algae doubles how much of the pond it covers each day. If it covers 1/1000 of the pond after the first day, how long until it covers the pond? If it covers the pond after 29 days, how long until it covers the entire pond? Human brains do not compound well (think exponentially). We are linear thinkers, interest is non-linear. Amount of time that you invest makes a huge difference in later balance.

How Do I Start Investing? Good news is that many companies make it easy (e.g., Vanguard, Fidelity, Charles Schwab, Robinhood) Can open account online Usually no minimum balance Some types of investments have minimums. But not those we will talk about on the next slide. For investments with minimums, build your balance up through regular deposits, and growth elsewhere. Some even give you $100 when you open an account with $50 Best investment long-term (which is investing) The stock market The stock market The stock market

Which Stock? Every study has shown that NOONE, not even the best broker, beats the market consistently One wants a diversified portfolio (i.e., not in one company or industry) Buy mutual funds, indexed funds, and Exchange-traded funds (ETFs) Low management fees to no virtually no management fees Available by market (e.g., US, Europe, Asia), industry (e.g., tech, financial, manufacturing, IT, oil, automotive), company size (small capitalization, medium cap, large cap), social responsibility, diversity, environmentally responsible Since no investors beat the market consistently and they take fees for their expertise , these funds will outperform the experts by tracking the market.

Inflation Has historically been around 3% If your savings/investments return less than 3%, you are losing money A way to think about it: A $1 burger at McDonalds used to cost 15 cents As the cost of the burger went up, so did salaries, number of burgers sold, McDonalds revenue, and the company became more valuable. Their stock went up in value, more than the 6-7X cost of the burger.

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