Economics and Personal Finance/Investments and Savings

Section 1

Principal: How much you have originally invested or borrowed
-You deposit $200 <-- the principle
-You made a purchase using your credit card for $250 <-- the principle you borrowed

Simple interest: Amount charge for the use of invested or borrowed money.
-When you invest money, you earn interest, so look for a higher interest rate.
-When you borrow money, you pay interest (look for a lower interest rate).

Calculation for INTEREST

Interest = Principle • Rate • Time in years (I=PRT)

If the time is given in months, you'll have to divide the months by 12 (5 months: 5/12 = 0.42 years).

Section 2

Simple interest only earns interest on the principal while compound interest earns interest on the principal plus the interest. Basically, savings grow faster with compound interest.

Section 3

Rule of 72

This rule tells you how long it takes for your investment to double in value. It also tells you how long it takes for your debt to double in value.

Formula: 72/interest rate = Number of years it will take for the money to double.

Savings Accounts

Savings accounts are not intended for daily use and are used for long-term purposes. It typically has a higher interest rate than checking, but still relatively has a weak earning potential. Your number of withdrawals are also limited.

CD

Certificates of deposit means that you agree to keep your money deposited for a certain amount of time. The cons are that there will be a hefty penalty for a withdrawal and the initial deposit is much more.

Money Market Funds

Interest rates are higher but require higher minimum balances.

3 types of savings accounts: Saving Accounts, CDs and Money Market Funds

Section 4

Investments

When you invest, you can earn OR lose money on your principal.

Types

Stocks: If you invest in a company stock, you become part owner of a company; therefore, you could share the profits or loses of the company.
Mutual Funds: Example of "indirect investing" because investors pool their money with other investors to reduce risk (you pay for the company's expertise).
Government Savings Bonds: You loan money to the government and then the government promises to repay you with interest: you can get a U.S. bond or a municipal (local government) bond.
Real Estate: Property such as land, houses, or office buildings (house flipping).
Retirement Plans: Individual (traditional IRA, Roth IRA), employee-sponsored (401K, 4038, 4038-B).