COMPOUND INTEREST PAYS OFF!
Saving money is necessary in many situations. Building an emergency fund, saving for a goal such as an education or a car, or saving for retirement are all important. This week, you will explore compound interest and how it can help you achieve your financial goals.
RESOURCES
Be sure to review the Learning Resources before completing this activity.
To prepare for this Discussion:
Click the weekly resources link to access the resources.
WEEKLY RESOURCE
Consider the following situation:
• Your great uncle twice removed has left you a windfall inheritance. Choose an amount between $10,000 and $50,000 (round to the nearest thousand dollars). Instead of spending this immediately, you decide to invest this for your future.
• Select a reasonable interest rate for your investment (between 5% and 15% is common for growth).
Select a period of time to let your money grow (between 10 and 30 years is common).
• Assume that your interest will be compounded monthly.
• Reflect on what your goal might be for this savings. Assuming the investment company you choose uses the compound interest formula, compute how much money will grow in your chosen time frame. Be prepared to show your parameters filled into the compound interest formula so your work can be checked.
• Determine how much interest will be earned during this period and be prepared to show you work.
• Consider what would happen if you had 10 more years to let your investment grow. Add 10 years to your time frame and find the new final amount. Be sure to show the new parameters in the compound interest formula. What is your new final amount? How much interest is earned during this period?
• Reflect on the difference in interest earned between the longer and the shorter time frames. Finally, think about one benefit to investing early versus later in life and having more time to allow your investment to grow.
With these thoughts in mind:
BY DAY 3
Post at least a 2-paragraph response addressing the following prompts:
In your first paragraph, explain:
• Your goal for this savings (retirement, car, education, etc.) and the initial amount, P (P for principal), you are putting into the savings account. • Your chosen interest rate.
• The time frame for your investment to grow
How much money will grow and how much interest will be earned in your chosen time frame? Be sure to show your parameters filled into the compound interest formula so your work can be checked.
• What would happen if you had 10 more years to let your investment grow? Add 10 years to your time frame and provide the new
final investment amount and the amount of interest that would be earned during this new time frame. Be sure to show the new parameters in the compound interest formula when showing your work.
In your second paragraph, explain:
• The difference in interest earned between the longer and shorter time frames.
• One benefit or liability to investing early versus later.
Read a selection of your classmates' postings.