What Can You Do With $100.00?
How else can you earn money??
Anyone have a savings account?
Savings Bonds?
Why should you save money?
Savings AccountsChecking AccountsCertificate of Deposits
Put your money to work for you!
Lower Rate of Return
Low Risk Investment
High Liquidity
Savings Accounts
• Account where you can deposit and
withdrawal money easily
• Accounts earn interest
• Money is accessible through an ATM
machine or debit card
Checking Accounts
• Combines benefits of checking and
savings, money can be easily withdrawn
• Some checking accounts earn interest
• Money can be accessed through an ATM
machine or debit card
Money Market Deposit Account
• Checking/Saving Account• Average interest rate higher than regular
checking account• Usually requires a minimum (more than
$1,000) balance• Limited number of checks can be written
each month
Certificate of Deposit
• Bank pays a fixed rate of interest for a fixed amount of time on a fixed amount of money.
• Example: 60 month CD, $1,000, 0.75%
• Restricted access to money, less liquid
PRINCIPAL & INTEREST
• Amount of money deposited is called principal.
• Amount of money bank pays on the principal is called interest.
Simple Interest is interest paid only on the principal
• Simple Interest Calculation:
Dollar Amount X Interest Rate X Length of Time
$100.00 x 2% x 1 year = $2.00
At the end of one year you have made $2.00 on your $100.00 initial deposit.
You Do the Math!SIMPLE INTEREST 3% Interest Rate
Year Beginning Balance Interest Paid Year End Balance
1 $1,000.00 $30 $1,030.00
2 $30
3
4
5
6
7
8
9
10
You Do the Math!SIMPLE INTEREST 3% Interest Rate
Year Beginning Balance Interest Paid Year End Balance
1 $1,000.00 $30 $1,030.00
2 $1,030.00 $30 $1,060.00
3
4
5
6
7
8
9
10
You Do the Math!
SIMPLE INTEREST 3% Interest Rate
Year Beginning Balance Interest Paid Year End Balance
1 $1,000.00 $30 $1,030.00
2 $1,030.00 $30 $1,060.00
3 $1,060.00 $30 $1,090.00
4 $1,090.00 $30 $1,120.00
5 $1,120.00 $30 $1,150.00
6 $1,150.00 $30 $1,180.00
7 $1,180.00 $30 $1,210.00
8 $1,210.00 $30 $1,240.00
9 $1,240.00 $30 $1,270.00
10 $1,270.00 $30 $1,300.00
Compound Interest
Compound interest, interest is earned on the original amount of deposit AND on the interest that has already been earned on the deposit.
Annual Compound Interest Calculation
(Original Deposit + Interest Earned) x Interest Rate x Length of Time
Year One: $100.00 x 2% x 1 = $2
$100.00 + $2.00 = $102.00
Year Two: $102.00 x 2% x 1 = $2.04
$102.00 + 2.04 = $104.04
You Do the Math!COMPOUND INTEREST 3% Interest Rate
Year Beginning Balance Interest Paid Year End Balance
1 $1,000.00 $30.00 $1,030.00
2 $1,030.00
3
4
5
6
7
8
9
10
You Do the Math!COMPOUND INTEREST 3% Interest Rate
Year Beginning Balance Interest Paid Year End Balance
1 $1,000.00 $30.00 $1,030.00
2 $1,030.00 $30.90 $1,060.90
3
4
5
6
7
8
9
10
You Do the Math!
COMPOUND INTEREST 3% Interest Rate
Year Beginning Balance Interest Paid Year End Balance
1 $1,000.00 $30.00 $1,030.00
2 $1,030.00 $30.90 $1,060.90
3 $1,060.90 $31.83 $1,092.73
4 $1,092.73 $32.78 $1,125.51
5 $1,125.51 $33.77 $1,159.28
6 $1,159.28 $34.78 $1,194.06
7 $1,194.06 $35.82 $1,229.88
8 $1,229.88 $36.90 $1,266.78
9 $1,266.78 $38.00 $1,304.78
10 $1,304.78 $39.14 $1,343.92
Computing Interest Compounded Quarterly
Compound interest means earning interest on your original amount of deposit AND on the interest that has already been earned on your deposit.
Computing Interest Compounded Quarterly
To compute interest compounded quarterly, divide the annual interest rate by 4 to get the quarterly rate:
3% or .03 / 4 = .0075
You Do the Math!COMPOUND INTEREST
3% Interest RateCompounded Quarterly
Year
Beginning Balance
1st Quarter Interest
Subtotal 2nd Quarter Interest
Subtotal 3rd Quarter Interest
Subtotal 4th Quarter Interest
Total Savings
1 $1,000.00 7.50 1,007.50
2
3
4
5
You Do the Math!COMPOUND INTEREST
3% Interest RateCompounded Quarterly
Year
Beginning Balance
1st Quarter Interest
Subtotal 2nd Quarter Interest
Subtotal 3rd Quarter Interest
Subtotal 4th Quarter Interest
Total Savings
1 $1,000.00 7.50 1,007.50 7.56 1,015.06 7.61 1,022.67 7.67 1,030.34
2
3
4
5
You Do the Math!COMPOUND INTEREST
3% Interest RateCompounded Quarterly
Year
Beginning Balance
1st Quarter Interest
Subtotal 2nd Quarter Interest
Subtotal 3rd Quarter Interest
Subtotal 4th Quarter Interest
End of Year Balance
1 $1,000.00 7.50 1,007.50 7.56 1,015.06 7.61 1,022.67 7.67 1,030.34
2 1,030.34 7.73 1,038.07 7.79 1,045.86 7.84 1,053.70 7.90 1,061.60
3 1,061.60 7.96 1,069.56 8.02 1,077.58 8.08 1,085.66 8.14 1,093.80
4 1,093.80 8.20 1,102.00 8.27 1,110.27 8.32 1,118.60 8.39 1,126.99
5 1,126.99 8.45 1,135.44 8.52 1,143.96 8.58 1,152.54 8.64 1,161.18
Compounded Interest
Interest can be compounded every six months: divide interest rate by 2
Interest can be compounded monthly: divide the interest rate by 12
The Rule of 72
The rule of 72 is a shortcut that can be used to find out how many years it will take a deposit to double in value using compounding interest.
72 / Annual Rate of Return = Number of Years to Double
Rule of 72
If you invest $1,000.00, how many years will it take for it to grow to $2,000.00
At 3%?
24 years
At 6%?
12 years