Predicting Your Financial Future Name ________________________

Compound Interest & Savings Accounts

The ability to predict the future is an invaluable task when dealing with money. Who would have
guessed gas would quadruple in price in a span of ten years? While making predictions about
future gas prices is a nearly impossible task, when investing money in a bank account, the
future value can be predicted with a great deal of certainty.

For example, suppose you have $2,000 and hide it under your mattress for 40 years. At the end
of 40 years, you would still have $2,000. However, if you had invested it in a bank at an interest
rate of 4.5%, you would have more than $12,000 at the end of the 40 years. How is this
possible? The answer is compound interest, which works in the following way. Money is first
invested. Then, at regular intervals (for example, monthly, quarterly, yearly), interest is awarded
to the account and becomes the investors money. In this way, interest is earned on previously
earned interest in other words, the interest is compounded.

In this activity, you will utilize the Compound Interest Formula & Compound Interest Simulator to
explore different options for savings accounts. Be sure to show your work on problems in which
you are asked to utilize the Compound Interest Formula! These you solve by hand, without the
simulator.

1. Suppose you want to take the first $1000 you make from your new job and invest it into a
savings account. You decide to go to the three major banks in your area to determine which
one will give you the biggest return on your money.

a. Bank of America is currently offering 0.01% interest for a basic savings account,
compounded yearly. Use the formula to determine how much money will be in your
account after 15 years, assuming you do not deposit or withdrawal any.

b. Chase Bank is currently offering 0.01% interest for a basic savings account, but
compounded monthly. Use the formula to determine how much money will be in your
account after 15 years, assuming you do not deposit or withdrawal any.

c. Wells Fargo is currently offering 0.01% interest for a basic savings account, but
compounded daily. Use the formula to determine how much money will be in your
account after 15 years, assuming you do not deposit or withdrawal any.
Predicting Your Financial Future Name ________________________

2. You decide that none of the local banks will give you enough return on your money, so you
decide to search elsewhere and stumble on Huffington Posts 10 Best Savings Accounts of
2017.

a. A savings account from Ally Bank will give you 1% interest, compounded weekly. If
you invest with Ally Bank, how much money will be in your account after 15 years?
Use the Compound Interest Formula.

b. Another option on the list is Capital One Savings, which will give you 0.75% interest,
compounded daily. Which bank, Capital One or Ally, will give you the better deal and
by how much?

3. As you can see from your results, regular savings accounts typically do not give you the best
return on your money. Therefore, you decide to explore what would happen if you not only
invested the original $1,000, but contributed another $20 each month after that. For this
scenario, you will need to use the Compound Interest Simulator (we cannot take into
account monthly contributions in the Compound Interest Formula).

a. Using the simulator, determine how much money you would have after 5 years if you
invested the $1000 at the 0.01% interest rate, contributing $20 each month. (NOTE:
the simulator compounds yearly)

b. How much money would you have after 10 years?

c. After 30 years?
Predicting Your Financial Future Name ________________________

4. To further observe the effects of compounding interest, imagine we have two people who
start saving for retirement.

Person A invests $2,000 at age 30 and then makes a monthly contribution of $200 until
age 65; the account has an annual interest rate of 4.5%. Person B executes the same
plan, but begins at age 40. This means she only has 25 years of investing compared to
person As 35 years.

While ten years may not seem like much, in terms of compound interest, it is. Using the
simulator, determine how much her delay of ten year will have cost person B when she
retires.

Credit Card Debt

According to the Federal Reserve, in 2007 the average American had $4,000 in credit card debt.
How does this happen? Lets say a person decides to join a gym, and buys a membership with
a $300 initiation fee plus a $100 monthly charge. This person makes all payments using a credit
card, paying only $10 a month, which is the minimum due. In this situation, the gym member
would owe a balance of more than $4,000 on the credit card in less than 3 years!

For this activity, you will utilize the Compound Interest Formula, but this time, you will use it to
calculate debt instead of investments.

1. You decide to open your very own credit card, and you found the best deal around town,
11.5% interest, compounded daily. If you spend $2000 on the card, and make no
payments for 2 years, how much money will you now owe the credit card company?

2. Using the same rates as Question 1, if you continue to put off paying your credit card
statement, how much debt will you be in after 10 years?
Predicting Your Financial Future Name ________________________

3. Congrats! Youve been admitted to your dream school. Your final task is to research the
cost of 4 years of undergraduate tuition at the school of your choice (or the price of a trade
school). In order to pay your tuition, you decide to take out a student loan with 4.3%
interest, compounded daily. If you make no payments after graduation, how much debt will
you have obtained after 5 years? After 10 years?

School Name: _____________________________

Total Cost of Tuition: ________________________

Debt after 5 years: _________________________

Debt after 10 years: ________________________