# Building Your Money with Interest

advertisement ```Mr. Stasa – Willoughby-Eastlake City Schools &copy;

If you put \$100 under your
mattress for one year, how
much will you have?
 \$100

Will the \$100 you have
today be able to buy the
same value of goods a year
from now?
Current U.S. Rate of Inflation 1.7%

Inflation is the rise in the cost of goods and
services over time

Inflation decreases the spending power of
each dollar you have
“A Hershey’s bar in 1955 could have been
purchased with a nickel”
“The price of a Hershey bar has increased 13%
from 2008-2010”

Principal is the original (initial) amount of
money that is invested or borrowed.




Banks and credit unions pay customers interest
for the use of money that is deposited in an
account
The customers’ money on deposit is used by the
bank to give out loans
Those who pay back interest on borrowed loans
is greater than the interest the bank pays for
the use of customer’s money
Banks are able to pay depositors
interest and still make a profit.
1. Simple interest
2. Compound interest
I = prt
 I = interest
 p = principal
 r = interest rate (as a decimal)
 t = number of year
Mark has \$500 in his savings account that pays 4%
simple interest. How much total money will he
have in his account after THREE years?

I = prt
PRINCIPAL
500

X RATE X TIME = INTEREST
3
\$60
X 0.04 X
=
Total after three years:
PRINCIPAL
500
+ INTEREST
+
60
= TOTAL MONEY
\$560
=
Sarah has \$1,000 in her savings account that pays
2% simple interest. How much total money will
she have in her account after FIVE years?

I = prt
PRINCIPAL
1,000

X RATE X TIME = INTEREST
5
\$100
X 0.02 X
=
Total after three years:
PRINCIPAL
1,000
+ INTEREST
+
100
= TOTAL MONEY
\$1,100
=

With simple interest, only the original
principal is used to compute annual interest

Compound interest is money earned on
principal plus previously earned interest.
http://www.youtube.com/watch?v=0t74Kxc9OJk
The sooner you invest your money, the
more time it has to grow!
 The rule of 72 has two functions:
1.
Calculate the number of years needed to
double your investment
2.
Calculate the interest rate required to
double your investment
72
#1
=
Years Needed to
Double Investment
Interest Rate
72
#2
Years Needed to
Double Investment
=
Interest Rate
Required
72
Interest Rate


=
Years Needed to
Double Investment
Your grandparents give you \$200 for your
birthday. You want to invest it to help save
for a down payment on a car.
If you put the \$200 in an account that earns
6% interest per year, how long will it take to
double into \$400?
72 / 6% interest = 12 years
72
Years Needed to
Double Investment


=
Interest Rate
Required
What if you were very anxious to buy your
new car and don’t want to wait too long for
your money to double. Instead, you want
your \$200 to double in 4 year.
What will the interest rate need to be?
72 / 4 years = 18% interest
```