Lesson 6B: Simple and Compound Interest— Why It Is Great To Save Unit 6: Saving Lesson 6B: Simple and Compound Interest— Why It Is Great To Save ©2017, Minnesota Council on Economic Education. Developed in partnership with the Federal Reserve Bank of St. Louis.

How can savers benefit from compound interest? Compelling Question How can savers benefit from compound interest? Lesson 6B

Visual 6B.1: Simple Interest Slide 1 of 2 Ending Value (Balance) with Simple Interest V = P(1 + r) V = Value (balance) after 1 year P = Principal (initial amount saved) r = Annual interest rate Lesson 6B

Visual 6B.1: Simple Interest Slide 2 of 2 V = P(1 + r) Principal Annual interest rate # of Years Interest earned Value $50 5% 1 $200 7% $60 10% $40 4% Lesson 6B

Visual 6B.2: Compound Interest Slide 1 of 3 Compound interest starting principal: $100 After 1 Year: $100 + $100 (0.08) = $100 (1 + 0.08) = $108.00 = $108.00 = $100 (1 + 0.08) After 2 Years: $108 + $108 (0.08) = $108 (1 + 0.08) = $116.64 = [$100 (1 + 0.08)](1 + 0.08) = $100 (1 + 0.08)2 Lesson 6B

Visual 6B.2: Compound Interest Slide 2 of 3 Compound interest starting principal: $100 After 3 Years: $116.64 + $116.64 (0.08) = $116.64 (1 + 0.08) = $125.97 = [$100 (1 + 0.08)2] (1 + 0.08) = $100 (1 + 0.08)3 After N years*: = $100 (1 + 0.08)N *N = Number of years Lesson 6B

Visual 6B.2: Compound Interest Slide 3 of 3 V = P(1 + r)N V = Value (balance) after N years P = Principal r = Annual interest rate N = Number of years Lesson 6B

Years to double = 72/Interest rate Visual 6B.3: The Rule of 72 Slide 1 of 3 Years to double = 72/Interest rate 4%………72/4 = 18 years 6%………72/6 = 12 years 9%………72/9 = 8 years 12%………72/12 = 6 years Lesson 6B

$1 saved at 12% interest rate, after… Visual 6B.3: The Rule of 72 Slide 2 of 3 $1 saved at 12% interest rate, after… 6 years = $2 30 years = $32 12 years = $4 36 years = $64 18 years = $8 42 years = $128 24 years = $16 48 years = $256 Lesson 6B

48 years (age 65) = $1,024,000 = Millionaire Visual 6B.3: The Rule of 72 Slide 3 of 3 $4,000 saved at age 17 at a 12% annual interest rate, after… 48 years (age 65) = $1,024,000 = Millionaire (It doubles 8 times!) Lesson 6B

Visual 6B.4: Jack and Jill Jack saves $5,000 when he is 38 years old and puts it in a savings account with an 8% annual interest rate. Approximately how much money will he have in the account when he is 65 years old? Jill saves $5,000 when she is 20 years old and puts it in a savings account with an 8% annual interest rate. Approximately how much money will she have in the account when she is 65 years old? Lesson 6B