Remembering Lanna Loaner Lanna Loaner paid for college by taking student loans and working in the summer –In 5 years she accumulated about $51,600 in debts.

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Presentation transcript:

Remembering Lanna Loaner Lanna Loaner paid for college by taking student loans and working in the summer –In 5 years she accumulated about $51,600 in debts Lanna ended up paying back her loans over the next 5 years –Her monthly payments were over $1000 a month

Meet Fursee Foresight Fursee began working when she was 14. She saved her money for college –(she also got a deal from her parents to match the money that she saved) At the end of every summer Fursee tucked away her stash in the bank (along with Mommy and Daddy’s money) –Each summer Fursee saved $5,000 –Mommy and Daddy matched $5,000

Fursee Foresight Prepares to be a Saluki! Fursee puts her money into CDs at 6% interest How much money does Fursee have for college when she starts after the summer of her 18th year?

Lets See - All these problems are done the same way First thing I do is to make the inspiring story into a cash flow I need to pick my perspective –(I have Fursee and the bank where she's stashing money) –I’ll pick her banker where she’s stashing the money

Drawing Pretty Pictures $10,000 each time Fursee’s 14 this fall Fursee’s 15 Fursee’s 16 Fursee’s 17 Fursee Stashes her summers loot and turns into a Dog (Ok she just started College)

Where do I put the Pot? $10,000 each time Fursee Stashes her summers loot and turns into a Dog (Ok she just started College)

I Smell an Annuity! $10,000 each time Fursee Stashes her summers loot and turns into a Dog (Ok she just started College) Woops don’t forget the rule about annuities starting one compounding period into the cash flow time line

This is an Annuity $10,000 each time Fursee Stashes her summers loot and turns into a Dog (Ok she just started College) What magic number do I need to drop this cash into the pot? F/P 0.06, 4 = *$10,000 = $12,625

Oh My Pots on the Wrong Side $10,000 each time Fursee Stashes her summers loot and turns into a Dog (Ok she just started College) I need a new magic number $12,625

Enter F/A F/A is the Future Value of an Annuity –Use the cancel trick to make sure I have the right Super Hero F/A * Annuity = Future Value Ok Its good so whats the formula –[(1+i) n -1]/I n = 4 payments in series at the end of compounding period i = and interest rate of 0.06

Sweeping The Annuity into the Pot $10,000 each time Fursee Stashes her summers loot and turns into a Dog (Ok she just started College) F/A 0.06, 4 = $10,000 * = $43,746

Fursee Foresights Savings Fursee Stashes her summers loot and turns into a Dog (Ok she just started College) $56,371 in pot - If Fursee uses the same program as Lanna she will have money left over $56,371

Use of Discounted Cash Flow Used extensively in engineering economics Can be a powerful tool for personal life decisions Most of our money will go for needs rather than investments –Can help you find the true cost / especially where interest opportunities exist.