Mr. Stasa – Willoughby-Eastlake City Schools ©

 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?

 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 ” Current U.S. Rate of Inflation 1.7%

 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  Total after three years: PRINCIPALXRATEXTIME=INTEREST XX= $60 PRINCIPAL+INTEREST=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  Total after three years: PRINCIPALXRATEXTIME=INTEREST XX= 1, $100 PRINCIPAL+INTEREST=TOTAL MONEY += 1, $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.

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 Interest Rate = Years Needed to Double Investment 72 Interest Rate Required = Years Needed to Double Investment #1 #2

 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 Interest Rate = Years Needed to Double Investment

 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 Interest Rate Required = Years Needed to Double Investment 72 / 4 years = 18% interest