INTEREST

SOME TERMS Principal: the original amount before interest charges are added on Term: how long the investment is invested for Inflation: refers to a general rise of the price of goods and services over time Deflation: the opposite of inflation. Refers to general decrease over time, in the price of goods and services

GROWING YOUR SAVINGS Saving is the first step in building your financial future. After you have created a budget, set your goals, and identified how much money you can save each month or year, think about what you will do with your money.

GROWING YOUR SAVINGS Here are some choices: 1 Keep the money at home in a safe place. 2 Put your money in a savings account or guaranteed investment certificate (GIC) to earn interest. 3 Buy a Treasury Bill or a Canada Savings Bond to earn interest. 4 Buy some stocks to earn dividends or capital gains. With the exception of the first option, choices 2–4 can help you to increase your savings.

WHAT IS INTEREST? Interest is money paid out for the use of someone else’s money It is expressed as a percent (ex.5%, 10%, 12.75%) For example: If you have a $100 and receive 5% interest, how much will you have after a year? Answer: $100 *0.05 = $5 $100 + $5 = $105 - This form of interest is called simple interest

Simple INTEREST Formula Simple Interest: = p * i * n P = Principal I = interest rate N = term

WHAT IS BETTER THAN Simple INTEREST? COMPOUND INTEREST!!!!

COMPOUND INTEREST Compound interest helps you build wealth faster andWith compound interest your original investment earns interest, the next interest payment is calculated on both the original amount and the interest earned For example If you have a $100 and receive 5% interest, how much will you have after 2 years if interest is compounded yearly. Answer: Year *.05 =5Year *.05 = = =

COMPOUND INTEREST However, what if you had to determine interest for a 25 year period. That process would be tedious and time consuming Sooooo there is a handy little formula that will do it for us

COMPOUND INTEREST Future Value = Present Value (1 + interest rate) t T= the number of periods Try the problem from the previous slide using the new formula and see how it works.

COMPOUND INTEREST Future Value = Present Value (1 + interest rate) t FV = 100 (1+0.05) 2 FV = 100 (1.05) 2 FV = 100 (1.1025) FV =

COMPOUND INTEREST Future Value = Present Value (1 + interest rate) t OVER 25 years … FV = 100 (1+0.05) 25 FV = 100 (1.05) 25 FV = 100 ( ) FV = or $338.64