1. Calculating interest
You can calculate the time value of your savings by figuring out how much interest you will earn.
Principal – the original amount of money on deposit
Annual Interest Rate – interest rate when opening an account, given as a percentage, extra money earned
FORMULA:
Principal x Annual Interest Rate = Interest Earned for One Year

2. Example: Annual Interest
You just deposited $1,000 in a savings account. The bank will pay you 3 percent annual interest. How much interest will you earn if you keep your money in the bank for one year?
FORMULA
$1,000 x .03 = $30
How much will you earn in interest?
$30
Multiplying the principal by the annual interest rate and then adding that interest amount to the principal (compounding).

3. Example: Compounding Interest
You just deposited $1,000 in a savings account that will pay you 3 percent annual interest. You earned $30 in interest after the first year. How much will you earn after two years?
FORMULA:
(Principal + Previously Earned Interest) x Annual Interest Rate = Interest Earned for the Second Year
SOLUTION:
($1,000 + $30) x .03 = $30.90
$1,030 + $30.90 = $1,060.90
The future value of your original deposit will be $1, after two years.

4. Future values of a series of Equal deposits
Some savers like to make regular deposits into their savings.
A series of equal regular deposits is called an annuity.
Example: Determine the future value of $1,000 a year at 5 percent annual interest for six years.
page 79 Part B of Figure 4

5. Present value of a single deposit
Present value – the amount of money you would need to deposit now in order to have a desired amount in the future.
Example: If you want to have $1,000 in five years for a down payment on a car, and your savings account pays 5% annual interest, how much money will you need to deposit now to accumulate $1,000?
page 79 Part C of Figure 4

6. Present value of a series of deposits
Used to determine how much you would need to deposit so you can take a specific amount of money out of your savings account for a certain number of years.
Example: if you want to take $400 out of your account each year for nine years, and your money is earning interest at 8 percent a year, how much money would you need to deposit now?
page 79 Part D of Figure 4