1. 1 Time is Money: Personal Finance Applications of the Time Value of Money

2. 2 Problem #1 Your first “real” job pays $32,000 a year to start. How much will you need to be earning in 20 years to maintain the same purchasing power if inflation averages 3%? $57795.56

3. 3 Problem #2 Your grandparents (age 60 and 62) are about to retire next month. They will have a yearly income of $24,000. Assuming an annual inflation rate of 4%, how much will they need in 10 years to equal the purchasing power of today? $35525.86

4. 4 Problem #3 Your rich uncle has promised to give you $25,000. The only “catch” is that you must graduate from college and get a job before he gives it to you. Let’s assume that’s in 4 years. What is the value of his gift today if his money is earning 5%? $20567.56

5. 5 Problem #4 Heather starts a Roth IRA at age 22. She plans to contribute $3,000 at the end of each year until age 67. How much will she have if her IRA investments earn 9% ? $1,577,576.10

6. 6 Problem #5 You quit smoking a pack a day of cigarettes and save $2,550 a year (savings of $7 per pack per day). You are 20. How much would you have if you invested the money in a stock index fund averaging a 10% return and don’t touch it until age 55? $691,112.22

7. 7 Problem #6 You want to invest $2,500 into a CD which pays an APR of 12%. If the CD compounds monthly, what will it be worth in 2 years? $3,174.34

8. 8 Problem #7 Your savings account earns 8% interest. Assume it is January 1 st and you have a balance of $1750 in your account. How much will you have at the end of five years if your account compounds quarterly? $2600.33

9. 9 Two Take-Home Messages: 1. For every decade that you delay saving, the required investment triples (approx.) 2. Compound interest is NOT retroactive!!!

10. 10 Define the following in your own words : 1.CD 2.Liquidity 3.IRA 4.Rule of 72 5.Simple Interest 6.Compound interest 7.APR and APY 8.IRA 9.Traditional IRA 10.ROTH IRA