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The Power of Compound Interest. The Effect of Compound Interest.

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Presentation on theme: "The Power of Compound Interest. The Effect of Compound Interest."— Presentation transcript:

1 The Power of Compound Interest

2 The Effect of Compound Interest

3

4 1. Suppose you are a 22-year-old who just started working and, while you have not found a permanent job, you commit to start saving today. Assume you succeed and save just $730 each year (which comes out to saving $2 a day). At 7% interest compounded once a year, every year from now until you retire, how much will you have for retirement consumption, savings, investment and charitable purposes 43 years from now when you reach the age of 65? A good compound interest calculator is available at MoneyChimp.com $193,538.22Answer: 2. Now suppose you decide to wait until are 30 years old to start saving $730 a year at 7% until you retired at 65. That leaves you with only 35 years to save $730 a year and roll over past savings and earned interest. Now, how much would you have on retirement? What is the opportunity cost of waiting? That is, what do you sacrifice in retirement income and interest? $107,976.83, $85, $193, $107, = $85,561.39Answer: $2 per day, 7% interest, start at age 22 or 30, to age 65 Age 22Age 30Lost in Value Total Return: $193,538.22$107,976.83$85, Investment: $31,390.00$25,550.00$5, Interest: $162,148.22$82,426.83$79,721.39

5 3. Now suppose at 22 or 30 years old to start saving $3 a day, $1,065 a year at 7% compounded annually until you retired at 65. At 22 years old, how much will you have on retirement at 65? What if you wait 8 years later and start at age 30? How much of your retirement fund is lost as a result of foregone savings? Foregone interest? $290, If you started at 22, you would have $290, when you retire, but if you waited until you were 30 then you would only have $161, Waiting 8 years to start saving would cost you $128,342.09, of which only $8,760 would be foregone savings, the other $119, would be foregone interest Answer: $3 per day, 7% interest, start at age 22 or 30, to age 65 Age 22Age 30Lost in Value Total Return: $290,307.33$161,965.24$128, Investment: $47,085.00$38,325.00$8, Interest: $243,222.33$123,640.24$119,582.09

6 4. Now lets see if you are 22 or 30 years old you start saving just $1 a day, $365 a year at 7% compounded annually until you retired at 65. At 22 years old, how much will you have on retirement at 65? What if you wait 8 years later and start at age 30? How much of your retirement fund is lost as a result of foregone savings? Foregone interest? If you started at 22, you would have $96, when you retire, but if you waited until you were 30 then you would only have $53, Waiting 8 years to start saving would cost you $42, of which only $2, would be foregone savings, the other $39, would be foregone interest Answer: $1 per day, 7% interest, start at age 22 or 30, to age 65 Age 22Age 30Lost in Value Total Return: $96,769.11$53,988.41$42, Investment: $15,695.00$12,775.00$2, Interest: $81,074.11$41,213.41$39,860.70

7 Now lets see the results of how compound interest works in a Credit Card Payment. Assume you spend $2 per day, $730 per year, with a 13% interest rate, and you pay the minimum of 4% each month on the Credit Card balance NOW LETS SEE HOW COMPOUND INTEREST CAN WORK AGAINST YOU


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