1. Managing your Personal Finances Simple vs. Compound Interest Mr
Managing your Personal Finances Simple vs. Compound Interest Mr. Eleuteri - C114 Blocks 2 and 4
Take attendance – get phonetic spelling, nicknames

2. DO NOW:
What is the purpose of a savings account? How do you earn money on your money?

3. Goals of the day:
Students will be able to understand the differences between simple and compound interest
Students will be able to calculate simple and compound interest
Students will understand the Rule of 72

4. What is Interest:
Income you earn when you save money with a bank (in a savings account).
(Note: you will be responsible to pay interest when you borrow money from a bank…next unit!)

6. Simple Interest Video

7. Simple Interest Formula
Principal – an amount of money that is lent, borrowed, or invested, apart from any additional money such as interest
Rate – interest rate, expressed as a decimal (%/100 –> 6% = 6/100 = .06)
Time – time period, usually in years

8. Simple Interest Practice
$ at 4% for 1 year
$2, at 6% for 25 years
$10, at 10% for 50 years
1. Interest $40.00, Total $1,040.00
2. Interest $ , Total $6,250.00
3. Interest $50,000.00, Total $60,00.00

9. Compound Interest
Interest calculated on the initial principal and also on the accumulated interest of previous periods of a deposit or loan. Compound interest can be thought of as “interest on interest,” and will make a deposit or loan grow at a faster rate than simple interest, which is interest calculated only on the principal amount.

10. Compound Interest (Cont.)
The rate at which compound interest accrues depends on the frequency of compounding; the higher the number of compounding periods, the greater the compound interest (the more money you earn!)
Compounding factors
Annual – 1
Semi-annual – 2
Quarterly – 4
Monthly – 12
Daily - 365

11. Compound Interest Formula
FV – Future Value
PV – Present Value
r – rate
m – compounding factor
t – time
Compounding factors
Annual – 1
Semi-annual – 2
Quarterly – 4
Monthly – 12
Daily - 365

12. Compounding Interest Using a Calculator (10 years)
Calculate the Future Value or FV on $2,500 (Present Value or PV) at 6% (.06) interest rate, compounded annually or 1 (m) for 10 years
Calculator Keys:
2500(1+(.06/1))(1*10) enter
> $4,477.12

13. Let’s try again…Compounding Interest (for 50 years)
Calculate the Future Value or FV on $2,500 (which is the Present Value or PV) at 6% (.06) interest rate, compounded annually or 1 (m) for 50 years
Calculator Keys
2500(1+(.06/1))(1*50) enter =

14. Let’s try again…Compounding Interest (for 50 years)
Calculate the Future Value or FV on $2,500 (which is the Present Value or PV) at 6% (.06) interest rate, compounded annually or 1 (m) for 50 years
Calculator Keys
2500(1+(.06/1))(1*50) enter
= 46,050.39

15. Another Compounding Interest Problem together
Calculate the Future Value or FV on $5,000 (which his the Present Value or PV) at 8% (.08) interest rate, compounded monthly or 12 (m) for 25 years
Calculator Keys
5,000(1+(.08/12))(12*25) enter

16. Another Compounding Interest Problem together
Calculate the Future Value or FV on $5,000 (which is the Present Value or PV) at 8% (.08) interest rate, compounded monthly or 12 (m) for 25 years
Calculator Keys
5,000(1+(.08/12))(12*25) enter
=$36,700.88

17. And another Compounding Interest Problem together
Calculate the Future Value or FV on $10,000 (Present Value or PV) at 7% (.07) interest rate, compounded semi-annually or 6 (m) for 10 years
Calculator Keys
10,000(1+(.07/6))(6*10) enter

18. And another Compounding Interest Problem together
Calculate the Future Value or FV on $10,000 (Present Value or PV) at 7% (.07) interest rate, compounded semi-annually or 6 (m) for 10 years
Calculator Keys
10,000(1+(.07/6))(6*10) enter
=$20,056.10

19. What is the meaning of the following picture?

20. Calculating Simple and Compound Interest #1
DO NOW
See Practice Sheet :
Calculating Simple and Compound Interest #1

21. DO NOW
What would you do with $1,000,000

22. Rule of 72
Quick way of finding out how long it will take to double your money!
Rule was first mentioned in an arithmetic book published in 1494.
Rule is:
The number 72 divided by the interest rate
The result is the number of years it will take to double your money

23. Rule of 72 Practice Rule is: Practice –
The number 72 divided by the interest rate
The result is the number of years it will take to double your money
Practice –
Interest rates: % 9% 8% 6% 4% 2%

24. The Power of Compounding:Dave Ramsey

25. Calculating Simple and Compound Interest #2
DO NOW
See Practice Sheet :
Calculating Simple and Compound Interest #2