2. Interest rates play a key role in borrowing, taking
loans, and receiving earnings on your
savings/investments.
Interest Rates:
A rate that is charged or paid for the use of money.
Expressed as an annual percentage of the principal.
Principal:
The amount of money that you invest or borrow.
When you borrow money:
Interest rates are the cost of borrowing.
When you invest or save money:
Interest rates are your earnings for allowing
corporations or financial institutions to use your money.
3. Another name for interest rates is APR.
YOU MUST KNOW THESE WHEN:
Trying to decide where you will get the best
deal on a credit card, loan, or return on
investment.
It is the law for credit card companies
and loan borrowers to give customers a
full understanding of the actual rates
applicable to their agreements. When
you invest or save money:
4. The Federal Reserve Bank plays a large role in influencing
interest rates, especially to stimulate the economy.
When Interest Rates are LOWERED:
Cheaper Borrowing Costs
Consumers will take out loans to finance greater
spending/investments.
Incentive to Save Money Decreases:
Consumers will want to spend as opposed to hold onto
their money.
Lower Interest Payments on mortgages, cars, etc.
Prices of Assets Increase
Large assets like home price will increase—as will the rise
of wealth and consumer confidence.
5. The Federal Reserve Bank plays a large role in influencing
interest rates, especially to stimulate the economy.
When Interest Rates are RAISED:
Borrowing Becomes More Expensive
People will have less disposable income as more money
will be paid in interest.
Incentive to Save Money Increases:
Consumers will want their money earning interest in
savings accounts as opposed to spending
Spending and Consumption Decreases Across Economy
Prices of Assets can Decrease
Consumer Confidence Decreases
6. TIME VALUE OF MONEY:
Savings accounts and other investments pay
interest on the money you deposit, which
increases the amount of money in your
account over time.
Amount of earnings growth depends on the
combination of time, money, and rate of
return (interest).
7. Time
Money
Time, Money and the Rate of Interest
The more time you have to save the
more money you will have at the end
of the time period.
The more money you have to save
the more money you will have at
the end of the time period.
Interest
The higher the rate of interest you
can earn, the more money you will
have at the end of the time period.
8. There are 2 ways you can receive interest payments:
1. Simple Interest:
A quick method to calculating the interest charge on a
loan or payment on a deposit.
The charge/payment is always based on the original
principal.
Mainly used for short-term loans
Simple Interest Formula:
Interest = PRINCIPAL x RATE x TIME
Principal = original amount of deposit/loan
Rate = Interest Rate of Return/APR (Annual
Percentage Rate
Time = Period of time
Usually measured in years
9. If you had $100 in a savings account that paid 6% simple
interest, during the first year you would earn $6 in interest.
Steps:
1. Write the formula:
I=PxRxT
2. Identify your values:
P=$100, R= 0.06, T=1
3. Plug in your values:
$100 x 0.06 x 1 = $6
At the end of two years you would have earned
$12.
The account would continue to grow at a rate of $6
per year, despite the accumulated interest.
10. NEFE High School Financial Planning Program
Unit Three – Investing: Making Money Work for You
Investing Annually to Achieve a Goal
Value of $20 1 Year 2 Years 4 Years 6 Years
4%
5%
6%
8%
10%
$20.80
$21.00
$21.20
$21.60
$22.00
$21.63
$22.05
$22.47
$23.33
$24.20
$23.40
$24.31
$25.25
$27.21
$29.28
$25.31
$26.80
$28.37
$31.74
$35.43
Building….
11. There are 2 ways you can receive interest payments:
2. Compounded Interest:
Interest is paid or received on the original amount of
the loan or deposit, plus any interest earned.
Compounded Interest Formula:
Amount = PRINCIPAL x (1 + I)
Amount = original amount in account
Principal = original amount of deposit
Interest = Interest Rate of Return expressed as
decimal
N = Number of years compounded
1=1yr
To Understand
the concept, you
need a scientific
calculator to do
the math
n
12. If you had $100 in a savings account that paid 6% interest compounded annually, the first
year you would earn $6.36 in interest.
Steps:
1. Write the formula:
Amount = PRINCIPAL x (1 + I)
2. Identify your values:
P=$100, I= 0.06, T=1
3. Plug in your values:
$100 x (1+.06) = $106
Using simple interest add your amount to new principal = $100+$6 = $106
With compounded interest, the second year you would earn $6.36 in
interest. Here is the calculation using simple interest:
$106 x 0.06 x 1 = $6.36
$106 + $6.36 = $112.36-- new amount in account
USING COMPOUND INTEREST FORMULA:
100x(1+.06)^2 = $112.36
1
13. Another Compounded Interest Example
Compounding – the idea of earning
interest on interest
Assume you have $100 in an account earning
10% interest per year…A the end of that one
year, you have $110 in your account….In year
two your account earns 10% - How much do
you have at the end of the second year?
14. Example Answer
Compounding –
the idea of earning interest on interest
Answer = $121.00
USING SIMPLE INTEREST:
100 x 10% x 1 = $10
(100 + 10) = 110 x 10% x 1 = $11 yr2
USING COMPOUND INTEREST
Amount = Principal x (1 +I)
100x(1+.1)^2 = $121.00
n
15. NEFE High School Financial Planning Program
Unit Three – Investing: Making Money Work for You
Investing a $10,000 Lump Sum
11%
10%
9%
8%
7%
6%
5%
12%
Interest
Rate
5
Years
20
Years
15
Years
10
Years
$12,763
$17,623
$16,851
$16,105
$15,386
$14,693
$14,026
$13,382
$16,289
$31,058
$28,394
$25,937
$23,674
$21,589
$19,672
$17,908
$20,789
$54,736
$47,846
$41,772
$36,425
$31,722
$27,590
$23,966
$26,533
$96,463
$80,623
$67,275
$56,044
$46,610
$38,697
$32.071
1
16. NEFE High School Financial Planning Program
Unit Three – Investing: Making Money Work for You
Investing $1,000 Annually
11%
10%
9%
8%
7%
6%
5%
12%
Interest
Rate
5
Years
20
Years
15
Years
10
Years
$5,526
$6,353
$6,228
$6,105
$5,985
$5,867
$5,751
$5,637
$12,578
$17,549
$16,722
$15,937
$15,193
$14,487
$13,816
$13,181
$21,579
$37,280
$34,405
$31,772
$29,361
$27,152
$25,129
$23,276
$33,066
$72,052
$64,203
$57,275
$51,160
$45,762
$40,995
$36,786
1
17. To determine how long it will take to
double your money, you need to use the
RULE OF 72::
72
Interest Rate
=
Years Needed to
Double Investment
72 Interest Rate
Required=Years Needed to
Double Investment
18. Example #1:
Assuming you can earn 6% on your money, how
long will it take $100 to grow to $200?
72
Interest Rate
=
Years Needed to
Double Investment
72
6%
= 12 years
19. Example #2:
Now, let’s say you have a set time period in mind to
double your investment. If you have $200 today and need
$400 in 8 years, what interest rate do you need to earn?
72
8 years
= 9%
72 Interest Rate
Required=Years Needed to
Double Investment
20. It’s all about:
RISK AND RETURN:
The more risk you take with your money,
the potential you will have for a higher
return.
The less risk, the less of a chance for a
greater return
RATE OF RETURN:
How fast your money grows.
22. The more frequently your money is
compounded the better your return on
savings:
Therefore, it is better to choose an
account that will pay you:
Daily over Weekly
Weekly over Monthly
Monthly over Quarterly
23. INFLATION:
The rate at which the general level of prices for goods
and services is rising, and subsequently, purchasing
power is falling.
The FED tries to monitor and control the rate of
inflation in a attempt to keep the excessive growth of
prices down.
Ex: If the inflation rate is 2%, than a $1 pack of gum will
cost $1.02 next year.
24. Impact of Inflation on:
Interest Rates:
Increase/Decrease has a direct relationship on the cost of
borrowing.
Purchasing/Buying Power:
Increase/Decrease has a direct relationship on the amount
of purchasing or buying power.
Who benefits most from inflation?
Borrowers and producers
Who benefits least from inflation?
Lenders/savers (APR is inflated), lower-income/fixed
income families, individuals/businesses (rushed
transactions).