Chapter 8 Plan for Financial Security

Why Save 8.1

Benefits of SavingSaving StrategiesAutomatic Saving

How We Spend Our Income

Food 13.5%

Housing 33%

Transportation 18.6%

Apparel & services 4.7%

Health care 5.4%

Entertainment 4.9%

Personal insurance 1.1%

Pensions/Social Security 8.4%

Other 10.4%

65%

Savings Institutions and Accounts 8.2

Savings InstitutionsSavings Accounts

Save with Safety 8.3

Savings OptionsGovernment Bonds

Simple and Compound Interest 8.4

How is the interest calculated?

Simple Interest—interest paid only on initial amount of deposit.Compound Interest—interest paid at set intervals and added back to principal.

If simple interest is used, there is no compounding:

Interest = Principal x Rate x Time (Years)

$30 = $1000 x .03 x 1New Principal after 1 year

$1030

If compound interest is used, occurs semiannually

First 6 months' interest:$1000 x .05 x 6/12 = $25.00

Second 6 months' interest: +$1025 x .05 x 6/12 = $25.63

Total annual interest = $50.63

If compound interest is used, occurs quarterly

$100 at 5% (3/12)1st - $100 x .0125 = $1.252nd - $101.25 x .0125 = $1.273rd- $102.52 x .0125 = $1.284th - $103.80 x .0125 = $1.30Total annual interest = $5.10

If compound interest is used, occurs monthly

$400 at 5% (1/12)400 x .0042 = 1.68401.68 x .0042 = 1.69403.37 x .0042 = 1.69405.06 x .0042 = 1.70406.76 x .0042 = 1.71408.47 x .0042 = 1.72

410.19 x .0042 = 1.72411.91 x .0042 = 1.73413.64 x .0042 = 1.74415.38 x .0042 = 1.74417.12 x .0042 = 1.75418.87 x .0042 = 1.76

$420.63 $20.63

Total Interest

If compound interest is used, occurs daily

$100 at a rate of 3%1 year

$ Amount x Factor = Interest$100 x 1.03 = $103.00

2 years$100 x 1.062 = $106.20

COMPOUND INTEREST TABLE

Year

3% 6% 10%

1 1.030 1.062 1.105

2 1.062 1.127 1.221

3 1.094 1.197 1.350

4 1.127 1.271 1.492

5 1.162 1.350 1.649

6 1.197 1.433 1.822

7 1.234 1.522 2.014

8 1.271 1.616 2.225

9 1.310 1.716 2.459

10 1.350 1.822 2.718

15 1.568 2.459 4.481

20 1.822 3.320 7.387