Chapter 1 Planning Your Financial Future: It Begins Here
21
You
Do the Math 1-3
Assume you deposit $5,000 in a saving account at an interest rate of 6%
compounded annually. Calculate your earnings using the following table.
Year Beginning Balance 6% Interest Ending Balance
1 $5,000.00
2
3
4
5
How much interest have you earned in the fi ve-year period?
Ending balance _________
Beginning balance _________
Interest earned _________
The results may not seem impressive in the fi rst few years; but after 25
or 30 years, the difference is astounding. If you keep adding to your
investment on a regular basis, the results are even better!
Check
Your
Understanding
How does compound interest differ from simple interest?
Example 1-4
Now look at adding more to your investment along with compounding quarterly
instead of annually. Suppose your initial deposit of $2,000 is compounded quarterly
(four times per year) at 4% and you are depositing an additional $500 each quarter.
Step 1
Principal × Rate × Time = Interest
$2,000 × .04 × .25 (1/4 of a year) = $20
Step 2
Principal + Interest = New Balance
$2,000 + $20 = $2,020
Step 3
New balance + Deposit = 1st Quarter Balance
$2,020 + $500 = $2,520
(This number is also the beginning balance for next quarter.)