Transcript Unit 6 comp int and rule 72

The Power of Compound Interest
Compound interest is the eighth wonder of the world. He who
understands it, earns it ... he who doesn't ... pays it." Albert Einstein
Year
Start
(Principle)
interest
0 (now)
$1,000
$1,000 x 10% = $100
$1,100
1
$1,100
$1,100 x 10% = $110
$1,210
2
$1,210
$1,331
3
$1,331
$1,210 x 10% = $120
$1,331 x 10% = 133.10
4
$1,464.10
$1,464.10 x 10% = $146.41
$1,610.51
5
$1,610.51
Balance
$1,464.10
….vs. Simple Interest
only adds interest to original principle
•
•
•
•
•
•
$1000 x 10% = $100
$1000 x 10% = $100
$1000 x 10% = $100
$1000 x 10% = $100
$1000 x 10% = $100
What do you have after 5 years?
• 5 years = $1,500 vs. ……….
The Power of Compound Interest
Compound interest is the eighth wonder of the world. He who
understands it, earns it ... he who doesn't ... pays it." Albert Einstein
Year
Start
(Principle)
interest
0 (now)
$1,000
$1,000 x 10% = $100
$1,100
1
$1,100
$1,100 x 10% = $110
$1,210
2
$1,210
$1,331
3
$1,331
$1,210 x 10% = $120
$1,331 x 10% = 133.10
4
$1,464.10
$1,464.10 x 10% = $146.41
$1,610.51
5
$1,610.51
Is there an easier way?
Balance
$1,464.10
Simple Interest
• The Rule of 72 is a great mental math
shortcut to estimate the effect of any
growth rate, from quick financial
calculations to population estimates.
Here’s the formula:
• Years to double = 72 / Interest
Rate
• This formula is useful for financial
estimates and understanding the nature
of compound interest
•To double your money in 10 years, get an
interest rate of 72/10 or 7.2%.
•If your country’s GDP grows at 3% a year,
the economy doubles in 72/3 or 24 years.
•If your growth slips to 2%, it will double in 36
years. If growth increases to 4%, the
economy doubles in 18 years.
•Given the speed at which technology
develops, shaving years off your growth time
could be very important
You can also use the rule of 72 for expenses
like inflation or interest:
•If inflation rates go from 2% to 3%, your
money will lose half its value in 24 years
instead of 36.
•If college tuition increases at 5% per year
(which is faster than inflation), tuition costs will
double in 72/5 or about 14.4 years. If you pay
15% interest on your credit cards, the amount
you owe will double in only 72/15 or 4.8 years!