# Compound Interest: The Ninth Wonder of the World

#### Process

Read the online article Start on your first \$1 million at age 16. It’s an amazing article, right? You will need to verify the author’s calculations mentioned in the article. You can do this by visiting a financial calculator web site like the one found at Calculator Zone or moneychimp. Simply click on the link for compound interest. Are the figures quoted in the article correct and accurate? Hint: you will first need to calculate the future value of each \$2,000 investment from age 16 to 20 (4 years). Remember that if the money is invested in common stocks and you receive the average compound annual rate on large-capitalization U.S. stocks, 10.7% will be the interest rate used in your calculations. In Excel we could use the FV function to determine this amount quickly by using the 3 parameters or arguments (interest rate, term, and the payment). In summary, you will need to verify the following calculations:

 Age Amount You’ve Accumulated 20 \$9,378 30 \$25,917 40 \$71,625 50 \$197,943 60 \$547,037 67 \$1,114,423

Please answer the following questions: You will need to understand how to derive the amounts specified above in order to run the calculations for the task that follows.

1.   Is this a valid article? Are the calculations above correct?

2.   Determine the dollar amount between each 10 year growth period.

3.   What do you find is the most interesting aspect of this article?

4.   Using Microsoft Excel...verify calculations using Future Value Function or Compound Interest Formula.

5.   Explain why the compound interest formula is so powerful.

Assume that you’re very ambitious and are able to invest \$3,000 for each of four summers. Now that you’re comfortable using the compound interest calculator at Calculator Zone, determine if it would be beneficial to try to save an extra \$1,000. You are to assume the same rate of return – 10.7% in order to compare your results from Task 1.

1.    How much more money will you have at age 67 if you invest \$3,000 a year for 4 years rather than \$2,000?_______

2.    Basically, by investing an additional \$4,000 (\$12,000 total for 4 years rather than \$8,000) you’ll walk away with?

3.    Is it worth trying to put away an extra \$1,000 a year toward your retirement? Please explain.

Task 3 Purchase a New Car

Assume you’ve just test driven a brand new Ford Mustang Convertible. It has a Vehicle Anti-Theft, System, CD Changer, MP3 Player, GPS Navigation System, Leather Seats and a 281 CID Engine. You’ve decided that you must have it! The price of the car after all negotiations are complete is \$29,795. Go online and find the best interest rate for a new auto loan. The State of New York Banking Department has many capital area banking institutions for you to compare loans. You can then go back to the online calculator, Calculator Zone, and fill in the following chart:
 # of Payments Interest Rate Principal Monthly Payment Interest Paid 36 8% \$29,795 48 8% \$29,795 60 8% \$29,795 60 6% \$29,795 60 \$29,795 \$525

1.    Can you get your car payment down to \$500 per month borrowing \$29,795? __________

2.    How much are you paying back to the bank to use their money…\$29,795 at 8% for 60 months? _________

3.    Take a guess at how much your “car investment” (answer from #2) would have yielded if you had put it in your Roth-IRA for 45 years at age 20 instead of buying the car ___________ Hint: Use the compound interest calculator from the Calculator Zone.

Task 4 Invest Money From Task 3 in a Roth-IRA Rather Than Purchase The Car

Using the parameters from the previous task: invest the total that would have been paid back to the bank in a ROTH-IRA at 8% for a period of 45 years (when a 20 year old would hit 65 and be ready to retire).

Price of car     \$29,795
Interest Rate         8%
Interest Paid    \$6,453
Total Paid Back \$36,248
*Invest in ROTH-IRA
to Bank (after 60 months)

1.    What would be the value of your ROTH -      IRA after 45 years? ___________

2.    What if you invested that amount (\$36,248) at a rate of 10%? ___________

3.    Would you still enjoy driving your new Mustang knowing the potential value of your retirement account? _______

Task 5 Write a summation and prepare a computer generated slide show

There is a golden nugget of wisdom buried in each of the tasks you’ve completed. Write a paragraph for each task 1 through 4 discussing the concepts presented for that particular module. It is important to establish a good financial game plan early in life. Include in your discussion why it is important for everyone in a family to understand how compound interest works—why not wait until you’re in your mid-to-late thirties to begin saving money and investing money? Use your written summary as a guide to create a brief 5-10 minute slide show presentation for class (6-10 slides) on the results of your webquest. Turn in a handout copy of the slides of the presentation with a list of the references you used in completing the webquest.

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