Section 1.2 Review

Section 1.2 Review

Opportunity Costs and Strategies

​The Time Value of Money

• ​The time value of money is the increase of an amount of money due to earned interest or dividends.

  If you decide to save or invest instead of spending, that money could be worth more later because you would earn interest or dividends on it

  Every time you spend, save, or invest money, think about the time value of money as an opportunity cost.

Multiple Select

Which 3 pieces of information do you need to determine how much interest you will earn on money in a savings account? Select all that apply.

• Principal

• Present Value

• Interest Rate

• Length of time money will be in the account

​Calculating Interest

• ​You can calculate the time value of your savings by figuring out how much interest you will earn. To do this you will need to know the principal, the annual interest rate, and the length of time your money will be in an account.

  For a savings account, the principal is the original amount of money on deposit.

Multiple Choice

________ ____ is the amount your original deposit will be worth in the future based on earning a specific interest rate over a specific period of time.

• Principal

• Future Value

• Annuity

• Present Value

​Future Value

• ​Future value is the amount your original deposit will be worth in the future based on earning a specific interest rate over a specific period of time.

  Each year, interest is earned on your principal and on previously earned interest. This is why future value computations are also called compounding.

  With compounding, your money increases faster over time. If you make deposits now, your money will have more time to increase.

​The Future Value of a Single Deposit

​

Principal x Annual Interest Rate = Interest Earned After the First Year

​

(Principal + Previously Earned Interest) x Annual Interest Rate = Interest Earned After the Second Year

Multiple Choice

What is the future value of a $2,000 deposit if you put it in an account for 2 years and it earns 2% interest?

• $2,040

• $2,080

• $2,080.80

• $2,120

​Solution

​$2,000 x 0.02 = $40

​

​($2,000 + $40) x 0.02 = $40.80

​

​$2,000 + $40 + $40.80 = $2,080.80

​

​The future value of the original $2,000 deposit will be $2,080.80 after two years.

Multiple Choice

Which of the following is an example of an annuity?

• I withdraw $500 from my savings account every year.

• I deposited $500 into my savings account today.

• I deposit $500 into my savings account every year.

Multiple Choice

You are depositing $200 into your savings account every year and want to determine how much it will be worth in 5 years. Which table should you use?

• Future Value of a Single Deposit

• Future Value of a Series of Equal Annual Deposits

• Present Value of a Single Deposit

• Present Value of a Series of Equal Annual Withdrawals

Multiple Choice

You want to have $4,000 for a car down payment in 3 years and want to know how much you should deposit now into your savings account. Which table should you use?

• Future Value of a Single Deposit

• Future Value of a Series of Equal Annual Deposits

• Present Value of a Single Deposit

• Present Value of a Series of Equal Annual Withdrawals

Multiple Choice

You need to know how much money you should put in your account so that you can withdraw $20,000 from your savings account each year for 3 years when you go on a backpacking trip. Which table should you use?

• Future Value of a Single Deposit

• Future Value of a Series of Equal Annual Deposits

• Present Value of a Single Deposit

• Present Value of a Series of Equal Annual Withdrawals

​Future Value of a Single Deposit

​$5,500 x 1.606 = $8,833

​

​In seven years, his $5,500 will be worth $8,833

​Present Value of a Series of Equal Annual Withdrawals

​$20,000 x 7.722 = $154,440

​

She needs $154,440 in her account before she can retire.

Multiple Choice

Which of the following describes the financial strategy of borrowing wisely?

• Spend less than you earn

• Achieve long-term growth by buying stocks

• Use credit cards and take out loans only when necessary

• Work to earn an income

​8 Financial Strategies

1. ​Obtain - Obtain financial resources by working, making investments, or owning property.

2. ​Plan - Plan how you will spend your money.

3. ​Spend Wisely - Spend less than you earn.

4. ​Save - Save on a regular basis.

5. Borrow Wisely - Use credit cards and take out loans only when necessary.

6. Manage Risk - Insurance will protect you and those who depend on you.

7. ​Invest - Increase your current income and achieve long-term growth by investing.

8. ​Plan for Retirement - Determine when you want to retire and how you want to live.