How to Adult: Interest Mini-Lesson

How to Adult:
Interest

​Interest

• What is it? Interest is the cost of borrowing money

• Where does it show up? banking, debt, credit cards, investing, student loans, savings, buying a car/home

• How Interest can be Good or Bad:

  • The Good: compound interest on money you save/invest

  • The Bad: paying more money than you borrowed

An Example

• Imagine you buy a $16,000 used car.

  • You decide to make a down payment (money up front) of $4,000 and pay the rest over time.

  • This means you have to finance (borrow) $12,000.

  • $12,000 is the principal (amount of money loaned)

  • Let's say the APR/annual percentage rate (the amount of interest you'll be charged every year) is 10%

Car Example (cont'd)

• How much money will you pay in interest every year? Every month?

  • 10% APR on a principal of $12,000 = 0.10 x 12,000 = $1,200 in interest

  • Monthly payment = yearly interest / 12 months = 1,200/12 = $100/month
    

Multiple Choice

You have $10,000 in your checking account. You decide to open a savings account at the same bank, and they offer you a 3% annual interest rate. Let's say you opened the account with $8,000 and didn't touch it after that. How much money will you earn from interest after a year?

• 300

• 240

• 120

• 2400

Open Ended

When is interest a bad thing for you and when is interest a good thing?

<-- Amortization Table

​The Power of Compound Interest

Multiple Choice

When you graduate high school, your strange but wealthy uncle gives you $3,000. You decide to invest that money. If you do not add any money to that account and just let the $3,000 accrue (grow) interest, how much money would you have after 5 years with a 5% annual return?

• $2,527.36

• $3,245.45

• $4,029.76

• $3,828.84

Key Takeaways

• When you borrow money, interest makes you pay back more money than what you initially borrowed.

• When borrowing, you want the lowest interest rate.

• When investing/saving, you want the highest interest rate.

• Pay back loans faster so that there is less time for interest to accrue! Higher monthly payments save you money in the long run!