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5.4 time value of money
1.
2. To be able to calculate the future
value of your investment.
3. Future Value of Money:
How much your money with be worth in the
future if you invest it.
Rate of Return:
The interest rate that you earn on your
money that you invest (ex: 8%)
Principle:
The money you actually invested (not
counting any interest earned.)
4. The formula that calculates how long it
will take your money to double at a
given interest rate.
72 ÷ Interest Rate = # Years to Double Money
72 ÷ 8 = 9 Years to Double Money
5. Interest earned only on the principle.
(Not the interest you already earned.)
Usually figured annually or biannually
Compute using formula FV = PIT + P
FV = (Principle x Interest x Time) + Principle
FV = ($1,000 x 6% x 3 years) + $1,000
Future Value of Your investment = $1,180
6. Interest earned on the principle AND the
interest you already earned.
Usually figured monthly or quarterly
Must use a financial calculator or an
“N-Chart” to find future value.
FV = N x Principle
7. If you were investing money, would you
want to use Simple or Compound
Interest?
If you are taking a loan from a bank or
credit card, which one would you want?
Let’s put it to practice…