It is estimated that most individuals pay $1,200 per year in interest costs. Assuming you are 25 and instead of paying interest, you “decide to decide” to earn it. You do not go into debt, but instead invest that $1,200 per year that you would have paid in interest in an equity mutual fund that earns an 8% return. How much money would you have in that fund at age 50 (25 years) assuming payments are at the end of the year and it is in a Roth account in which you pay no additional taxes? At age 75 (50 years)?
Suppose you have $2,000 per year to invest in a Roth IRA at the beginning of each year in which you will pay no taxes when you take it out after age 59½. What will be your future value after 40 years if you get:
A. 0% interest?
B. 8% interest (but only on your invested amount)?, and
Total Number of periods of interest (note that the first $2,000 has 40 years of interest, the next $2,000 has 39 years, etc., (40+39+38….+1) = 820 periods times interest earned of $160 (or 8% * 2,000) + $80,000 principal (40 years * $2,000) = $211,200
C. Total earnings with principal and interest
Beginning of Year mode: 40=N I=8 –2,000 = PMT FV=$559,562
You graduate from BYU and you really want that new $35,000 BMW 320i that your buddy has. You estimate that you can borrow the money for the car at 9%, paying $8,718 per year for 5 years.
(a) Your first thought is that you buy the car and begin investing in year 6 the $8,718 per year for 25 years at 9%.
(b) Your second thought is to keep your old Honda Civic with 150,000 miles and invest the $8,718 per year for the full 30 years at 9%.
Even though 9% may be a high return to obtain, what is the difference in future value between thought (a) and thought (b)? What was the cost of the car in retirement terms?
Bob and Bill are both currently 45 years old. Both are concerned for retirement; however, Bob begins investing now with $4,000 per year at the end of each year for 10 years, but then doesn’t invest for 10 years. Bill, on the other hand, doesn’t invest for 10 years, but then invests the same $4,000 per year for 10 years. Assuming a 9% return, who will have the highest amount saved when they both turn 65?
Your friend just got married and had to have a new living room set from the Furniture Barn down the street. It was a nice set that cost him $3,000. They said he only had to pay $60 per month—only $2 per day.
a. At the stated interest rate of 24.99%, how long will it take your friend to pay off the living room set?
b. How much will your friend pay each month to pay it off in 30 years?
c. Why do companies have such a low minimum payoff amount each month?
a. Given an interest rate of 24.99% and a $3,000 loan, your friend will be paying for this furniture set for the rest of his life. He will never pay it off.
Clear memory, set payments to end mode, set payments to 12 (monthly) I = 24.99 PV = -$3,000, and solve for N. Your answer should be no solution.
c. How much would your friend have to pay each month to pay off the loan in 30 years? First, do you think your living room set will last that long?
Clear memory, set payments to end mode, set payments to 12 (monthly) I = 24.99 PV = -$3,000, N = 360 and solve for PMT. His payment would be $62.51.
Be the first to comment