Saving

Saving means to "pay yourself first."  Savings are disposable income (income after taxes) minus consumption spending.  Disposable income for middle grade students is likely to come from an allowance, gifts of money, or payments for doing jobs at home or in the neighborhood.  "Paying yourself first" means saving before spending on consumer goods.  Simple interest on savings is the annual interest paid on the initial amount saved (the principal).  Compound interest is interest paid on both the principal and the interest added to the principal.

People save money to gain the satisfaction of purchasing a special gift, to make large purchases, to meet emergencies that might arise, because the money will be matched by someone, and for a college education.  All savings decisions relate to some future use of money.  Each person's reasons for saving money is different. Generally, saving is done to help someone reach a goal.

As stated above, simple interest is interest paid on the principal or initial investment only.  So, the formula for this problem is easy.  You would simply multiply the amount saved by the interest rate.  Here is an example.  You invest $1000 and are paid 5% interest.  You would earn $50 interest on this investment for a year ($1000 x 5% = $50).

The Rule of 72 states that we divide 72 by the interest rate paid to determine how many years it will take for savings to double when the interest is compounded.  To apply this rule, let's look at an example.  If you have an account that will pay 8% interest, you divide 72 by 8.  The result of 9 is the number of years required to double your money.  This is the Rule of 72.  

Another example - you have $200 to invest in savings.  If you are earning 6% interest, how long will it take you to double your money.  The answer would be 12 years.  You find this by dividing 72 by 6.  This gives you 12.  So, you know 12 years of leaving the money in savings is required to double the money invested or reach $400.

Look at the table below for investing $100 for more understanding of how simple and compound interest are figured.  Notice the difference in money earned between the two investment types.  Compound interest earns more money for the investor.

Now that you understand interest and saving, let's work five problems.  Upload your answers using the Submit Assignment link when you have finished.

1. You wish to invest $500.  You are going to earn 5% simple interest.  How much interest will you earn?

2. How long will it take you to double your initial investment if you are paid 9% interest annually?

3. This question is "tricky", but you will be able to answer it.  You need to think about the process and information you have learned already.  Apply your knowledge.  Here goes...You deposit $500 at 6% interest annually.  After 6 months, how much money will you earn?

4. Using the Rule of 72, if your money is expected to double in 12 years, you are earning approximately how much interest annually?

5. If you deposited $750 in a savings account paying 8%, how much interest would you earn in nine months?  (Little tricky again but apply your knowledge - remember the formula of interest = amount deposited X interest rate X time of investment - think how long 9 months is out of a year or 12 months)

Work these 5 problems.  Type your answers into the text box.