How to make money grow
A relative has given you a gift of $60,000 on the condition that you put it in a bank account and leave it untouched for at least 6 years.
Bank 1:“Put your money with us! We will give you 8% of your initial deposit each year it stays with us.
Bank 2:“Put your money with us! We’ll pay you 10% annual interest, and we’ll compound it every year. At the end of each year, we’ll add to your account the interest earned and we’ll base the next year’s interest on that new, larger amount. That way you will earn interest on your interest!”
The offer made by BANK 1 uses the idea of simple interest because interest is paid only on the initial deposit, which was $60,000. You will earn 8% interest every year only on the initial deposit.
BANK 2 offers compound interest, which differs from simple interest. With compound interest, your annual interest earned is calculated on your original principal PLUS all the previously earned interest.
How to make money grow
A relative has given you a gift of $60,000 on the condition that you put it in a bank account and leave it untouched for at least 6 years.
Bank 1:“Put your money with us! We will give you 8% of your initial deposit each year it stays with us.
Bank 2:“Put your money with us! We’ll pay you 10% annual interest, and we’ll compound it every year. At the end of each year, we’ll add to your account the interest earned and we’ll base the next year’s interest on that new, larger amount. That way you will earn interest on your interest!”
The offer made by BANK 1 uses the idea of simple interest because interest is paid only on the initial deposit, which was $60,000. You will earn 8% interest every year only on the initial deposit.
BANK 2 offers compound interest, which differs from simple interest. With compound interest, your annual interest earned is calculated on your original principal PLUS all the previously earned interest.
How to make money grow
Bank 1
Total Amount after 6 years ______
Bank 2
Year / Starting Balance ($) / Prt / I (Interest earned $)1
2
3
4
5
6
Total Amount after 6 years ______
Which bank should we use?? ______
Earning interest is a way of making your money grow, and compounding is a way of making it grow faster!
Independent Practice
- You borrow $6650 for 4 years at an annual rate of 16%.
Interest paid ______Total Amount Paid ______
- You borrow $15,000 at an annual rate of 6%. How much simple interest will you pay on this loan if the loan is for 12 years? What is the total amount of money you will repay?
Interest paid ______Total Amount Paid ______
- You borrow $10,000 for 3 years at an annual rate of 3%. How much will you pay in total at the end of 3 years?
Year / Starting Balance ($) / Prt / I (Interest earned $)
1
2
3
Total Interest paid ______Total Amount Paid ______