Activity: Compound Interest Calculator & Goals Activity

Activity:

Compound Interest

Calculator & Goals Activity

This activity asks you to set three goals you would like to achieve in the future,

estimate the total cost of each goal, and then calculate the amount of principal

you would need to invest to reach your goal in each scenario.

Understanding Compounding Interest

Investing & Personal Financial Planning

Activity: Compound Interest Calculator & Goals Activity

Create three different scenarios that you desire for yourself in the future. What event would you

like to experience, or what item you would like to own, at some point in the future? Set three of

these as your goals.

Estimate how much each goal will cost.

Then, using an online calculator or the provided ¡°pen-and-paper¡± calculations, determine the

principal amount it would take to achieve that goal:

Less Accurate, but Simple Calculation:

Year 1: $10,000 X 1.05 = $10,500.00

Year 2: $10,500 X 1.05 = $11,025.00

Year 3: $11,025 X 1.05 = $11,576.25 ¡­ and so on until you reach the figure you need.

More Accurate, but Complex Calculation:

A = P (1 + r/n)(nt)

Where:

A = future value of the investment (the dollar amount of your total investment: original principal

plus all interest earned)

P = principal investment amount (the original amount you invested)

r = annual interest rate (as a decimal; 5% would be 0.05)

n = number of times interest is compounded in a year (¡°1¡± if compounded annually; ¡°12¡± if

compounded monthly)

t = number of years of your investment

Understanding Compounding Interest

Investing & Personal Financial Planning

Activity: Compound Interest Calculator & Goals Activity

This exercise does not take into account inflation or additional principal you might add over

the years. If you invested an amount today, next month, or next year, how close would your

investment get you to achieving your goal?

Example:

Goal: Family Vacation to Rome, Italy.

Estimated cost: $10,000

Current principal: $2,500

Years to grow: 15

Interest rate: 8%

Total Investment Principal after Years to Grow: $8,267.30; most of the way to the goal!

Scenario #1

Goal:

Estimated cost:

Current principal:

Years to grow:

Interest rate:

Total Investment Principal after Years to Grow:

Scenario #2

Goal:

Estimated cost:

Current principal:

Years to grow:

Interest rate:

Total Investment Principal after Years to Grow:

Understanding Compounding Interest

Investing & Personal Financial Planning

Activity: Compound Interest Calculator & Goals Activity

Scenario #3

Goal:

Estimated cost:

Current principal:

Years to grow:

Interest rate:

Total Investment Principal after Years to Grow:

Understanding Compounding Interest

Investing & Personal Financial Planning

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