Two friends, Sally and Debbie, decide to make Saturday special and plan a fun family dinner twice a month.
Sally packs a picnic lunch and spends every other Saturday in the park; that night, she deposits $100 in an online mutual fund savings account which pays 8% interest.
Debbie takes her family out to eat every other Saturday and puts the charge of $100 on her credit card. Her credit card interest is 20% based on her credit score rating of “Prime”.
Part A: Based on the first scenario:
Answer the following question utilizing the Future Value of Annuity calculator:
If Sally’s account compounds monthly, calculate how much Sally will have in her savings account:
In 10 years?
In 20 years
In 30 years?
In 40 years?
Part B: Based on the second scenario:
Answer the following question utilizing the Credit Card Interest Calculator:
For just one year of spending $100 on dinner every other Saturday, how much would Debbie pay in interest for her credit card balance of $2,400 if she pays the minimum payment of $48 per month? How long would it take for Debbie to pay off the debt?
If she had the better credit score rating of “Superprime”, her interest rate would be lowered to 18%. With this change, how much interest would she pay and how long would it take to pay off this debt?
For more information about interest rates, please review this article regarding credit score ratings.
Part C: For the conclusion of this assignment, answer the following questions.
Were you surprised at the results?
What lessons did you learn from these calculations?
What changes may you make in your personal finances based on the knowledge of time value of money principles?
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