Time Value of Money

Topics: Money, Compound interest, Interest Pages: 1 (410 words) Published: April 4, 2013
Time Value of Money
According to the simple calculator on Bankrate.com, if I place $5000 in a saving account earning 2.50% Interest compounded at the end of a four year span I would have $10,558.93 accumulated in my account. Setting the annual interest option to semi-annual I would have $10,563.82. This is a difference of $4.89. Setting the annual interest rate to 3% compounded annually I would have $10,716.56 in a four year span. Setting the Annual interest option to semi-annual I would have accumulated $10,723.70 in four years. A difference of $7.14. Setting the interest rate to 2% the calculator states. You would have $10,403.27 for annually compounded interest. And $10,406.36 for semi-annual in a four year span. A difference of $3.09. I find it incredible how a fraction of a percent interest will affect your finances.

Considering there is a small amount of interest earned on a savings account the best thing would be to pay off the debt ASAP. The circumstances here are the rate of interest on both the credit card, the savings account and the rate of inflation. The rate of inflation makes the value of money lower over time. You also have to factor in how much money you can earn in interest in the savings account before you must pay off the bill. Earning interest on the savings account is most suitable until you have to pay the balance off at the last possible day. For example the interest rate on the savings account was greater than 14% then it would be more desirable to earn the interest as long as the inflation rate did not devalue the money. If you had a huge sum of money in the saving account and you gained more interest than you pay on your debt, then paying off your debt wouldn’t be as much of a priority.

Note: The simple savings calculator on Bankrate.com would not let me uncheck or enter a 0 for the monthly deposit option. All calculations above are based on an initial balance of $5.000 and a monthly payment of $100. The Class syllabus says...
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