Time Value Of Money

FP/101 Janie Wainscott

If I placed $5,000.00 in a savings account earning 2.50% interest compounded annually. How much would you have at the end of four years? How much would you have if the interest is compounded semi-annually?

Annually, in four years, I would have a final savings balance of $13,078.86. If my interest was compounded semi-annually of $13,084.52. That is a difference of $5.66. So, there is little difference in making payments annually or semi-annually.

If I changed the interest rate, to a higher rate of 3% interest, I would have a final savings rate of $13,269.32 semi-annually and $13,261.06 annually. That is a difference of $8.26, still showing little difference in using annually and semi-annually payments.

If I changed the interest rate, to a lower rate of 2% interest, I would have a final savings rate of $12,902.40 semi-annually and 12,898.82 annually. That is a difference of $3.58. Showing the difference is still low in semi-annul and annual payments.

Since there is little interest earned on a savings account, the best thing is to pay off the debt. The factors involved here are the rate of interest on both credit cards and savings account, with the rate of inflation, (Inflation makes the value of money lower over time), You have to consider how much money you earned in interest in the savings account before you pay off the bill. Earning interest on the savings account is most desirable until you have to pay off the balance on the last possible day. IF, for example, the interest rate was greater than 14% , then it would be more desirable to earn the interest as long as the inflation rate didn't devalue. The time value of money, net present value, interest earned, interest paid, and amount in your savings account must be properly matched for the math to actually benefit