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LESSON
How can you save money by investing small amounts of money regularly?
Saving and Investing16.2
ADDITIONAL EXAMPLE 1Suppose you have two savings accounts, both with a principal of $200 and an interest rate of 5%, but one earns simple interest and one earns interest compounded annually. Which account will earn more interest after 20 years? Explain.
The account with the compound interest earns more. The account that earns simple interest will earn $200. The account that earns compound interest will earn $330.66.
Fred and Melissa make regular deposits to a savings account. They both deposit $100 at the beginning of each year. Fred’s account earns simple interest at a rate of 4%. Melissa‘s account earns interest compounded annually at a rate of 4%.
16.2 LESSON QUIZ8.12.C, 8.12.D
1. How much interest does Fred earn at the end of the first year?
2. How much interest has Fred earned altogether by the end of the fifth year?
$4
$20
Fred and Melissa make regular deposits to a savings account. They both deposit $100 at the beginning of each year. Fred’s account earns simple interest at a rate of 4%. Melissa‘s account earns interest compounded annually at a rate of 4%.
3. How much interest does Melissa earn at the end of the first year?
4. How much interest has Melissa earned altogether by the end of the fifth year?
$4
$21.67
Fred and Melissa make regular deposits to a savings account. They both deposit $100 at the beginning of each year. Fred’s account earns simple interest at a rate of 4%. Melissa‘s account earns interest compounded annually at a rate of 4%.
5. After 5 years, how much more interest has Melissa’s account earned than Fred’s account? Give your answer in dollars and as a percent.
$1.67; about 8.4%
A riddle to solve
When invested at 5% simple interest, I earned my owner $285.75. But I cannot remember how many years it took. If I had been invested at 5% interest compounded annually, I could have earned my owner $350.09 after the same number of years. Of course, after the first year, I would have gotten my owner $31.75 from either bank. How much money am I? How many years have I been in the bank? $635; 9 years
How can you save money by investing small amounts of money regularly?
Sample answer: You can earn simple interest or compound interest on the money you invest. If you make regular deposits, the amount of interest earned each year increases over time.
