Before the Great Recession of 2007, United States had peaked at the highest level of consumption the world had ever seen. It was especially due to the low unemployment rate of approximately 4.5%, the income mean of the average family was at an all time high and we felt confident enough to no longer feel the need to save but rather to take large payouts against our home equity or deep personal credit. Most families quickly learned their lesson as many lost their homes due to foreclosure during the housing bubble burst, which ruined their credit to the point where they are lucky enough to afford renting a home near their previous neighborhood. In predicaments like this I am sad to state that is the luck of the draw but with a persistent attitude in investing, you may rekindle your savings by earning saving interest.
There are two ways to look at interest, during the present and the future. The future value equation is FV=P(1+r/m)^mt in which P is the “principle” or original amount invested, r is the annual rate of interest, m is the times per year compounded and t is how many years you would like to keep your current amount invested. The future value equation may be used when you have an initial investment and you would like to know how much you will earn in a future value. The present value equation is PV=FV/(1+r/m)^mt in which the variables are identical to the previous equation except that FV represents the future value needed in order to achieve the present value. The present value equation may be used when you know how much the future value goal is and you would like to know how much you would need to invest in order to reach such present value.
For example, lets assume I have $4000 that I would like to invest for a rate of interest of 4.05% which will compound monthly and I would like to keep my investment gaining interest for 6 years. The future value equation would look like 4000(1+.0405/12)^12*6 which would simplify to 4000(1.003375)^72 and would equate to 5098.188184 or $5098.18. Lets also assume that the present value is not enough and I need $6,000. The present value equation would look like 6000/(1+.0405/12)^12*6 which would simplify to 6000/(1.003375)^72 and would equate to $4707.55475. If I were to check my work and plug in 5098.188184 rather than 6000 it checks out to 4000. So, now that you know how to compute the hypothetical question of “what if I invested this disposable income?”, now you know. Keep in mind though that savings accounts usually yield about .5% interest so if you want to gain beneficial interest, you may want to think about a certificate of deposit (CD) which can yield almost 2% compounded.
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