Key Terms

Long-term savings are essential in order to afford large purchases such as higher education, vehicles, homes and retirement savings.

Interest is what accelerates the value of those long-term savings.

For some of these larger purchases, you may choose to borrow money. Interest is also the cost of borrowing money.

The cost of borrowing money. In other words, you are paying a certain amount for the use of borrowing money.

KEY TERM: Interest

Interest is expressed as a rate, such as 3%.

When you lend or invest money, a higher interest rate is better because it means you earn more. Whereas when you borrow money, a lower interest rate is better because it means you pay less.

KEY TERM: Simple Interest

KEY TERM: Compound Interest

A set rate on the original amount lent to the borrower. The borrower will have to pay this interest. Example: If you borrow $1,000 (principal) with 10% interest annually, the interest owed will be $100 ($1,000 x 10% or .10 = $100). If you’ve paid nothing on the loan after one year you will owe $1,100.

SIMPLE INTEREST PRACTICE PROBLEM

Find the simple interest and the total amount owed after 2 years.

Principal = $2,100 Annual rate of interest = 11%

Interest per year = ____________ Total interest (2 years) = ________________

Total amount owed after 2 years = ______________

Interest on both the principal (starting amount) and the interest paid on that loan. Example: If you borrow $1,000 (principal) with 10% interest compounded annually, you’d have $100 ($1,000 x 10% or .10 = $100) in interest in the 1st year. If you’ve paid nothing after 1 year, you will owe $1,100.

But, after the 2nd year you will owe $1,210 ($1,210 = $1,100 x 0.10 or 10%) because now you have to pay 10% of $1,100 instead of just the principal of $1,100.

COMPOUND INTEREST PRACTICE PROBLEM

Find the compound interest and the total amount owed back after two years.

Principal = $2,100 Annual rate of interest = 11%

Interest in 1st year = __________________ Total amount owed after 1st year = _____________________

Total interest in 2nd year = ________________ Total amount owed after 2 years = ______________

In which example do you owe more, simple interest or compound interest?

Additional Comparison of Simple and Compound Interest:

Another way to grow long-term savings is through INVESTING:

INVESTING

Buying assets such as stocks, bonds, mutual funds or real estate with the expectation that your investment will grow in value.

Investments are usually used to achieve long-term goals.

One common form of investing is purchasing stocks.

STOCKS

Stocks are shares (pieces) of ownership in a company.

STOCK MARKET

The collection of physical and electronic markets where buyers and sellers can trade shares. It is like a giant, global auction.

Most trading happens through stock exchanges.

The stock market is the sum of all individual stocks and when an individual stock moves, the market as a whole would also shift by a tiny amount.

Often, the stock market will move up or down because of larger events going on in a certain country or around the world.