December 2017 Financial literacy question
Imagine that the interest rate on your savings account is 1 percent a year and inflation is 2 percent a year. After one year, would the money in the account buy more than it does today, exactly the same or less than today?
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Question & answer to the November 2017 financial literacy question of the month!
Suppose you have $100 in a savings account earning 2 percent interest a year. After five years, how much would you have?
You’ll have more than $110.41 at the end of five years because your interest will compound over time. Here’s how – Savings account with $100 and a 2 percent annual interest rate would earn $2 in interest for an ending balance of $102 by the end of the first year. Applying the same 2 percent interest rate, the $102 would earn $2.04 in the second year for an ending balance of $104.04 at the end of that year. Continuing in this same pattern, the savings account would grow to $110.41 by the end of the fifth year. You will earn interest on the money you save and on the interest your savings earned in prior years.
This was a simple example using $100 but imagine if you are able to save $10,000, $100,000 or $500,000? 2% does not sounds like a lot, but it does add up.
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