Lesson 3 3 Compound Interest Introduction Compound interest

Lesson 3. 3 Compound Interest Introduction Compound interest is used in most financial transactions It has been described as “simple interest on steroids” According to some very smart people, it is essential for you to understand compound interest “Compounding is mankind’s greatest invention because it allows for the reliable, systematic accumulation of wealth ” Albert Einstein 1879 - 1955 February 15, 2011 Copyright © 2007 -2011 … REMTECH, inc … All Rights Reserved 1

Lesson 3. 3 Compound Interest Objectives You should be able to do the following after completing this lesson • Define compound interest and compounding period • Summarize why compound interest is so important • Identify the type of interest used in financial transactions • Explain why the principal for compound interest is dynamic • Describe how to use compound interest to increase wealth • Review what the Truth in Lending Act requires • Describe the different interest rates used today • Demonstrate how you would use the Rule of 72 February 15, 2011 Copyright © 2007 -2011 … REMTECH, inc … All Rights Reserved 2

Lesson 3. 3 Compound Interest 3. 3. 1 – Compound Interest In this section, you will learn: • What compound interest is • What is unique about compound interest • The components necessary to calculate compound interest • How to calculate compound interest using this formula February 15, 2011 Copyright © 2007 -2011 … REMTECH, inc … All Rights Reserved 3

Lesson 3. 3 Compound Interest 3. 3. 2 – Compound Interest’s Power In this section, you will learn: • How simple and compound interest are different • What dynamic principal means to you • Why everyone either loves or hates compound interest • What a Growth Factor is • How to calculate a Growth Factor using this formula You will run the following Interactive Example: • Principal Growth Example February 15, 2011 Copyright © 2007 -2011 … REMTECH, inc … All Rights Reserved 4

Lesson 3. 3 Compound Interest 3. 3. 3 – The Compounding Period In this section, you will learn: • What the time between interest calculations is called • What happens when the interest is calculated more frequently • The different compounding periods used with compound interest • How many times a year the compound interest is calculated for different compounding periods • What the actual annual interest rate for compound interest depends on February 15, 2011 Copyright © 2007 -2011 … REMTECH, inc … All Rights Reserved 5

Lesson 3. 3 Compound Interest 3. 3. 4 – Effective Interest Rate In this section, you will learn: • What financial institutions are required by law to show you • What the effective interest rate is and what it is based on • How the effective interest rate is calculated using this formula • What the APR is and why it is important • When the effective interest rate is equal to the APR • What the Truth in Lending Act is designed to do You will run the following Interactive Example: • Effective Interest Rate Example February 15, 2011 Copyright © 2007 -2011 … REMTECH, inc … All Rights Reserved 6

Lesson 3. 3 Compound Interest 3. 3. 5 – Calculating Compound Interest In this section, you will learn: • Why just reading about compound interest doesn’t do it justice • When compound interest is working for you • When compound interest is working against you • Whether compound interest is more powerful when it is working for or against you February 15, 2011 Copyright © 2007 -2011 … REMTECH, inc … All Rights Reserved 7

Lesson 3. 3 Compound Interest 3. 3. 6 – Benefits of Compound Interest In this section, you will learn: • What the only proven way of becoming wealthy is • How compound interest can help you become wealthy • What ingredients are necessary to increase personal wealth • What compound interest can do if given enough time • What happens to the power of compound interest when the interest rates are low You will run the following Interactive Exercise: • Compound Interest Exercise February 15, 2011 Copyright © 2007 -2011 … REMTECH, inc … All Rights Reserved 8

Lesson 3. 3 Compound Interest 3. 3. 7 – Rule of 72 In this section, you will learn: • What the Rule of 72 is • How to calculate the Rule of 72 using this formula • Why you might want to use the Rule of 72 February 15, 2011 Copyright © 2007 -2011 … REMTECH, inc … All Rights Reserved 9

Lesson 3. 3 Compound Interest Discussion Questions Do you believe you can use the power of compound interest to become wealthy? Why did Congress pass the Truth in Lending Act? February 15, 2011 Copyright © 2007 -2011 … REMTECH, inc … All Rights Reserved 10