Time Value of Money Real World Savings Exercise

Introduction

This exercise applies the Time Value of Money principles to your savings and earnings in the real world today. We have discussed the Time Value of Money using returns of around 10 percent. You cannot find that return in a bank account today (but from 1979-1984, the yield on the one-year Treasury security was 10 percent or higher). You can see historical Treasury rates back to 1962 athttp://federalreserve.gov/releases/h15/data.htm. Look at interest rates today and see what you could earn in a bank account. Also look at how much you could have in your retirement account if you begin saving today.

Deliverable Instructions

1. Suppose you open a regular savings account at Bank of America. Go to their website and look up the pitiful rate of interest you will receive on this account. To avoid the $5 monthly fee, begin with a balance of $300 today. And then suppose you save $100 a month for 5 years. How much will you have at the end of 5 years?

2. What is your age today? (If you do not wish to reveal your actual age, assume that you are 25.) At the beginning of each year, starting today, you put $3,000 in an investment account earning 8% per year and you continue making $3,000 contributions every year until you reach age 70.

a. How much will you have in your retirement account?

b. How much will you have in your account if you start contribution one year from now, instead of today?