PERSONAL FINANCIAL LITERACY : A TIME TO SPEND, A TIME TO SAVE : 02.04 : INTEREST RATES AND INFLATION

Put Your Money Where Your Mouth Is

For your assignment, you will compare savings options and make a recommendation as to which option would earn the most interest after taxes and inflation. 

Part One—Select Two Savings Options

Select one savings option from the Simple Interest column and one from the Compound Interest column to compare: 

Simple InterestCompound InterestOption A—earns 2.5% simple interest per yearOption D—earns 2% compound interest per yearOption B—earns 3% simple interest per yearOption E—earns 2.5% compound interest per yearOption C—earns 3.5% simple interest per yearOption F—earns 3% compound interest per year

Part Two—Crunch the Numbers

Calculate the after-tax real rate of return earned on $5,000 by your selected savings options over a period of three years. This will help your comparison. Remember, the real rate of return includes taxes on the interest earned and inflation. For this assignment, use a tax rate of 10% and an average cumulative rate of 3%.

You will submit your calculations as part of your assignment. Need help? Check out the steps to calculate the after-tax real rate of return:

Step 1: Calculate the interest earned

Step 2: Calculate the taxes on the interest earned

Step 3: Calculate the inflation on the interest earned

Step 4: Find the after-tax real rate of return

Part Three—Make Your Recommendation 

Compile your calculations and make a recommendation. Of the savings options that you chose, which would you recommend a depositor use? Use complete sentences to explain why one option would be more beneficial than the other based on the after-tax rate of return.

What to Submit

Submit your selected savings options, calculations, and recommendation to 02.04 Interest Rates and Inflation.

ASSESSMENT

1. Complete the reading and activities.
2. Review the rubric before completing and submitting this activity.
3. Complete parts one, two, and three. 
4. Submit your work to 02.04 Interest Rates and Inflation.

Rubric