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This worksheet is intended to show you the cost of debt. Debt not only costs you interest
but it also is taking away income from the future that could be used in other ways. Debt is
the way you make the Credit Industry wealthy by giving them your future earnings. Feel
free to experiment with the scenarios given below to see how changing the amounts
compounds the change in wealth. While this might seem like a “Do without Plan” or “
“Have no Fun way of life”. When we further discuss this in the next class period you
might see how this is the plan for contentment and fun. Right now this is only food for
thought. Keep an open mind and have some fun!
How much do I need to save each month to have 1,000,000 in 30 years? I will invest in a
mutual fund that averages 12% growth per year if there is 3.1% inflation?
Go to http://www.dinkytown.net/java/Savings.html and find out.
Enter 1,000,000 as the savings goal.
Use 30 for the Years to save.
Use 12% as the Expected rate of return.
Use 0 for current savings.
Use 3.1, the default for inflation.
___________________________
How much does that credit card really cost me?
The average American has $5000 worth of credit card debt.
If you were to make payments of $105 and the interest rate was 25%, most credit cards
are charging close to 32% interest now, how long would it take to pay it off?
Go to http://www.dinkytown.net/java/Debt2Amount.html and find out.
Enter 5000 for credit card 1.
Use 32 for APR
Use 105 for Monthly payment.
Select Time to Payoff
Select Calculate
What is the Time to payoff? _________________________
Now select Interest Paid
Select Calculate
How much interest did you pay? ________________________
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Lets see what would happen if instead of paying interest on a credit card you were to save
the same amount of money for the same period of time. If you saved the $105 for the
same amount of time at 12% how much would you have?
Use http://www.dinkytown.net/java/CompoundSavings.html and find out. Compound
the interest monthly.
Enter 0 as the initial balance.
Use the answer above for years.
Use 105 as the monthly contribution.
Use12% as the Rate of Return
Set Rate of Return to compounded monthly.
How much would you have? _________________________
Now take that value and use it as your starting balance. Subtract the number of years
from the last question from 30 and enter that as your term.
Now how much money do you have? _____________________
This is the amount having a credit card balance can cost you.
What happens to the balance if you continue saving the $105? Add 105 to the monthly
contribution and click calculate again.
How much now? _________________________
The average car payment is around $450 per month for 60-72 months
If you choose to save and pay cash for all of your cars so you saved $450 each month
how much could you spend on a car in 4 years? Enter 0 as the initial balance and use 4
years for the term and 450 as the monthly contribution and 12% as the interest
compounded monthly.
_______________________
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If you only spent half of the balance and continued to save $450 how much could you
spend on the next car sometime in the next 10 years. Enter ½ of the previous amount as
the initial balance and use 10 years for the term and 450 as the monthly contribution and
12% as the interest.
Look at the chart and choose a year to buy your next car. What is the year and how much
do you have?
_________________
If you want go ahead and ½ that number and calculate it again.
Now what about buying a new car vs. used. My last car purchased was a 2003 Cadillac
Deville DTS with 21000 miles. I bought it in 2006 for $19,000 with a included bumper to
bumper 100,000 mile GM warranty. It is currently worth $16,000 and has 60,000 miles.
The original sticker price was $46,000. How much did the first 21000 miles cost the first
owner? How much did it cost me? What is the cost per mile for each owner?
__________________ ________________ ___________ ___________
If you invested/saved the difference how much would you have in 20 years at 12%
growth? Enter the amount as initial balance and show 0 as monthly contribution 12% for
interest compounded monthly? How much do you have now?
_________________________
This is also how much a car would have to be worth as an investment. Say you buy a
limited edition Corvette and hold onto it for 10 – 20 years. Ignoring Insurance, storage,
and maintenance costs this is what it would have to sell for to be financially worth while.