| Annuities are how smart people
save! This is where you invest a set amount each
month... A little at a time is the way to go!
Here's how it works:
Let's invest
$100
each month at
12% compounded
monthly...
Beginning
of January: You put in
$100.
On the last day
of January:
They calculate your interest...
(Remember that, if we
make 12% for the whole year, we'll make 1% each month.)
100 +
.01(100)
= $101
On February 1st: You put in another
$100..
$101
+ $100
= $201
On
the last day of February:
They calculate your interest...
201 +
.01(201)
= $203.01
On March
1st: You put
in another $100..
$203.01
+
$100 = $303.01
On
the last day of March:
They calculate your interest...
303.01 +
.01(303.01)
= $306.0401
On April
1st: You put
in another $100..
$306.0401
+
$100 = $406.0401
On
the last day of April:
They calculate your interest...
406.0401 +
.01(406.0401)
= $410.100501
On May
1st: You put
in another $100..
$410.100501
+
$100 = $510.100501
On
the last day of May:
They calculate your interest...
510.100501 +
.01(510.100501)
= $515.201506
On June
1st: You put
in another $100..
$515.201506
+
$100 = $615.201506
On
the last day of June:
They calculate your interest...
615.201506 +
.01(615.201506)
= $621.3535211
On July 1st:
You put in
another $100..
$621.3535211
+
$100 = $721.3535211
On the last day of
July:
They calculate your interest...
721.3535211 +
.01(721.3535211)
= $728.5670563
On August
1st: You put
in another $100..
$728.5670563
+
$100 = $828.5670563
On
the last day of August:
They calculate your interest...
828.5670563 +
.01(828.5670563)
= $836.8527268
On
September 1st: You put in another $100..
$836.8527268
+
$100 = $936.8527268
On
the last day of September:
They calculate your interest...
936.8527268 +
.01(936.8527268)
= $946.2212541
On
October 1st: You put in another $100..
$936.8527268
+
$100 = $1046.2212541
On
the last day of October:
They calculate your interest...
1046.2212541 +
.01(1046.2212541)
= $1056.683467
On
November 1st: You put in another $100..
$1056.683467
+
$100 = $1156.683467
On
the last day of November:
They calculate your interest...
1156.683467 +
.01(1156.683467)
= $1168.250301
On
December 1st: You put in another $100..
$1168.250301
+
$100 = $1268.250301
On
the last day of December:
They calculate your interest...
1268.250301 +
.01(1268.250301)
= $1280.932804
|
|
So, if you invest $100 at the
beginning of each
month at 12% compounded monthly, at the end of one year
you'll have $1280.93... Your total interest earned
on this investment is $80.93.
With annuities, you invest a little
at a time. We invested a total of $1200.
Let's compare this to a one-time
investment like the ones we did in our compound interest
section: |
If we make a
one-time investment of $1200 at 12% compounded monthly,
how much will we have at the end of one year?
initial
amount invested = $1200
At the end of
each period (every month), we'll be earning 1%...
So, each $1.00 will turn into $1.01...
growth factor = $1.01
number of
periods = 12
Hey, we made more money!
Isn't a little at a time the better way to invest?
The reason we made more money is
that the $1200 went in at the BEGINNING of the year...
So, the balance was higher the whole year.
Bigger
balance = more interest
But, the realistic
question is: Would you HAVE the whole $1200 at the
beginning of the year? If the answer is "yes,"
then invest the whole thing. If the answer is
"no," then do it a little at a time. This is
usually easier for most people.
|
If the amount you want to invest is
realistic for you (like only $100 a month as opposed to
a chunk of $1200), then you are far more likely to
invest it! |
By the
way, the term "annuity" is used when something pays YOU
a little each month too. It works both ways. |
