Question: How Fast Does Your Money Grow?
Barry heard in his Personal Finance class that he should start investing as soon as possible. He had always thought that it would be smart to start investing after he finishes college and when his salary is high enough to pay the bills and to have money left over. He projects that will be 5-10 years from now. Barry wants to compare the difference between investing now and investing later. A financial planner who spoke to the class suggested that a Roth IRA (Individual Retirement Account) would be a more profitable in- vestment over the long term than a regular IRA, so Barry wants to seriously consider the Roth IRA.
When table values do not include the information you need, use the formula FV = $1(1 + R)N, where R is the period rate and N is the number of periods.
1. If Barry purchases a $2,000 Roth IRA when he is 25 years old and expects to earn an average of 6% per year compounded annually over 35 years (until he is 60), how much will accumulate in the investment?
2. If Barry doesn't put the money in the IRA until he is 35 years old, how much money will accumu- late in the account by the time he is 60 years old? How much less will he earn because he invested 10 years later?
3. Interest rate is critical to the speed at which your investment grows. If $1 is invested at 2% compounded annually, it takes approximately
34.9 years to double. If $1 is invested at 5% compounded annually, it takes approximately 14.2 years to double. Use Table 13-1 to deter- mine how many years it takes $1 to double if invested at 10% compounded annually; at 12% compounded annually.
4. At what interest rate would you need to invest to have your money double in 10 years if it is compounded annually?