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Summer Tuggle

 

Assignment 12

Using Spreadsheets to Explore Compound Interest

 

Pam and Sam just graduated college and started their professional career.Pam is very cautious with her money and decides to save $1000 a year.Sam is so excited to finally have money that he spends all that he makes and saves nothing.This continues for 10 years.At this point, Pam decides to let loose and quits saving.She does not make any withdrawals from her savings account; the money just sits there.Sam decides that he better get on the savings train so he starts with $1000 a year.Both accounts earn a fixed 6% interest rate.

 

Explore this situation with a spreadsheet and graph.Will Sam ever catch up to Pamís savings?If so, when will that happen?

 

year

Pam

Sam

0

$1,000.00

$0.00

1

$1,060.00

$0.00

2

$2,183.60

$0.00

3

$3,374.62

$0.00

4

$4,637.09

$0.00

5

$5,975.32

$0.00

6

$7,393.84

Year 10 is final contribution year for Pam.Year 11 is the first year that Sam saves.

 
$0.00

7

$8,897.47

$0.00

8

$10,491.32

$0.00

9

$12,180.79

$0.00

10

$13,971.64

$0.00

11

$14,809.94

$1,060.00

12

$15,698.54

$2,183.60

13

$16,640.45

$3,374.62

14

$17,638.88

$4,637.09

15

$18,697.21

$5,975.32

16

$19,819.04

$7,393.84

17

$21,008.18

$8,897.47

18

$22,268.68

$10,491.32

19

$23,604.80

$12,180.79

20

$25,021.08

$13,971.64

21

$26,522.35

$15,869.94

22

$28,113.69

$17,882.14

23

$29,800.51

$20,015.07

24

$31,588.54

$22,275.97

25

$33,483.85

$24,672.53

26

$35,492.89

$27,212.88

27

$37,622.46

$29,905.65

28

$39,879.81

$32,759.99

29

$42,272.60

$35,785.59

30

$44,808.95

$38,992.73

31

$47,497.49

$42,392.29

32

$50,347.34

$45,995.83

33

$53,368.18

$49,815.58

34

$56,570.27

$53,864.51

35

$59,964.48

$58,156.38

36

$63,562.35

$62,705.77

37

$67,376.09

$67,528.11

38

$71,418.66

$72,639.80

39

$75,703.78

$78,058.19

40

$80,246.01

$83,801.68

41

$85,060.77

$89,889.78

42

$90,164.41

$96,343.16

43

$95,574.28

$103,183.75

44

$101,308.73

$110,434.78

45

$107,387.26

$118,120.87

 

 

The chart and the graph show that Sam will catch up and surpass Pam at year 37 of saving.The blue curve shows that Pamís savings rate starts at a nice pace and then changes at year 10 (she quits contributing $1000).It becomes a gentler curve.Samís savings donít take off until year 10 and then it curves exponentially according to the growth factor of 1.06.

 

It is interesting to note that if Pam had continued with saving $1000 a month for the 45 years, she would have a total of $225,508.12.See the graph below.

 

 

 

 

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