Real World Applications – Algebra I
How do banks help you earn money?
One way for people to earn a little bit of money is by putting it in a special bank account and letting the bank hold on to it for a long time. Many use a special formula to compound interest:
The represents the initial amount of money that’s put into the bank account. The represents the interest rate in which the bank will give. The represents how often the amount is compounded over time, and represents the number of years that the money will be in the bank account for.
For example, I put $5,000 into a bank account for my newborn daughter’s college fund. This bank account offers a 5% interest rate, and is compounded monthly. I’d like for my daughter to get this money by the time she’s 18 and ready for college. With this information, we can calculate how much money she will have by the time she gets to college in 18 years.
We can put all of this into our scientific or graphing calculator! This is what I’ve entered:
This means that the bank will have accumulated $12,275 by the time she graduates high school.
Look into different banks and find out their compounding interest rate. Make up an amount that you would think of putting into the bank, and find out how much you would have in a specific period of time. This could be a way for you to save money!