PERSONAL FINANCIAL LITERACY : A TIME TO SPEND, A TIME TO SAVE : 02.04 : INTEREST RATES AND INFLATION

**Put Your Money Where Your Mouth Is**

For your assignment, you will compare savings options and make a recommendation as to which option would earn the most interest after taxes and inflation.

**Part One—Select Two Savings Options**

Select one savings option from the Simple Interest column and one from the Compound Interest column to compare:

Simple InterestCompound InterestOption A—earns 2.5% simple interest per yearOption D—earns 2% compound interest per yearOption B—earns 3% simple interest per yearOption E—earns 2.5% compound interest per yearOption C—earns 3.5% simple interest per yearOption F—earns 3% compound interest per year

**Part Two—Crunch the Numbers**

Calculate the after-tax real rate of return earned on $5,000 by your selected savings options **over a period of three years**. This will help your comparison. Remember, the real rate of return includes taxes on the interest earned and inflation. For this assignment, use a tax rate of 10% and an average cumulative rate of 3%.

You will submit your calculations as part of your assignment. Need help? Check out the steps to calculate the after-tax real rate of return:

**Step 1: Calculate the interest earned**

**Step 2: Calculate the taxes on the interest earned**

**Step 3: Calculate the inflation on the interest earned**

**Step 4: Find the after-tax real rate of return**

**Part Three—Make Your Recommendation**

Compile your calculations and make a recommendation. Of the savings options that you chose, which would you recommend a depositor use? Use complete sentences to explain why one option would be more beneficial than the other based on the after-tax rate of return.

**What to Submit**

Submit your selected savings options, calculations, and recommendation to **02.04** **Interest Rates and Inflation**.

**ASSESSMENT**

- Complete the reading and activities.
- Review the rubric before completing and submitting this activity.
- Complete parts one, two, and three.
- Submit your work to
**02.04****Interest Rates and Inflation**.