Part One: Savings and Loans


(http://www.familycar.com/RoadTests/BMW-X3/Images/LeftFront2.jpg)
(http://www.canadiandriver.com/articles/rr/images/04x3_3.jpg)
2004 BMW X3 $17,999
In order to finance 40% of $17,999 for this 2004 BMW X3, or $7,199.60, I would need to save up for the remaining down payment of 60%, or $10,799.40.
A: To save $10,799.40 in one year with an interest rate of 3.5% compounded monthly, I will need to deposit $885.60 into my savings account every month. The compounded interest will produce $172.20 over the period of one year. Without the interest, I would need to save $899.95, a difference of $14.35 every month. In this way, interest works for me, not against me!
B: To repay the loan amount of $7,199.60 over a three-year period with an interest rate of 6.3% compounded monthly, I will need to pay $220 per month. The total amount of my loan, interest included, would actually come out to be $7,920.21. If I were to add an additional $50 toward the principal (making a monthly payment $270), I would pay the loan off in 29 months versus 36, a difference of seven months. The amount of the actual loan, however, would still be $7,830.29, a difference of only $89.92 overall. In this particular scenario, I'd rather use the extra $50 for insurance, gasoline, or frequent car washes for my new BMW! And, well.. maybe a few of the cool BMW accessories they sell at the dealership!
Part Two: Analyzing Risk

(financialspreadbettingreview.com...)
ALI MAE'S Financial Portfolio in 2007 (10/1/07):
Apple Computers (AAPL) 15 shares @ $161.45/share: $2,421.75
Johnson & Johnson (JNJ) 10 shares @ $66.25/share: $662.50
Southwest Airlines (LUV) 60 shares @ $14.92/share: $895.20
Stock Total: $3,979.45
CD Deposit Amount at 3.5% APR: $1,020.55
PORTFOLIO TOTAL: $5,000.00
ALI MAE'S Financial Portfolio Two Weeks Later (10/15/07): *info unavailable for 10/08/07
Apple Computers (AAPL) 15 shares @ $170.42/share: $2,556.30
Johnson & Johnson (JNJ) 10 shares @ $64.23/share: $642.30
Southwest Airlines (LUV) 60 shares @ $13.96/share: $837.60
Stock Total: $4,036.20 (+$56.75)
CD Deposit Amount at 3.5% APR two weeks later: $1,022.05 (+$1.50)
PORTFOLIO TOTAL: $5,058.25 (+$58.25)
ALI MAE'S Financial Portfolio in 2008 (10/14/08):
Apple Computers (AAPL) 15 shares @ $104.08/share: $1,561.20
Johnson & Johnson (JNJ) 10 shares @ $64.00/share: $640.00
Southwest Airlines (LUV) 60 shares @ $12.32/share: $739.20
Stock Total: $2,940.40 (-$1,039.05)
CD Deposit Amount at 3.5% APR one year later: $1,056.73 (+36.18)
PORTFOLIO TOTAL: $3,997.13 (-$1,002.87)
RETURN ON INVESTMENT (2007-2008):
Apple Computers -35.5% -$860.55
Johnson & Johnson -3.4% -$22.50
Southwest Airlines -17.4% -$156.00
CD Deposit +3.5% +$36.30
All things considered, because I'm a boring person who prefers safe options I would have simply placed the entire $5,000 in CDs. Though the possibility of quick cash isn't the same with a CD as it is with playing the stock market, I'd rather know I'm earning a mere $36 per year than not know I'm going to be losing over $1,000. Of course the stock market is volatile (and is supposed to be!), but I prefer the stability and consistency of CDs. The con side of CDs is that they can be slow to grow and become profitable, but as a pro they are reliable and interest works on the customer's side. I don't know that there are immediate risks of investing in CDs. On the other hand, as a pro, stocks can be a fast way to earn money but there are no guarantees that they will. In my hypothetical portfolio, I started losing money as quickly as two weeks later. Within a year, each of my stocks had declined while my CD did not. Boring? Yes. Safe? Yes. But $36.30 richer because of my CD? Yes.
Part Three: Reflection
Who couldn't use a little extra every month?

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An exciting part of this project was the realization that interest isn't always "the bad guy". For me, interest has been something of a four-letter word; whether student loans, car loans, credit cards, or medical bills, interest is something I've never had a vacation away from. When I was working out the amount I'd need to save monthly for a down payment on a BMW, I was excited to learn that interest could result in something good for me. Knowing there is a real potential for 'free money' via interest makes me want to be more diligent in putting even a small amount of money into savings. I think it's important to see the positive side of interest because it helps us make more advantageous decisions when spending/investing/saving money, even if only a small amount. And you know, it's got me thinking.. what could do I do with all that extra cash?
