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Personal Financial Planning 13th Edition by Lawrence Gitman,Michael Joehnk,Randy Billingsley
Edition 13ISBN: 978-1111971632Personal Financial Planning 13th Edition by Lawrence Gitman,Michael Joehnk,Randy Billingsley
Edition 13ISBN: 978-1111971632 Exercise 2
Chad Jackson's investments over the past several years have not lived up to his full return expectations. He is not particularly concerned, however, because his return is only about 2 percentage points below his expectations. Do you have any advice for Chad
Explanation
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Person CG's investments have earned about 2% less than expected over the past several years. Currently, he is not concerned about the lower rate of return because he feels it is not significant.
First, it is important to the note that CG's decision to invest his excess funds is an extremely smart decision. Building wealth through investing is a smart way to save for retirement and other major life expenditures. If there is a higher rate of return on investments, wealth will accumulate at a higher rate.
Person CG should be concerned about his investments earning 2% less than expected. This seemingly small percentage can have a significant effect on the amount of money he is actually earning. This is because of compound interest.
As an example, imagine you have invested $1,000 today and it earns 4% interest. After 40 years, your money will have grown to $4,801. Now imagine that same $1,000 invested today is earning 6% interest. After 40 years, your money will have grown to $10,286 - which is more than twice as much as you would have earned at 4%!
From the above example, Person CG should realize that a 2% lower rate of return than expected does have a significant effect on the amount of money he is earning on his investments. It is recommended that he talk to his financial advisor to investigate new ways to increase his investment earnings.
First, it is important to the note that CG's decision to invest his excess funds is an extremely smart decision. Building wealth through investing is a smart way to save for retirement and other major life expenditures. If there is a higher rate of return on investments, wealth will accumulate at a higher rate.
Person CG should be concerned about his investments earning 2% less than expected. This seemingly small percentage can have a significant effect on the amount of money he is actually earning. This is because of compound interest.
As an example, imagine you have invested $1,000 today and it earns 4% interest. After 40 years, your money will have grown to $4,801. Now imagine that same $1,000 invested today is earning 6% interest. After 40 years, your money will have grown to $10,286 - which is more than twice as much as you would have earned at 4%!
From the above example, Person CG should realize that a 2% lower rate of return than expected does have a significant effect on the amount of money he is earning on his investments. It is recommended that he talk to his financial advisor to investigate new ways to increase his investment earnings.
Personal Financial Planning 13th Edition by Lawrence Gitman,Michael Joehnk,Randy Billingsley
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