Question

1. Which of the following were provided in the Money 101 Video as the 5 Basic Money Rules to Use Forever? Choose all that apply.

		Cut up credit cards and close the accounts
		Save and Invest
		Make savings automatic
		Have a positive Net Worth when you graduate from college
		Create an amortization schedule for all of your loans
		Spend less than you make
		Make a plan: Set goals, create a budget, and track everything

2. You just won the $1,000,000 lottery. You can take a cash payout now of $500,000 or receive a 20 year annuity of $50,000 per year at the end of each year. If you have a required return of 7%, which is the better option? (Hint: You need to compare these two options at the same point in time, either in today's dollars or in future dollars 20 years from now.)

Answer 1

1)

• Save and Invest
• Make savings automatic
• Spend less than you make
• Make a plan: Set goals, create a budget, and track everything

Please note that after paying off the credit card interest with higher amount do not close the accounts.Maintain the dues as zero after paying off all the debts.

2) present value of annuity of receiving $50,000 each year is

P = PMT x ((1 – (1 / (1 + r) ^ -n)) / r)

The variables in the equation represent the following:

• P = the present value of annuity
• PMT = the amount in each annuity payment (in dollars)
• R= the interest or discount rate
• n= the number of payments left to receive

PV of annuity = $500000 *(1-(1+.07)^-20)/.07 = $529700.71

So if we are taking cash pay now it will be only $ 500000.

By comparing both option we can see that receiving $50,000 per year has more PV i.e 529700.71 than taking out cash 500,000 now.

Hence 2nd option of receiving $50,000 per year is better.