GED Social Studies
Personal Finance & Consumer Economics
This is the money math of ordinary life: budgets, interest, credit, and the fine print. Interest is the price of money — you EARN it when saving and PAY it when borrowing — and the same compounding that grows savings quietly multiplies debt.
The words first
- budget
- a plan matching money in to money out
- interest / principal
- the charge for borrowed money / the original amount itself
- compound interest
- interest calculated on principal PLUS past interest — growth on growth
- credit score
- a number rating how reliably you repay — sets your borrowing price
- minimum payment
- the smallest allowed card payment — mostly interest, barely principal
The method
SIMPLE INTEREST
interest = principal × rate × time
$1,000 at 5% for 3 years = 1000 × 0.05 × 3 = $150
COMPOUND INTEREST — growth on growth
$1,000 at 10%/yr:
year 1: 1000 → 1100 (+100)
year 2: 1100 → 1210 (+110 — interest earned interest)
year 3: 1210 → 1331
the same snowball works AGAINST you on card debt
CREDIT CARD REALITY
pay in full monthly → interest costs you $0
carry a balance at 20%+ APR and pay minimums →
a $1,000 balance can take years and hundreds
in interest to clear
COMPARING LOANS: the price of a loan is its APR + fees,
not its monthly payment — a longer loan can have a
smaller payment and a much bigger total cost
Worked all the way through
The problem
You deposit $500 at 4% annual compound interest. Walk the balance through two years — and why is it more than 500 + 4% + 4%?
- Step 1 — Year one's interest.500 × 0.04 = $20. Balance: $520.
- Step 2 — Year two computes on the NEW balance.520 × 0.04 = $20.80. Balance: $540.80.
- Step 3 — Name the extra 80 cents.It is interest earned BY year one's interest — compounding. Trivial at two years; decisive over twenty.
On the board
start: $500
yr 1: 500 × 0.04 = 20
balance 520
yr 2: 520 × 0.04 = 20.80
computed on the new balance
balance: $540.80
the .80 = interest on interest
compounding
Answer
$540.80 — the second year's interest was earned on $520, not $500
A second one, in a different form
Two offers for the same $10,000 car loan: 4 years at $240/month, or 6 years at $180/month. Which really costs less?
total A: 240 × 48 = $11,520
total B: 180 × 72 = $12,960
smaller payment, bigger cost
$1,440 more
compare TOTALS, never payments
Answer
The 4-year loan — $1,440 cheaper despite the higher monthly payment
The usual mistake
Applying the annual rate to a single month without dividing by 12.
Check yourself
Whenever money and time appear together, multiply everything out to a TOTAL before comparing. Monthly payments, minimums, and teaser rates are all designed to hide the total — the total is always the answer.
Practice it
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