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With annuities, you
invest a little at a time. We invested a total of
$1200.
Let's compare this to
a one-time investment like the one's we did in the last section:
If we make a one-time
investment of
$1200 at
12%
compounded monthly, how much will we have at the end of one year?
Remember the formula:
initial amount
=
$1200
At the end of each period (every month), we'll be earning
1%...
So, each
$1.00
will turn into $1.01...
growth factor
=
$1.01
number of periods
=
12
Hey, we made more
money! Isn't it better to invest a little at a time?
The reason we made
more money is that the $1200
went in at the BEGINNING of the year. So, the balance was
higher the whole year.
BIGGER BALANCE =
MORE INTEREST
But, the realistic
question is: Would you HAVE the whole
$1200
at the beginning of the year? If the answer is "yes," then
invest the whole thing. If the answer is "no," then do it a
little at a time. This is usually easier for most people.
If the amount you
want to invest is realistic
for you (like only $100 a month as opposed
to a chunk of $1200), then you are far more
likely to invest it! |
By the way, the term
"annuity" is used when something pays YOU a little each month, too.
It works both ways. (But, be careful because some people use
the word "annuity" as a cloak for bad insurance investments!
You can read more about this on
Finance FREAK.)
Continued on the
next
page
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