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Glossary
Decision Time

Should I Save or Should I Spend?

That's a good question! Only you can decide if the opportunity costs of saving outweigh the opportunity costs of spending. Every scenario is different.

At the beginning of this lesson, we asked you if you would rather:

  • Leave $600 in the bank for one year to earn 3% interest and buy a $500 car using a one-year loan at 4% interest OR
  • Put $100 in the bank today to earn 3% interest for one year and buy a car today for $500 cash (no interest)

Let's explore this situation further.

 
So here's what happened. You just deposited $600 into a savings account to earn 3% interest for the next year. While you were in the bank, someone stole your car and then totaled it. Now, you have to go buy a used car for $500.00.
You have two choices: pay $500 cash for the car today and leave $100 in the bank to collect 3% interest; or leave your $600 on deposit in the bank and ask your parents for a one-year $500 simple-interest loan with a 4% interest rate. If you take the loan, you'll pay your parents back in one year with money from your savings account.

What is the best decision?

Let's assume your goal is to make a decision based on which scenario leaves you with the most money after one year. Given that, should you pay cash for the car today or pay for the car later? Which decision, assuming you have either $600 or $100 in the bank earning interest for one year, will result in the most money left over in one year? If you can calculate percentages, you can figure this out. Even still, you may click here for additional help…

Here is a calculator to help with the math.

Fill in the answers below and click SUBMIT to check your answers.

1. If I choose to save $600 for one year and pay for the car one year from now plus interest, how much money will I have left after I pay for the car?

Enter your answer in the text box and click SUBMIT.

$
2. If I choose to pay cash for the car today and save $100 in the bank for one year, how much will I have after one year?

Enter your answer in the text box and click SUBMIT.

$
3. If I want more money at the end of one year, which option should I choose?