When people think about investing, they typically think about things like stocks, bonds, real estate, etc. The truth is that there are amazing investments all around us everyday, we simply have to open our eyes to see it. Here is an example of an everyday "investment" that all of us have seen, but very few people notice.
Max is getting ready to pay his car insurance for the month and decides to ask his insurance company if they offer any special incentives or discounts. The insurance company informs Max that if he pays for 5 months in advance, he will receive the 6th month for free. Max normally pays $100/month for car insurance. So, under this deal, if Max pays $500 up front, he does not have to pay anything for 6 months. In this scenario, what would be the return on Max's $500 investment?
Answer: (These are the keystrokes to put into your 10bii calculator) (if you don't have one, no worries, simply follow along)
N (number of months) = 6 (this investment takes place over 6 months of time)
I/YR (interest rate/year) = ?? (this is what we are solving)
PV (present value) = ($500) (Max is investing $500 upfront)
PMT (monthly payments) = $100 (Max is NOT having to pay $100/month, which he would have had to of paid otherwise. This is the equivalent of receiving $100/month. I know that this concept can seem weird at first, but just think about it.)
FV (future value) = 0 (there is no balloon payout in the end)
I = 65.66% (this is the return on investment that Max would get if he invested the $500 upfront in order to not have to make any payments for 6 months. This rate of return is amazing and is astronomically higher than anything that is being offered at the banks right now. It is important to remember that there are often phenomenal "investments" right under our noses.)
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