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Laurent saves money from his lawn service to buy a new $20,000 mower and trailer. He would like to buy the new equipment as soon as possible but only has $12,000 in his simple interest savings account. To reach his goal sooner, Laurent should

keep his money where it is and be patient
move his money to an IRA or Certificate of Deposit
Move his money to a compound interest account
Move his money to a business checking account

1 Answer

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In order to reach his goal sooner, Laurent should move his money to a compound interest account. Unlike a simple interest account, which pays interest in each period only on the money initially invested, a compound interest account also pays additional interest in each period on the interest that has accumulated so far. Therefore, his money will grow faster in a compound interest account than if he keeps it in a simple interest account or a checking account. An IRA or Certificate of Deposit is intended for long-term savings, and will not help Laurent buy his new equipment quickly.
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