You have been dating your significant other for 2 years now and you’ve decided it is time to pop the question! Your fiancé-to-be, Pat, has expensive taste and has picked out a band that costs $7,450, but Pat is willing to wait for you to save the money. You don’t want to wait though and have found the jeweler with the best financing options.
a. Let's assume that you listen to Pat and decide to make monthly deposits into a savings account. How much would you have to save each month if you deposited the money in a 2% interest bearing account for 18 months?
b. Now, let's look at how much you would pay each month if you financed the ring as you want to do. What would be your monthly payment if you financed the total cost of the ring for 18 months at 2% interest?
c. How much more will you pay for the ring if you finance it?
a) I will assume that your 2% is compounded monthly. You will need to save each and every month for 18 months: $408.06
b) If you financed the band for 18 months @ 2% comp. monthly, then you will have to make a monthly payment of: $420.47.
c) [18 x $420.47] =$7,568.46 - [18 x $408.06] =$7,345.08
=$223.38 extra cost of financing the band.
