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Last month we talked about compound interest. This month we will use the compound interest concept and do a real-world problem, a kind of exercise often performed by financial analysts.

Netflix is a company that provides movies for viewing, either by streaming online or by mailing a DVD to your home. As a company, it has done extremely well. Its revenue (the total amount of money it receives from all of its customers) was $1.21B (billion) in 2007, $1.36B in 2008, and $1.67B in 2009. Here is the problem: What was Netflix’s average revenue growth rate from 2007 to 2009? If it continues to grow at that rate, how big will the revenue be in 2015?

Find out how to do this problem!

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Compounding interest is a very powerful concept. It can really hurt you, such as when you don’t pay off your credit card bill and the interest payment keeps getting bigger and bigger. It can also help you if you save money and manage it well enough to earn a steady return over many years.

If you start with $1000.00, how much will this become after 10 years if the rate of return is 5%?

Find out how to do this problem!.

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Happy New Year! The holiday break came and went so quickly. But it did allow time for me to be with my family, to catch up on year-end cleaning and organization, and to reflect and think about my goals for 2011. As my children get closer to college (2.5 years away), I am thinking more about how to plan, prepare and help guide the kids. There are many aspects to this process, including of course financial planning. Saving and investing are important lifetime skills. Children are not typically taught these skills in school. How are you preparing your children for this?

I always try to find opportunities to tell my children the importance of saving, how the daily Starbucks hot chocolate can add up to a large sum of money over a year. I also tell them the power of compound interest, both in terms of its negative aspects, relating to unpaid credit card bills, and in terms of its positive aspect with regard to saving and investing money. While I don’t think my children really understand the importance of this yet, I hope that later in life it will make sense and help them plan for themselves. The ability to calculate compound interest is a skill for life. Interested in sharing your thoughts with me on this topic? Email me at contactus@goldstudent.com.

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