You have inherited $500,000 at age 20

You have inherited $500,000 at age 20. The money is in a trust fund that is paying 8% interest per year. You can either take the interest each year

or reinvest it in the trust fund. The principal cannot be withdrawn from the trust fund until you are 40.

1) Divide it into two groups. One group to be the "Spenders." They will spend money as they receive it (on cars, vacations, new homes, etc.).

The other group will be "Savers." They want to retire at age 45 and lead a comfortable life before and after they retire.

2) Next, determine the value of the trust fund at age 40. Which of the groups will be most likely to achieve its primary financial goal and why?

For the first group of "Spenders", they will spend the money they received from the trust fund, which pay 8% interest per year. As this group does not reinvest the interest received in the trust fund, the value of the trust fund at age 40 is still $500,000.

For the other group, "Savers", by reinvesting 8% into the trust fund, the trust fund value at age 40 will be: -

$500,000(1 + 0.08)^20 = $2,330,500

We can see that the "Savers'" group will be most likely to achieve its primary financial goal because of the compounding interest effects on their decision to reinvest the interest receive into the trust fund.