Compound Interest?
By elisa812
@elisa812 (3026)
United States
April 27, 2007 2:51pm CST
I am wondering if anyone here might be able to explain compound interest to me. I am just about to graduate from college , and I just got married, and since I want to get financially stable, I keep hearing to take advantage of compound interest while I'm so young. I don't really know a lot about finances though, so I don't really know exactly what that means, or if it is different than the interest I'm already getting in my regular savings account? I hope this isn't a really silly question, but I've looked around for information on it and even asked around, and nobody has really been able to explain it to me! So anyway, would anyone here be able to let me know a little more about this and how I can start taking advantage of it? Thanks in advance! :)
3 people like this
6 responses
@squaretile (3778)
• Singapore
18 Dec 07
compounded interest refers to the effect of accumulation on interest.
A simple example is as follows:
Say you have $100 to put in a bank that pays 5% interest.
At the end of one year, you have $105. If you leave the $5 earned inside, the next year you will earn 105% x $105 = $110.25.
So the compounding effect has enabled you to earn $0.25 more for the second year. When taken over ten years, instead of earning $50 of interest from your $100 investment. You will earn much more.
At 4%, $100 will double to $200 in 18 years. If it was simple interest, you will only get $180 in 20 years.
this is due to the compounding effect.
1 person likes this
@BrainTeaser (1428)
• Pakistan
28 Apr 07
I guess till now you have understood what is compound interest right, so there are plenty of programs even available online that gives you compound interest , so you might get actually involved with them with investing a single buck in them and see how will it increase, so if interested in HYIP programs please feel free to ask me anything about these.
@cheongyc (5072)
• Malaysia
16 Jul 08
I think compound interest, means the interest base on new total after the previous interest has been factored in. It means the interest is base on the increasing total sum after more and more interest are added into it. In other words, it's a way of growing the lump sum money base on recursive interest rate. I believe a quick on the internet will give you much better explanation. I think nowadays all bank give compound interest for the fixed deposit and savings account. So you do not need to worry about it. Just look out for the best rate that you can get.
@ladym33 (10979)
• United States
8 Mar 09
Well there are things called amortization schedules that make things more confusing, but a simple explanation would be that if you invest $100.00 at a 1% interest rate at the end of the interest period you would have you would have $101.00 in your account which meant you earned $1.00 in interest. Then at the end of the next interest period you would earn the 1% based on the $101.00 amount, which means you would then have $102.01 in your account at the next interest period you would earn $1.02 and would now have 103.03. So essentially compound interest is interest earned on your previoius deposit, plus interest x the amount of the interest. The amount just keeps adding up as you go. Hopefully this was an understandable answer.
@ladym33 (10979)
• United States
29 Nov 09
Well it is not as good as it used to be, but it can add up over time. Let's say you put five dollars in the bank and 10% interest (this is unrealistic but will make the math easy). So lets say you get 10% interest at every quarter of the year. The first quaurter you would get .50 so your balance would be $5.50 so then the next quarter would earn that 10% on the $5.50 and you would get .55 and your total would then become $6.05 then you would earn 10% on that so you would make .61 cents, and then you would have 6.66 and then you would earn 10% on that. So as you can see everytime you earn interest it gets added to your balance and then the next time you earn interest it will be calculated using the new higher balance.
@oyenkai (4394)
• Philippines
10 Mar 09
I only know compound interest from Pension Plans - so basically if you put in 1000 then that earns you a 1% interest then you have 1010 in total and that in turn earns 1% so you get 1020.1 in total and so forth
In contrast to non-compound interest: you have 1000 then you earn 1% then you have 1010 in total. Then you earn another 1% so next you have 1020 because you only earned 1% of 1000 the second time, not 1% of the total (including earnings from interest).
Thanks for the response on my discussion!
