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Let's get some
bigger bucks flowing here...
If
we invest $60,000 in an account that pays 9% compounded
semi-annually, how much will we have in the account in
25 years?
initial
amount invested = $60,000
At the end of
each period (six months), we'll be earning 4.5%...
So, each $1.00 will turn into $1.045...
growth factor = $1.045
number of
periods = 50
What if we make
the same investment, but compound it quarterly?
initial
amount invested = $60,000
At the end of
each period (every 3 months), we'll be earning 2.25%...
( That's 9% divided by 4 ---- .09 / 4
= .0225 )
So, each $1.00 will turn into $1.0225...
growth factor = $1.0225
number of
periods = 100
See how we made
more money? Will we make even more if we compound
it monthly?
initial
amount invested = $60,000
At the end of
each period (every month), we'll be earning 0.75%...
( That's 9% divided by 12 ---- .09 /
12 = .0075 )
So, each $1.00 will turn into $1.0075...
growth factor = $1.0075
number of
periods = 300
So, the more time we compound,
the more money we make!! Cool.
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Most standard savings accounts compound quarterly... But, some
investments, like certificates of deposit (CDs) DO
compound monthly.
But, there's one trick to this... Banks can
compound as often (or not often) as they like and they
won't tell you how they're doing it -- UNLESS YOU ASK!
It won't make a lot of difference unless you have a big
chunk of money... But, check out these numbers: |
Invest $1000
at 3% compounded yearly
(just once a year) for 10 years...
You'll have $1343.92.
Invest $1000
at a lower rate, 2.98%, compounded
monthly for 10 years...
You'll get more interest and have
$1346.66. Sure, it's only a few bucks, but
every penny counts in the long run!
Check out the same investments with
some big bucks for a longer time:
Invest $100,000
at 3% compounded yearly for
45 years... You'll
have $378,159.58.
Invest
$100,000 at 2.98%
compounded monthly for 45
years... You'll have
$381,651.45.
The difference is
$3491.87 and that'll buy
something fun!
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