# Compounding interest

291 views

I’ve gotten as far as buying \$1000 worth of XEQT in TFSA do I just leave it for 30 years now?

In: Economics

You usually don’t earn any interest on shares and stocks.

The shares you buy may go up in value, but you will not have more shares.

You may also earn dividends and reinvesting those over and over again, would be sort of like compound interest, but this is not usually the main way to increase the value of your .

On top of what the other commenter said, compound interest, while good, isn’t magic.

For simplicity, I use a savings account with a 5% interest rate.

So I deposit \$1000 today. Next month, the bank calculates how much interest to give me. It calculates it would owe me \$1000 x 5% yearly interest = \$50 interest for a year. But it’s been a month, so they divide by 12 and give me \$4.17. It goes into my savings account.

Next month, they do the same thing, except now I start with \$1004.17. This month I get \$4.18 in interest, slightly higher than last month.

This process repeats, each month giving me 5% interest on a bit more money. Eventually, after not touching it for 30 years, I will have \$4,467.74. So 5% interest over 30 years made my account grow by about 4.5 times.

So what do you do now? It depends on why you invested.

r/personalfinance is a fantastic place to learn about this question, I would stop what you’re doing and go read their “Prime Directive” and then ask questions like this in that sub, you’ll get much higher quality results there.

Actually, it looks like you might Canadian in which case r/PersonalFinanceCanada is a great resource as well.

Compound interest is where future interest calculations include previous interest. Imagine you borrowed \$100 at 10% assessed monthly. If it is simple interest, every month, there is an additional \$10 of interest. If it is compound interest, the first month there’s \$10 of interest, the second month is \$11 of interest because it’s being calculated off of 110 instead of off of just the principal.

Stock funds don’t earn interest, they see share price growth. It too compounds…. 10% this year would \$100 on your \$1000. If it’s worth \$2700 years from now and increases 10%, you’d see gains of \$270.

There are some good comments already, but let me provide a different perspective.

Perhaps obviously, there are two parts that make up compound interest: “compound” and “interest”.

Interest is a way in which the owner of capital is paid for providing their capital. It’s a predetermined cash payment based on a percentage of the value of capital the owner holds.

Compound refers to the fact that the “baseline” amount of money that you have is updated regularly (and generally automatically) to include new money you recently received from your investment. The result is that your money grows exponentially.

Now, when people say “I want compound interest” it’s often because they’ve been warned of products that do not compound, or at least do not compound automatically, so require lots of impractical manual work. What they really mean is “I want exponential growth”.

Stocks, or funds (collections of stocks) like ETFs do also grow in value exponentially. However it’s incorrect to say that they offer “compound interest” because stock returns come in the form of dividends, appreciation, or return or capital (not interest). But anything whose growth is measured in percent that has a regularly updating baseline value is growing exponentially. This is usually what people want.

In summary: XEQT does not offer compound interest, but it does offer (the likely prospect of long-term) exponential growth, which might be what you want.