I don’t understand it like at all. I’ve heard it’s beneficial moneywise but I don’t understand why or how to invest in compounds??
Reading online it seems that it’s beneficial however that’s all I seem to understand so if it is something to look into and invest in I’d like to Understand it better 🙂
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I think the better way to think about it is to compare it to it’s opposite: simple interest.
In a simple interest account, the interest you earn on the account is only calculated using the initial principal. So, consider a US treasury security for example. The interest earned on that is simple, thus if you buy a $100 treasury note at 3% interest, you get $3 per year no matter what. Thus after 10 years, you have $130.
In compound interest, the interest you accumulate is added to the principal, thus the interest earned increases year over year. So, consider putting $100 in an account that earns 3% compounding per year. After the first year, you’d earn 3% interest and thus get $3. But the second year, you get 3% interest on $103, not just $100. Thus you’d get $3.09 of interest rather than just $3. And this builds year after year. Thus, after 10 years, you have $134.39.
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