In class we have been learning a lot about exponential growth. An interesting aspect of exponential growth is how it works when dealing with money. Compound interest is a very important function of exponential growth and if used properly can earn a person a whole lot of money. I once read some where that if you have 17,000 dollars invested in a conservative money market account by the time you were 20, that by the time you were 50 you would be a millionaire. However the same is not the case if you invested just a few years later... and that is all because of compound interest. What compound interest is, is interest making money on interest in the most simple terms. When money is put into the stock market or any market where interest is being made then, IF LEFT ALONE, eventually money will begin to be generated from the interest which has already been put into the account. For instance if you invest 1000 dollars into an account with 10% interest annually then one year later there will be 1100 dollars in the account. Interest on this account the next year would gain 110 $ oppose to 100 $ and overtime the increments become much greater.
Say for instance one invests 20,000 by the time they are 20 years old in a 5 % market (is reasonable)
21- 21,000
22- 22,500
23- 23,625
24- 24,806
25- 26,046
26- 27,348
27- 28,715
28- 30,150
29- 31,657
30- 33,239
31- 34,900
32- 36,645
33- 38,477
34- 40,400
35- 42420
36- 44541
37- 46768
So, within 15 years the money doubled on its own and this is with a low level of interest. With an aggressive market (8-10%) the 100,000 mark would have already been made!
The example made the concept easy to understand. Great job!
ReplyDeleteGreat example! This made it so much interesting and easier to understand. I liked your example in the first part about how you could become a millionaire by 50.
ReplyDeletespencer,
ReplyDeletei like the way your brain was thinking regarding this lesson and your example. however, i was a little confused as to whether your example is talking about 5%/year compounded annually or not. i am assuming that is what you meant to say, but after 15 years the value on an investment of $20000 with 5% annual interest would be $41578. good segue into the topic, though. thanks for being a positive contributor to the class this semester. it was great having you. =]
professor little