In this post, I will show you the importance of the compounding period in calculating the future value of money.
The setup for this example is as follows: You have $10,000 deposited in a saving account with a fixed annual interest of 5% for ten years.
Let's quickly calculate what happens to your money at the end of ten years with annual compounding:
Your $10,000 becomes $16,288.95 in 10 years with a 5% fixed annual interest rate compounded annually.
Now let's look at what happens if the money is compounded in different frequencies. To do that, we need to introduce a modified formula:
Monthly Compounding
Your $10,000 becomes $16,456.98 in 10 years with a 5% fixed annual interest rate compounded monthly. This (monthly compounding) is larger than the previous case (yearly compounding) by $168.03.
Weekly Compounding
Your $10,000 becomes $16,487.20 in 10 years with a 5% fixed annual interest rate compounded weekly. This (weekly compounding) is larger than the yearly compounding by $198.25 and larger than the monthly compounding by $30.22.
Official Curriculum for CFA Level I: https://amzn.to/414Ev3r
An easy-to-read book for personal finance: https://amzn.to/3AP5aH2
Make a one-time donation
Make a monthly donation
Make a yearly donation
Choose an amount
Or enter a custom amount
Your contribution is appreciated.
Your contribution is appreciated.
Your contribution is appreciated.
