Compounding Interest

One of the most complicated parts of deciphering the finance accounts is determining how interest is calculated. What does it mean for interest to compound annually as opposed to quarterly? To explain in a simple way is not really easy to do. Whatever you interest rate is, it will be divided by the number of times is it compounded per year, and whatever is in the account when they calculate it is what the interest is added to. Sometimes an example would be easier to illustrate how it works. Suppose that your interest rate is 10% annually and you deposited, for the sake of our simple transaction, $100.00 into that account, at the end of the year you would have 10% of that $100.00 added to your account. So if you deposited $100.00 on January 1st, then on December 31st you would have $110.00. Now let us take our same $100.00 deposited on January 1st and put it into an account that compounds our same rate of 10% interest semiannually. In June it would calculate half of our interest rate, or 5%, and we would have $105.00. Then on December 31st the remaining 5% would be calculated on the $105.00 that we now had in the account, bringing our balance to $110.25. Now let us do the same thing only with quarterly compounding interest. January 1st we would have our same $100.00, at the end of the first quarter we would add 2.5% interest for $102.50.

At the end of the second quarter, our 2.5% interest on $102.50 becomes $105.06, third quarter would increase of our 2.5% to %105.06 brings our total to $107.69, and finally on December 31 we would add our 2.5% of $107.69 and our total of the same $100.00 original deposit will be $110.38. As you can see, the more times your interest compounds per year, they more money you will make. Now we are only using $100.00 for our example, so the differences are less than .40 cents, but if this were a million dollars, the difference between interest that compounded annually and quarterly would be pretty close to four thousand dollars. When you are talking about interest and building your money, every little bit helps, and the most important thing that you will need to grow your money for you has nothing to do with bank accounts, it is time. The sooner you get those interest bearing accounts started and working for you, they will continue to build and build, and time is the only thing that will get you where you want to be financially. So start a savings plan for yourself right away. Find bank accounts that work for your situation and jump in. Educate your children on bank accounts and financial accounts and encourage them to start young. Teach them to save for their future and that having everything you have ever wanted will never compare with having fiscal knowledge and financial security. If we can pass that simple lesson onto our children and really understand and live it ourselves, we will prosper as a nation once again and never again have our banking industry in such turmoil.