Compound Interest Monthly Online Quiz

Teaching kids power of monthly compounding

Compound interest is a powerful financial tool that can help you grow your savings over time. When you earn compound interest, you not only earn money on your initial principal, but you also earn interest on any accumulated interest from previous periods. This can lead to your money growing at an exponential rate.

One way to earn compound interest is through a savings account or a certificate of deposit (CD) at a bank or credit union. These accounts generally pay interest on a regular basis, such as monthly or annually. By opting to have your interest paid out on a monthly basis, you can take advantage of the power of compound interest more quickly. Here’s an example of how compound interest works:

Imagine you have $1,000 saved in a savings account that earns 2% interest per year, compounded monthly. If you leave the money in the account for one year and opt to have the interest paid out to you monthly, here’s what your balance would look like:

Month 1: $1,000 x 2% = $20 in interest New balance: $1,000 + $20 = $1,020

Month 2: $1,020 x 2% = $20.40 in interest New balance: $1,020 + $20.40 = $1,040.40

As you can see, each month your balance grows by a little bit more, because you’re earning interest on the previous month’s balance, which includes the interest you earned in the previous month. By the end of the year, your balance would be $1,081.17, which is $81.17 more than you started with.

Now, let’s say you decide to leave the money in the account for 10 years and continue to have the interest paid out to you monthly. After 10 years, your initial $1,000 investment would have grown to over $2,000, thanks to the power of compound interest.

It’s important to note that the amount of compound interest you earn will depend on the interest rate of your savings account or CD, as well as the frequency at which interest is compounded. Higher interest rates and more frequent compounding will result in more rapid growth of your savings.

It’s also worth noting that compound interest can work against you if you have debt, such as credit card balances or a mortgage. In these cases, you’ll be charged compound interest on your outstanding balances, which can make it more difficult to pay off your debts. It’s generally a good idea to focus on paying off high-interest debt as quickly as possible to minimize the amount of compound interest you’ll be charged.

Overall, compound interest can be a powerful tool for growing your savings over time, especially when you opt to have your interest paid out on a regular basis, such as monthly. By starting to save and invest early, you can take advantage of the power of compound interest to build a strong financial foundation for your future.