Maximizing Investment Returns with Compounded Interest

TLDR; Understanding compounded interest formula, calculations, and impact of compounding frequency on investment returns.

💰 Interest Accounts

Most people have checking or savings accounts that earn interest.

Banks use compounded interest to calculate the interest paid each month.

This video focuses on using compounded interest to solve interest problems.

📈 Formula Explanation

The formula for compounded interest involves the principal amount (P), the interest rate (I), the number of compounds per year (N), time in years (T), and the resulting amount (A).

The interest rate must be expressed as a decimal, and time must be in years.

Converting percentages to decimals involves removing the percentage symbol and dividing by 100.

⚙️ Example Calculation

An example is given where $1000 is invested at 8% interest compounded quarterly for 3 years.

The formula is applied, considering the quarterly compounding, resulting in an amount of $1268.24 after 3 years.

This example demonstrates the practical application of the compounded interest formula.

🔄 Change in Compounding Frequency

The impact of changing the compounding frequency from quarterly to daily is explored.

Using the same initial amount, interest rate, and time, the resulting amount is calculated with daily compounding, yielding approximately $1271.22.

The difference in returns highlights the impact of compounding frequency on investment growth.

💡 Frequency Impact

Compounding interest on a daily basis yields slightly more returns compared to monthly compounding.

The speaker emphasizes that even small differences in compounding frequency can have a significant impact, especially for large sums of money.

This underlines the importance of understanding the frequency of compounding for maximizing investment returns.