Question

Explain the concept of compounded interest, and how this compounding may benefit one’s retirement savings. For example, (not that any of us will receive a 100% interest compound on a daily basis), but imagine you began with a single penny. If you were able to compound and double your investment each day, how much would you have accumulated in a mere 30-day period? The answer is amazing … at $5,368,709.12. Share examples your explanation of compounding interest.

Answer 1

There is one most fascinating thing about compound interest that you get interest on interest. i.e. the interest that you earned on day 1 on principal amount shall be eligible for day 2 interest along with principal. For example, if you invest $100 and the daily compound interest rate is 15%, then interest for day 1 shall be $15. The fascinating thing is that interest for day 2 shall be calculated on $100 plus $15 i.e. $115 and not on only $100. This is the reason a single cent is giving $5,368,709.12 in 30 days at 100% daily compound interest rate. Because the 1 cent will become 2 cent on day 2 and 4 cent on day 3 and shall go on like this to give $5,368,709.12 in the 30 day period.