Question

What is compounding? Give an example to show the power of compounding.

Please dont copy and paste. looking for original answers only!

Answer 1

Power of compounding is the aggreagte increase in value of investment over a period of time.

For example you invest $100 at start of your college when you are 18. The rate is 5% over the years. When you retire at 60, the value of your investment is: 100*1.05^42=$776.16
The power of compounding makes your investment 7 times.

For example if you have investmented $100 every month:
rate = 0.05/12=0.004167
=FV(0.004167,42*12,100)

=$171,134.87
Hence you shall receive $171,134.87 at retirment when your total investment was $100*12*42=$50,400