You invest $200 in a savings account that earns 4% interest each year. If you do not touch the account for three years, how much money will you have in your account after those three years?
This problem is not as simple as it first seems. We have to deal with compound interest. Find the Year-End Total each year before calculating the following year’s interest.
At the end of three years your bank account now has $224.97. You have earned $24.97 just by sitting around doing nothing. Can't complain about that!
How NOT to Do It:
If you had combined the interest for the three years (4% × 3 years = 12%), then applied the interest, you would have earned less than when compounding it:
After three years your total would have been $200 + 24 = $224, a whopping 97¢ less than compound interest.
(Yeah, that can barely buy a pack of gum, but imagine investing $200,000 instead of $200, and you can see that this really makes a difference.)