Compounding is the practice of iterating the value of a given investment or rate of return at a given % value for a period of time.

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practice of iterating the value of a given investment or

rate of return at a given percentage value of reach

period of i measured bottom line to get the most

out of com pounding invested and don't touch it Okay

so your prototypical investment sits there in compounds at ten

percent a year right around the average stock market's performance

over the last one hundred fifty years yourself So if

you have one hundred grand after one year it's the

one hundred ten thousand after two years it's one hundred

twenty one thousand that extra grand is going to be

the you know star of the show so pay attention

Here we come pound at one hundred ten grand to

get there not one hundred grand and after three years

it's one hundred thirty three thousand one hundred dollars and

so on And you can kind of look at this

chart here and you think about it and yes we

rounded numbers of it here But you get the gist

After ninety six years and change of compounding your hundred

grand you saved your way to being Ah billionaire And

also yes it's Too bad you're now too old to

really enjoy it Sorry but power of compound ing is

pretty impressive huh You've made ten thousand times your money

in a hundred years Key idea discipline Fifty shades of

saving that is you didn't take out even up penny

from your original investment The whole thing compounded year after

year after year you took no bling budget nor no

car cash nor no toy tax A rich uncle larry

has died Crocodile tears gives a break He's left you

fifty grand You in Vast like you're a little old

lady from peoria with blue hair driving a old cadillac

at two percent in a bank savings aqui count How

long till you can afford the hundred grand maserati You've

been ogling Well you'd need to double your money Well

remember that rule of seventy two thing It's the calculator

you use to figure out how many years it takes

for a compound investment to double given a continuous interest

rates That is if you invested ten percent annual return

It takes you seven point two years to double your

money invested twelve percent and it takes only six years

But in this case your little bank account at two

percent takes you seventy two divided by two or thirty

six years to double your money You'll likely be a

tad old to really enjoy it And it's likely that

by then that same hundred thousand dollar maserati you wanted

will cost three hundred grand So yeah i don't do

that All right Another helpful tool The compound ing formula

Here's How it looks in plain english Wealthy eventual value

equals the initial amount invested times the quantity one plus

the interest rate at which the investment is compounding through

the power of years All right how about some numbers

here That was silly Ma's money fifty grand times quantity

one plus point two two thirty six That help Alright

notice that it's point zero two here point to would

be twenty percent compound raid and get you that car

really quickly Three and a half years Way better And

in more normal speak Nomenclature The fifty k Is the

present value i eat the value today of the dough

uncle larry left you the future value is the ma's

money and to be more finance e you'll see are

a lot here That's the rate of return of your

investment i either two percent of the twenty percent or

the whatever you'll also see in a lot that's the

number of periods in which you are come pounding that

can get confusing So listen up We could have given

you a curveball and said that an internet company was

growing trafficked and per cent a month Who And then

we ask you how much traffic it'll have in three

years At that rate if it has started out with

ten thousand page visits a day today what does that

mean Well it means the internet company will do grade

for about six puns than flattened growth and then decline

and that you can't trust the numbers any internet company

gives you with growth projections like that that's just said

from the dark cynical side cigar chewing part of shmoop

so you can kind of move on now All right

well you actually answer the problem like this Well if

i back out the numbers to be an annual compound

ng raid in extrapolating the ten percent a month and

said that it grows at one hundred twenty percent a

year then that would be ten thousand times one plus

the quantity one point two to the third power which

equals ten point six five So in three years my

ten thousand page visits a day will be ten point

six five times ten thousand or one hundred six thousand

four hundred eighty Page visits a day but that's not

really with questions implying it's are about the voice there

It gives a monthly compound period You can't just back

out an annual period willy nilly The right way to

answer this question to a formulas more like ten thousand

times quantity one plus point one to the thirty sixth

power that's thirty six ends or thirty six periods of

calm pounding to get three hundred nine thousand one hundred

twenty six and huge difference from that much smaller one

hundred six thousand change paid view number Right Well the

period here is one month and we compound everything each

month Not each year So it pulls our basis against

which were compounding much closer and ends up generating a

much bigger number At the end the annual rate on

any given month is the same in both cases It's

One hundred twenty percent But the fact that we compounded

monthly in the second case gave us three times the

number of changes the sell ads against at the end

of the year Three rainbow and let's Just hope that 00:05:35.834 --> [endTime] pot of gold comes with compound interest No