ShmoopTube

00:00

Principles of finance Ah la shmoop Calm pounding All right

00:07

people we're speaking to you in monotone as you repeat

00:11

after us compound being comes yes we're hypnotizing you it's

00:17

your golden ticket to wealth and bankruptcy should you use

00:21

the force with abandoned specifically calm pounding refers to the

00:25

practice of iterating the value of a given investment or

00:28

rate of return at a given percentage value of reach

00:30

period of i measured bottom line to get the most

00:33

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

00:36

so your prototypical investment sits there in compounds at ten

00:40

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

00:43

over the last one hundred fifty years yourself So if

00:45

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

00:47

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

00:50

twenty one thousand that extra grand is going to be

00:54

the you know star of the show so pay attention

00:57

Here we come pound at one hundred ten grand to

01:00

get there not one hundred grand and after three years

01:02

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

01:05

so on And you can kind of look at this

01:07

chart here and you think about it and yes we

01:09

rounded numbers of it here But you get the gist

01:11

After ninety six years and change of compounding your hundred

01:15

grand you saved your way to being Ah billionaire And

01:19

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

01:21

really enjoy it Sorry but power of compound ing is

01:24

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

01:28

in a hundred years Key idea discipline Fifty shades of

01:32

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

01:34

from your original investment The whole thing compounded year after

01:38

year after year you took no bling budget nor no

01:41

car cash nor no toy tax A rich uncle larry

01:46

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

01:50

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

01:53

lady from peoria with blue hair driving a old cadillac

01:57

at two percent in a bank savings aqui count How

02:01

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

02:05

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

02:08

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

02:10

you use to figure out how many years it takes

02:12

for a compound investment to double given a continuous interest

02:16

rates That is if you invested ten percent annual return

02:19

It takes you seven point two years to double your

02:21

money invested twelve percent and it takes only six years

02:25

But in this case your little bank account at two

02:27

percent takes you seventy two divided by two or thirty

02:30

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

02:33

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

02:36

by then that same hundred thousand dollar maserati you wanted

02:39

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

02:42

that All right Another helpful tool The compound ing formula

02:45

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

02:48

equals the initial amount invested times the quantity one plus

02:51

the interest rate at which the investment is compounding through

02:54

the power of years All right how about some numbers

02:56

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

02:59

one plus point two two thirty six That help Alright

03:02

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

03:05

be twenty percent compound raid and get you that car

03:07

really quickly Three and a half years Way better And

03:10

in more normal speak Nomenclature The fifty k Is the

03:13

present value i eat the value today of the dough

03:16

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

03:20

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

03:23

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

03:26

investment i either two percent of the twenty percent or

03:29

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

03:31

number of periods in which you are come pounding that

03:35

can get confusing So listen up We could have given

03:37

you a curveball and said that an internet company was

03:40

growing trafficked and per cent a month Who And then

03:44

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

03:46

years At that rate if it has started out with

03:49

ten thousand page visits a day today what does that

03:51

mean Well it means the internet company will do grade

03:54

for about six puns than flattened growth and then decline

03:57

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

04:00

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

04:03

from the dark cynical side cigar chewing part of shmoop

04:07

so you can kind of move on now All right

04:08

well you actually answer the problem like this Well if

04:11

i back out the numbers to be an annual compound

04:13

ng raid in extrapolating the ten percent a month and

04:16

said that it grows at one hundred twenty percent a

04:18

year then that would be ten thousand times one plus

04:22

the quantity one point two to the third power which

04:25

equals ten point six five So in three years my

04:29

ten thousand page visits a day will be ten point

04:32

six five times ten thousand or one hundred six thousand

04:35

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

04:38

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

04:40

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

04:44

out an annual period willy nilly The right way to

04:47

answer this question to a formulas more like ten thousand

04:50

times quantity one plus point one to the thirty sixth

04:53

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

04:57

calm pounding to get three hundred nine thousand one hundred

05:00

twenty six and huge difference from that much smaller one

05:04

hundred six thousand change paid view number Right Well the

05:07

period here is one month and we compound everything each

05:11

month Not each year So it pulls our basis against

05:15

which were compounding much closer and ends up generating a

05:18

much bigger number At the end the annual rate on

05:21

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

05:24

One hundred twenty percent But the fact that we compounded

05:27

monthly in the second case gave us three times the

05:30

number of changes the sell ads against at the end

05:32

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

Full Transcript