Compound Interest Formula: The Effect Of Compounding Periods
The compound interest formula, as we all know, is used in knowing to the outcome of a savings or a debt that uses the compound interest principle. There are certain parts to the compound interest formula. One is the period of compounding. Does it affect that much of the outcome? We are going to look at the difference of the outcome when interest gets compounded every day and every month in this article. Will it really affect that much of the whole debt of savings if the money is compounded frequently and not so frequently? With this article and using the compound interest formula, we will show you the answer.
A Straight Answer You Will Get From The Compound Interest Formula
Before discussing the whole compounding period and its effect using the compound interest formula, this is the answer to your question. The truth is it doesnt affect that much of the outcome. However, having a cash amount that is more than six figures is something. This is why if you are saving, it is recommended to start early to be able to reach a certain amount that will really give you big profits. For debts, of course, the only answer is to pay off early to save yourself from interests. Since, there are a lot of people with this question in mind, I bet that it is time that you get the answer straight. And that is what we just did in the above statement. If you want, you can even use the compound interest formula to check. For a small amount of cash, it is only cents or some dollars different with daily and monthly interest compounding. If you are not satisfied with just a statement then let me give you a savings example together with a computation using the compound interest formula.
The scenario and computation using compound interest formula:
The amount to be invested is ten thousand dollars. The investment will last for a year. The yearly rate is 5% for both monthly and daily compounding. Now, after a year which do you think will have more money and what is the difference of the daily to monthly compounding of interest?
For the monthly compounding of interest:
The first thing we need to do before computing the answer is dividing the 5% rate to twelve. Why? This is because we need to get the percentage of the rate of the monthly compounding. The monthly rate is .0416667 or simply .05.
Using the compound interest formula, let us solve:
$10,000 x (1 + .05/12)12 = $10511.62
For the daily compounding of interest:
Again we need to divide the rate of interest. Unlike the first one, the rate is now going to be divided to 365 because we need to know the daily interest. Therefore, 5% divided by 365 is .0136986% or just simple .0137%.
Using the compound interest formula, let us solve:
$10,000 x (1 + .05/365)365 = $10,512.67
As we all predicted, the daily compounding is still better however, it is only higher by a dollar and point zero five cents. It is very clear with the use of compound interest formula.
A Straight Answer You Will Get From The Compound Interest Formula
Before discussing the whole compounding period and its effect using the compound interest formula, this is the answer to your question. The truth is it doesnt affect that much of the outcome. However, having a cash amount that is more than six figures is something. This is why if you are saving, it is recommended to start early to be able to reach a certain amount that will really give you big profits. For debts, of course, the only answer is to pay off early to save yourself from interests. Since, there are a lot of people with this question in mind, I bet that it is time that you get the answer straight. And that is what we just did in the above statement. If you want, you can even use the compound interest formula to check. For a small amount of cash, it is only cents or some dollars different with daily and monthly interest compounding. If you are not satisfied with just a statement then let me give you a savings example together with a computation using the compound interest formula.
The scenario and computation using compound interest formula:
The amount to be invested is ten thousand dollars. The investment will last for a year. The yearly rate is 5% for both monthly and daily compounding. Now, after a year which do you think will have more money and what is the difference of the daily to monthly compounding of interest?
For the monthly compounding of interest:
The first thing we need to do before computing the answer is dividing the 5% rate to twelve. Why? This is because we need to get the percentage of the rate of the monthly compounding. The monthly rate is .0416667 or simply .05.
Using the compound interest formula, let us solve:
$10,000 x (1 + .05/12)12 = $10511.62
For the daily compounding of interest:
Again we need to divide the rate of interest. Unlike the first one, the rate is now going to be divided to 365 because we need to know the daily interest. Therefore, 5% divided by 365 is .0136986% or just simple .0137%.
Using the compound interest formula, let us solve:
$10,000 x (1 + .05/365)365 = $10,512.67
As we all predicted, the daily compounding is still better however, it is only higher by a dollar and point zero five cents. It is very clear with the use of compound interest formula.
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