Confused about compound interest - is it worth it?

Alex_P_2

Hi

I’ve been playing about with a compound interest calculator inspiredtosave.com. It throws up some fantastic numbers based around what I “could” have in future... Are they accurate? If so, does anyone know why we weren’t taught this at school?

Also has anyone ever managed to really gain from it? I’m not talking about a few quid here and there, but some actual large numbers. It seems like it takes an awfully long time until you actually see the benefits. Therefore, I’m curious to know if anyone has succeeded. If so it might give me some motivation.

Thanks

Cynical Alex

Derivative

Compound interest indeed works and the exponential function is a lovely thing.

Simple maths really.
£1000 at 10% yield. Simply multiply the capital by 1.1 each year (assuming tax free).

1000.00
1100.00
1210.00
1331.00
1464.10
1610.51
1771.56
1948.72
2143.59
2357.95
2593.74
2853.12
3138.43
3452.27
3797.50
4177.25
4594.97
5054.47

17 years, five times the initial sum. That is, if you can find a way to get 10% yield consistently.

As opinions4u has stated you need to take into account inflation, and so you need something with a real return. However, remember that your personal rate of inflation may be more important than the CPI index - if you're aiming to buy technology, that generally gets cheaper in nominal and real terms.

kidmugsy

"does anyone know why we weren’t taught this at school?"

We were, but that was before the Forces of Progress got hold of the schools.

Lokolo

kidmugsy wrote: »

"does anyone know why we weren’t taught this at school?"

We were, but that was before the Forces of Progress got hold of the schools.

Not so sure, I'm not exactly old, only (ha) 22. I was taught it.

Derivative

I'm not sure the concept of money came up once in my secondary education and that was only a few years back now.

We did do the old "You have two pounds, you spend 57p on sweets, how much change do you have and what coins would make it", that's about it.

someone

I'm 21 and compound interest was definitely in Maths ... sure I've seen exam questions like

"John has £100 and saves it in an account paying 10% interest a year. What would the balance be in 5 years? Show your working"

The question is designed to show your able to spot compound interest and work it out.

Loughton_Monkey

someone wrote: »

I'm 21 and compound interest was definitely in Maths ... sure I've seen exam questions like

"John has £100 and saves it in an account paying 10% interest a year. What would the balance be in 5 years? Show your working"

The question is designed to show your able to spot compound interest and work it out.

A bit unfair not to give the answer!

I think Grade A would go so someone who said "This question is not valid. Firstly, you do not give John's tax status. If he is a taxpayer, it would depend upon whether the interest was actually credited annually, or only at the end of the 5 years. In any case, it depends upon whether or not the interest is re-invested. By the way, please tell me where John gets 10% interest from, since my dad keeps complaining he can't get a penny more than 5.25% on a 5 year fixed rate."

someone

Loughton_Monkey wrote: »

A bit unfair not to give the answer!

I think Grade A would go so someone who said "This question is not valid. Firstly, you do not give John's tax status. If he is a taxpayer, it would depend upon whether the interest was actually credited annually, or only at the end of the 5 years. In any case, it depends upon whether or not the interest is re-invested. By the way, please tell me where John gets 10% interest from, since my dad keeps complaining he can't get a penny more than 5.25% on a 5 year fixed rate."

(Checks mark scheme)
0 marks

ChiefGrasscutter

Depressing really that this sort of thing seems not to have taught to the OP either at school or by his/her parents.
When I was young the parents would have been expected to teach their offspring about 'money'.

slinga

You were lucky.

We used to have to find the compound interest on £2..13..4 1/2d over 6 years and 3 months at 1 3/4%.

And do that in our heads.

Milarky

Some very funny replies here, but a useful 'yardstick' is the so called 'rule of 70' (sometimes '72') This conveys the approximate 'doubling time' for a given lump (say £1000 in an account) just by dividing the number '70' by the annual percentage rate.

• So, at '10%' the time is about 7 years - rather than the '10' years we might initially suspect - and we can 'see' (seeing and appreciating being the real point of the exercise) that you could quadruple your money in just around 14 years
• .
• At '7%' doubling time is therefore about a decade (70%/7% - remember your units, class!) and 30 years is needed to increase eightfold (or should that be sevenfold? Discuss)
• .
• At '5%' it takes more like 14 years to double and over the same three decades your money increases by a factor of four - i.e. one less doubling.

The significance of rule of 70 is more applicable to real world concerns than personal finances [see 'Albert Bartlett' for that talk]