Question 1

How often should interest compound for best returns?

Accepted Answer

Daily compounding gives the best returns, followed by monthly, quarterly, and annual. However, the difference is small; for example, 0,000 at 5% over 10 years grows to 6,487 with daily compounding and 6,289 with annual compounding, so the interest rate is more important than how often it compounds.

Question 2

What's the difference between simple and compound interest?

Accepted Answer

Simple interest is calculated only on the principal amount. Compound interest is calculated on both the principal and accumulated interest, causing exponential growth. For example, $10,000 at 7% grows to $19,672 with simple interest vs $38,697 with compound interest over 20 years.

Question 3

When should I start investing for compound interest to work?

Accepted Answer

Start immediately—time is more valuable than amount. Due to compound interest, investing 00/month from age 25-35 (only 4,000 contributed) grows larger than investing 00/month from age 35-65 (2,000 contributed) at 7% return. The first 10 years of compounding are incredibly powerful.

Question 4

How often should interest compound for best returns?

Accepted Answer

Daily compounding gives the best returns, followed by monthly, quarterly, and annual. However, the difference is small; for example, $10,000 at 5% over 10 years grows to $16,487 with daily compounding and $16,289 with annual compounding, so the interest rate is more important than how often it compounds.

Question 5

How do investment fees affect compound interest?

Accepted Answer

Fees significantly erode compound returns over time. A 1% annual fee might seem small, but it can reduce your 30-year balance by 25% or more. For example, 00,000 growing at 7% for 30 years becomes 61,000, but with a 1% fee it

Question 6

What's a realistic annual return for investments?

Accepted Answer

The S&P 500 has historically averaged around 10% annually before inflation (7% after inflation). Conservative portfolios typically return 5-6%, moderate portfolios 7-8%, and aggressive portfolios 9-10%. For long-term retirement planning, most financial advisors recommend using 6-7% as a reasonable, conservative estimate.

Question 7

When should I start investing for compound interest to work?

Accepted Answer

Start immediately—time is more valuable than amount. Due to compound interest, investing $200/month from age 25-35 (only $24,000 contributed) grows larger than investing $200/month from age 35-65 ($72,000 contributed) at 7% return. The first 10 years of compounding are incredibly powerful.

Question 8

How do investment fees affect compound interest?

Accepted Answer

Fees significantly erode compound returns over time. A 1% annual fee might seem small, but it can reduce your 30-year balance by 25% or more. For example, $100,000 growing at 7% for 30 years becomes $761,000, but with a 1% fee it's only $574,000—a $187,000 difference. Always minimize fees by choosing low-cost index funds.

Compound Interest Calculator

The Mathematics and Power of Compound Interest

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Compound Interest

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Securities and Exchange Commission: Compound Interest Basics

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