Compound Interest

Free Money!  Yes indeed if you understand a little something about compound interest. A quote from Albert Einstein:

“The most powerful force in the universe is compound interest”

Compound interest is a description of how something grows overtime and you need to understand it as an algebra student.  An easy way to describe compound interest is to use examples involving money.  Compound interest applies to many things so to be clear the topic is not a money concept only.  Ok back to the money- yes!  Lets say you put $100 in a savings account paying 6% a year meaning that the end of 1 year the bank will pay you $6 or 6% of $100 for the right to hold your $100. So at the end of the first year you have $100 + $6 or $106 in your savings account.  Now lets say you have the bank hold your money for another year at the same savings rate of 6%.  At the end of the second year how much money will the bank give you as a reward to hold your $106?  Well it will be 6% of $106 which is .06(106) = $6.36.  Can you see what’s happening? As long as you keep your money in the savings account the bank will be paying you more and more each year in interest.  The increase from $6 to $6.36 does not seem much but after 30 or 40 year the rewards are huge!  No joke Wall Street, 401ks, Mutual Funds, etc depend on compound interest to generate massive profits and overtime not much can beat the effects of compound interest. The notes below go over the compound interest formula. Pay special attention to what the variables stand for and be very careful when simplifying problems- many students make order of operation mistakes so watch out!  Ok have fun and good luck growing that free money!


 

 

some key topics that involve compound interest:

* percent
* powers and exponents
* exponential functions
* logarithms
* finance




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