Compound Interest Explained in One Minute
Summary
TLDRThe script compares the investment strategies of John and Lisa, who both invest $1,000 at a 10% annual interest rate. John withdraws his $100 interest each year, leaving him with $4,000 after 30 years. Lisa reinvests her interest, earning compound interest, and accumulates $17,449.40, illustrating the power of compounding over time.
Takeaways
- 🏦 John and Lisa both invest $1,000 in a bank offering a 10% annual return.
- 💸 John withdraws the interest each year, leaving his principal intact.
- 💰 Lisa reinvests her interest, allowing it to compound over 30 years.
- 🔢 After one year, John has $1,100, taking out $100 interest, leaving $1,000 principal.
- 📈 Lisa's account grows to $1,100 after one year, without withdrawing interest.
- 📊 In subsequent years, Lisa earns interest on the accumulated amount, not just the initial principal.
- 💲 By the 30th year, Lisa's account has grown to $17,449.40, significantly more than John's.
- 📉 John's account remains at $1,100 each year, taking out $100 interest, ending with $4,000 total after 30 years.
- 📚 The power of compounding is evident as Lisa's investment grows four times more than John's.
- 💡 The example illustrates the importance of reinvesting interest for long-term financial growth.
Q & A
What is the annual interest rate offered by the bank in the script?
-The bank offers an annual interest rate of 10%.
How much does John invest in the bank?
-John invests $1,000, which is referred to as the principal.
What does John choose to do with the interest earned each year?
-John chooses to spend the interest each year and keeps only the principal in the bank.
How much interest does John earn in the first year?
-John earns $100 in interest in the first year, which is 10% of his $1,000 principal.
How much money does John have in his account after 30 years if he withdraws the interest each year?
-After 30 years, John will have $4,000 in total, which includes his initial principal of $1,000 and the interest of $100 per year for 30 years.
What is Lisa's investment strategy compared to John's?
-Lisa chooses to save for 30 years without withdrawing the interest, allowing it to compound annually.
How does the interest earned by Lisa differ from John's after the first year?
-After the first year, Lisa earns interest not only on her initial $1,000 but also on the interest earned in the first year, resulting in more than $100 for the second year.
What is the formula for calculating the amount in Lisa's account after each year?
-The amount in Lisa's account after each year is calculated by taking the previous year's total and adding 10% of that total.
How much does Lisa have in her account after 30 years?
-After 30 years, Lisa has $17,449.40 in her account.
What is the difference in the final amount between John and Lisa after 30 years?
-After 30 years, Lisa has over four times more money than John, with $17,449.40 compared to John's $4,000.
What is the key concept illustrated by the difference in the final amounts between John and Lisa?
-The key concept illustrated is the power of compound interest, where reinvesting the interest can lead to significantly higher returns over time compared to withdrawing it annually.
Outlines
💼 Investment and Interest Calculation
The paragraph discusses a scenario where John and Lisa each invest $1,000 in a bank offering a 10% annual return. John chooses to withdraw the interest each year, leaving his principal intact, while Lisa allows her investment to compound over 30 years. John's account grows to $1,100 each year, from which he withdraws $100 annually, resulting in a total of $4,000 after 30 years, including his principal. Lisa's account compounds, meaning each year she earns interest on the accumulated amount, not just the initial principal. After one year, she has $1,100, and by the end of the 30th year, her account has grown to $1,749.40, which is significantly more than John's due to the power of compound interest.
Mindmap
Keywords
💡Bank
💡Return
💡Principal
💡Interest
💡Compound Interest
💡Invest
💡Spend
💡Save
💡Annual
💡Account
💡Year
Highlights
Bank offers a generous 10% annual return on investment.
John and Lisa each invest $1,000 as principal.
John spends the interest each year, keeping only the principal in the bank.
Lisa saves for 30 years without withdrawing the interest.
John earns $100 interest per year, totaling $3,000 over 30 years.
After 30 years, John's total account balance is $4,000.
Lisa's account grows annually with compound interest.
After one year, Lisa's account has $1,100.
In the second year, Lisa earns interest on $1,100, totaling $1,210.
By the third year, Lisa's account grows to $1,331.
After 30 years, Lisa's account reaches $17,449.40.
Lisa's final account balance is over four times more than John's.
The power of compound interest is demonstrated in Lisa's investment strategy.
John's strategy results in a total return of 100% over 30 years.
Lisa's strategy results in a total return of 644.94% over 30 years.
The importance of reinvesting interest for long-term growth is highlighted.
A clear comparison between spending interest and reinvesting it for compound growth.
The transcript illustrates the long-term benefits of saving over spending.
Transcripts
let's assume a very generous Bank offers
to pay John and Lisa a return of 10% per
year and they each invest $1,000 called
the principal john wants to spend the
interest each year and only keep the
principal in the bank while Lisa wants
to save for 30 years so she doesn't take
the interest out each year in John's
case the 10% amount to $100 each year so
after one year he'll have eleven hundred
dollars in his account out of which
he'll take a hundred dollars after the
second year he'll once again have eleven
hundred dollars in his account out of
which he'll take a hundred dollars after
the thirtieth year he'll have eleven
hundred dollars as usual and take $100
he will be left with a thousand dollars
in his account so his principal and the
returns he made amount to a hundred
dollars multiplied by 30 so another
three thousand dollars a grand total of
four thousand dollars that he made over
30 years Lisa on the other hand will
make more after one year she will have
eleven hundred dollars in her account
but she keeps everything there after the
second year she will earn 10% of those
eleven hundred dollars and not only on
the initial one thousand dollars
therefore she will have eleven hundred
dollars plus one hundred and ten dollars
so twelve hundred and ten dollars after
the third year she will earn 10% of
those one thousand two hundred ten
dollars and have one thousand three
hundred and thirty one dollars after
year thirty she will have seventeen
thousand four hundred and forty nine
dollars and forty cents over four times
more than John
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