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Compound Interest – A Deeper Dive

The_Financial_RulesWelcome! This post is meant to accompany Chapter 4 “On Compound Interest” and the Appendix to Chapter 4, in my book The Financial Rules For New College Graduates: Invest Before Paying Off Debt and Other Tips Your Professors Didn’t Teach You (ABC-CLIO Praeger, 2018.)1

I highly recommend you open up a spreadsheet alongside this material.

For starters, we want to know how to set up a spreadsheet to calculate Future Value, if we already know Present Value, Yield, and Time.

This first video below can get you started on that journey.

 

COMPOUNDING MULTIPLE AMOUNTS OR WITH MULTIPLE YIELD ASSUMPTIONS

The next video adds a level of complexity. Let’s say we want to see multiple years’ worth of compounding returns. For example, we might want to contribute to a retirement account multiple years in a row, and see the results of that activity over time. Spreadsheets are ideally suited for this type of setup, as the next video shows:

 

NON-ANNUAL COMPOUNDING

The third compound interest video introduces the idea that in the real world, money can compound more frequently than annually. Bonds often compound semi-annually. Stock returns often compound quarterly (because dividends are paid quarterly.) Monthly-pay debts we owe to our mortgage company, credit card company, or auto-loan company compound 12 times a year. We need to add an additional step for compounding more frequently than once a year.


Please see related posts on Discounting Cashflows and Compound Interest:

Discounting Cashflows – A Deeper Dive With Video 

 

And please see my earlier writing about compound interest and discounting cashflows.

Compound Interest – The Most Powerful Math in the Universe

If You Like Feral Cats, You’ll Love Compound Interest

College Savings And Compound Interest

Rapunzel and Compound Interest

Compound Interest and Vampires

 

How To Win With Powerball – Learn The Discounting Cashflows Math

Discounting Cashflows – Annuities

Discounting Cashflows – Pensions

 

 

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  1. Hey! Order it here: https://www.amazon.com/gp/product/1440861056?ie=UTF8&tag=bankeanony-20&camp=1789&linkCode=xm2&creativeASIN=1440861056

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I founded Bankers Anonymous because, as a recovering banker, I believe that the gap between the financial world as I know it and the public discourse about finance is more than just a problem for a family trying to balance their checkbook, or politicians trying to score points over next year’s budget – it is a weakness of our civil society. For reals. It’s also really fun for me.

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