# 947: Investing

## Explanation

Compound interest is a type of interest in which the interest earned is added to the total amount, so that the interest itself then begins to gain interest. This contrasts to simple interest, where the amount used to calculate the interest will always stay at a fixed value. In economics classes, many teachers like to demonstrate extreme examples of compound interest, typically turning a thousand dollars into tens of thousands over several decades thanks to unrealistically high interest rates over several decades. But here, Ponytail discovers that a more realistic example is less than overwhelming.

There is an urban legend that Einstein said that compounding interest is the most powerful force. Snopes has its doubts about it.

## Transcript

- Ponytail: Sure, 2% interest may not
*seem*like a lot. But it's*compound*!

- [Ponytail opens a computer and begins calculating.]
- Ponytail: If you invest $1,000 now, in just ten short years you'll have... ...let's see...

- Ponytail: ...$1,219.

- Ponytail: Ok, so compound interest isn't some magical force.
- Megan: Yeah, I'm just gonna try to make more money.

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# Discussion

Accounting for inflation, you'll probably end up losing money if you're just relying on bank interest for income. Davidy22 (talk) 10:04, 9 October 2012 (UTC)

- Losing money compared to what? Even if inflation is 3%, getting 2% interest in a bank is better than getting 0% interest under your mattress... 72.169.224.98 14:09, 6 December 2012 (UTC)

- Actually, putting money in the bank, you lose more in inflation than you gain in interest. It's really a scam. However, by putting it under your mattress, you're taking it out of circulation and, in effect, increasing its value through deflation. It really IS a better alternative. At least until you put it back into circulation, then the deflation is undone but, by then, it's no longer in your hands so what the hell do you care?76.29.225.28 06:01, 8 July 2013 (UTC)

- Unless you own a bank, it's unlikely that the quantity of money you're able to store in your mattress will have any effect on the rate of inflation. 173.245.56.61 20:38, 19 November 2013 (UTC)

- An alternative to investing in a bank account is to do with your money what the bank intends to do with your money, which is to loan it to other people at a higher interest rate, higher than the rate of inflation. Of course, some fraction of these loans will never be repaid, and you can't simply withdraw your money whenever you feel like it, so this type of scheme works better if you have tons of money to begin with-- more than just a thousand dollars seed money.63.155.139.54 14:39, 26 April 2013 (UTC)

- You don't really have to have the money. You just have to be buddy-buddy with the Fed. Banks are allowed to lend out ten times more money than they actually have.76.29.225.28 06:01, 8 July 2013 (UTC)

- I see! So in order to avoid having to use a bank, you should... become a bank! ...oh.--199.244.214.110 20:42, 2 May 2013 (UTC)

- Banks don't have the luxury of being able to put all their money in insured term deposits. Promethean (talk) 03:08, 3 May 2013 (UTC)

Compound interest is actually extremely powerful, if you have enough interest and enough time. 10% interest (like what you'd get from a good mutual fund) over 30 years (a little under the length of an average working career) gives a pretty impressive return. 108.162.219.47 (talk) *(please sign your comments with ~~~~)*

- Exactly. The only reason the return here is unimpressive is the ridiculously low interest rate that won't even outpace inflation. With a good rate of return (10-15%), compound interest can work for you. I don't like Randall's implication that compound interest is over-hyped; it's not magical, but it is extremely powerful. NealCruco (talk) 16:14, 29 April 2014 (UTC)