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Finance allah shmoop What is calm Pounding value or compounding

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interest Ah the power of compounding it makes tree's stronger

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pollution More feral and the rich Well richer How so

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Well let's start with compounds kissing cousin with six toes

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Arithmetic calm pounding Right So the first was really geometric

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compounding Now we're talking about arithmetic compounding If you invest

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a thousand bucks in a ten year bond that pay

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six percent a year in interest the dough comes back

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to you in a pattern that looks like this Like

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every six months they pay thirty bucks and it's sixty

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dollars a year Got it nice You get the total

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of sixteen hundred bucks back from your investment And the

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cash that came back to you you know came in

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small parts all along the way until you got about

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two thirds of it or sixty percent at the end

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right If you just spent that money and collected your

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thousand bucks at the end That's it Okay So that's

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arithmetic compounding the money comes to you You don't reinvest

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it Ding ding ding that's the key here and you

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just go buy burgers Okay So now let's look at

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what six percent compound id looks like over the same

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ten year period Wealth at the end of your one

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it's a thousand sixty bucks and no we're only going

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to compound it annually We probably should do the semi

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annually but we confuse you even more is we won't

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do that but then you essentially re invest that money

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and you get another six percent compounded on that thousand

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sixty instead of six percent compounded against the original thousand

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so by the end of your two you'll have a

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thousand one hundred twenty three sixty and by the end

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of your ten you'll have one thousand seven hundred ninety

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dollars and eighty five cents So why do you make

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so much more money when you compound interest versus getting

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thirty bucks twice a year like you would in this

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bond example going by and burgers with it You don't

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wanna do that well essentially what's happening is that you're

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delaying your gratification of getting that sweet sweet cash or

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getting liquid Whatever you wanna call it by reinvesting your

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gains year after year after year So do you have

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that sort of self control Do you need the cash

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Yeah that's The question If you for example have trouble

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making it home from your local pizza spot with the

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pie intact well and compound interest Keeping the discipline to

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not spend the money today and wait for the happiness

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tomorrow Well when that may not be for you Sorry

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