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finance a la shmoop- what is compounding value or compounding interest? ah the

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power of compounding. it makes trees stronger pollution more feral and the

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rich well richer. how so well let's start with compounds kissing

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cousin with six toes, arithmetic compounding. right so the first was [feet with six toes pictured]

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really geometric compounding now we're talking about arithmetic compounding. if

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you invest a thousand bucks in a ten-year bond that pays 6% of a year in

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interest, the dough comes back to you in a pattern that looks like this - like

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every six months they pay thirty bucks and it's $60 a year, got it? nice. you get

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the total of sixteen hundred bucks back from your investment and the cash that

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came back to you you know came in small parts all along the way, until you got [list of yearly returns]

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about two thirds of it or sixty percent at the end right? if you just spent that

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money and collected your thousand bucks at the end that's it. okay so that's

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arithmetic compounding/ the money comes to you if you don't reinvest it.

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ding-ding-ding that's the key here and you just go buy burgers. okay so now

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let's look at what six percent compounded looks like over the same

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10-year period .well at the end of year one it's a thousand sixty bucks and note

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we're only gonna compound it annually we probably should do the semi-annually but [list of yearly compounds]

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we'd confuse you even more so don't do that. but then you essentially reinvest

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that money and you get another six percent compounded on that thousand

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sixty , instead of six percent compounded against the original thousand. so by the

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end of year two you'll have a thousand one hundred twenty three sixty. and by

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the end of year ten you'll have one thousand seven hundred and ninety

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dollars and eighty-five cents. so why do you make so much more money when you

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compound interest versus getting 30 bucks twice a year like you would in

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this bond example? go and find burgers with it? yeah .you don't want to do that

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well essentially what's happening is that you're delaying your gratification [man in a drive through window]

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of getting that sweet sweet cash or getting liquid whatever you want to call

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it. by reinvesting your gains year after year after year. so do you have that sort

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of self-control? do you need the cash yeah that's the question if you for

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example have trouble making it home from your local pizza spot with the pie

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in tact well then compound interest keeping the discipline to not spend the [man eats pizza while driving]

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money today and wait for the happiness tomorrow well when that may not be for

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you. sorry

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