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Compound Interest Student Tutorial

In our Payroll Check Tutorial Alex was making a weekly paycheck. Let’s calculate what compound interest can do for Alex help his investments prosper.

In the first year Alex saves every week: $

 

For a total of: $

 

Alex puts the money in a savings account that is paying % Annual rate of interest

.

The interest is calculated each week and added to the account. At the end of 52 weeks Alex has a balance of $

 

Note his interest earnings were $

 

Lets take this concept over a longer period of time. Lets say Alex started his account on his sixteen birthday and made the first deposit a that. Lets also say that Alex gets busy with football and then his college and quits work after that single year. Even if he adds no more savings to his account and just lets the interest add up here is what would happen to it.

 

On his

17 th Birthday the balance would be $
18 th Birthday the balance would be $
19 th Birthday the balance would be $
20 th Birthday the balance would be $
21th Birthday the balance would be $
22th Birthday the balance would be $
23th Birthday the balance would be $

 

Now let’s take a more comprehensive example. Over the next 50 years Alex is going to continue to save and invest. Lets look at what happens as his chess board gets filled up. Remember that if Alex invests till he is 80 he will have had a year off every square on the chessboard.

 

We are going to use “Rate of Return” instead of interest to highlight that Alex may be investing in other things than just a savings account. These may be stocks, bonds, mutual funds or other assets that can create a return or interest on Alex’s investment. Some of those could lose value and create a negative rate of return, which is not desirable.

 

You can very each years amount and rate as you go through the years. This will allow you to show Alex saving and investing more as he makes more in his job. You can also change the “Rate of Return” from year to year if you want.

 

Year
Amount Invested Rate of Return Running total
Alex's Age
1
 $ % $
17
2
 $ % $
18
3
 $ % $
19
4
 $ % $
20
5
 $ % $
21
6
 $ % $
22
7
 $ % $
23
8
 $ % $
24
9
 $ % $
25
10
 $ % $
26
11
 $ % $
27
12
 $ % $
28
13
 $ % $
29
14
 $ % $
30
15
 $ % $
31
16
 $ % $
32
17
 $ % $
33
18
 $ % $
34
19
 $ % $
35
20
 $ % $
36
21
 $ % $
37
22
 $ % $
38
23
 $ % $
39
24
 $ % $
40
25
 $ % $
41
26
 $ % $
42
27
 $ % $
43
28
 $ % $
44
29
 $ % $
45
30
 $ % $
46
31
 $ % $
47
32
 $ % $
49
33
 $ % $
49
34
 $ % $
50
35
 $ % $
51
36
 $ % $
52
37
 $ % $
53
38
 $ % $
54
39
 $ % $
55
40
 $ % $
56
41
 $ % $
57
42
 $ % $
58
43
 $ % $
59
44
 $ % $
60
45
 $ % $
61
46
 $ % $
62
47
 $ % $
63
48
 $ % $
64
49
 $ % $
65

 

 

If you enter 520 dollars a year and 10% rate of return which is less than average for the stock market over the last year.

 

Please also read about the Compound Interest Story. (The story of the Vizier and the chess board)