Cashtoons

Compound Interest

April 23, 2021

How does

compound interest

Turn this curve

turtle

Into this curve?

helicopter turtle

Let’s say that you are like Maria from last week; you have $10 to lend.

ten dollar bill

But you lend it to the US government, because it’s pretty safe you will get paid back with interest.

US map

This is called buying a bond. Your $10 investment is like a money plant.

money plant with no fruit

The government agrees to pay you a dollar interest every six months.

dollar in interest

So every half a year, your plant grows some fruit. This is the dollar in interest that the government is paying you to use your $10.

money plant with fruit

You now have a choice. You can spend the interest or you can plant it.

planting the interest

You’re reinvesting that dollar by lending it to the government. Your interest will start to grow a new money tree.

baby interest plant

After some time, your interest money tree will also grow fruit. You are earning interest on the interest.

interest plant with fruit

Now you get fruit from your original $10, (the principal), AND your $1 in interest. There are 2 plants where there was one!

principal plant and interest plant

Two plants becomes 4 plants, as both your principal and interest plants have babies.

You can replant every time your interest grows fruit. This cycle is compound interest.

field of money plants

By the time you go to get your $10 back, your money has grown a ton, and most of it is from interest, not the principal.

Tune in next Saturday to find out why vampires are always rich, and what this has to do with compound interest.

Sources:

sources

https://www.nerdwallet.com/banking/calculator/compound-interest-calculator

https://www.investopedia.com/terms/i/interest.asp

https://www.investopedia.com/terms/p/principal.asp#:~:text=Responsible%20Parties-,What%20Is%20Principal%3F,face%20value%20of%20a%20bond.

Warren Buffett’s Ground Rules: Words of Wisdom from the Partnership Letters of the World’s Greatest Investor


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