Arithmetic Mean

Finance allah shmoop What is calm Pounding value or compounding

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

pollution More feral and the rich Well richer How so

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

Arithmetic calm pounding Right So the first was really geometric

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

a thousand bucks in a ten year bond that pay

six percent a year in interest the dough comes back

to you in a pattern that looks like this Like

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

dollars a year Got it nice You get the total

of sixteen hundred bucks back from your investment And the

cash that came back to you you know came in

small parts all along the way until you got about

two thirds of it or sixty percent at the end

right If you just spent that money and collected your

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

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

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

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

what six percent compound id looks like over the same

ten year period Wealth at the end of your one

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

to compound it annually We probably should do the semi

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

do that but then you essentially re invest that money

and you get another six percent compounded on that thousand

sixty instead of six percent compounded against the original thousand

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

thousand one hundred twenty three sixty and by the end

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

dollars and eighty five cents So why do you make

so much more money when you compound interest versus getting

thirty bucks twice a year like you would in this

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

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

delaying your gratification of getting that sweet sweet cash or

getting liquid Whatever you wanna call it by reinvesting your

gains year after year after year So do you have

that sort of self control Do you need the cash

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

making it home from your local pizza spot with the

pie intact well and compound interest Keeping the discipline to

not spend the money today and wait for the happiness

tomorrow Well when that may not be for you Sorry