The Math Behind Compund Interest Really Adds Up

That's right, that is a math pun in my title. You see the name of my account, you know what you are getting into.

Let's talk about compound interest and how the math is really in your favour. The years of being into crypto has really shown me how to be smart with my money even if I learned it the hard way at times. You really are your own bank in this world and because of that you need to learn how to manage your funds in a smart way especially during the bear market which has lasted a long time recently.

One of the wisest things you can do with your money is invest in projects that pay dividends and then reinvest those dividends into the same project (or another project that pays dividends) in order to increase the number of daily dividends you are making and thus increase your overall account faster.

But where things really get crazy in the crypto world is the fact that you can get dividends daily paid out to you, or even twice a day on some sites. This was unheard of in the financial world where you would usually get divs paid out monthly or quarterly. Getting paid 4 times a year really doesn't make much of a difference when compounding compared to getting paid yearly. But getting paid 365 times a year can increase your APR significantly if you compound it everyday.

MATH!

Let's do some math to prove it.

Here is a link to a site that has the option for daily dividends:

When we start to input numbers it becomes clear that the percent of your yearly return actually goes up when you compound your interest.

Example 1

Starting funds: $1000
Yearly Interest: 10%

If I put it in an account that is paying me 10% then in a year I will have $1,100 total and made $100 in interest.

But if I got paid those dividends every day and reinvested them at the end of the year I would have $1,105.16 as I made $105.16 in interest.

That is an increase in my yearly return of .516%. That might not seem like a lot but when you are working with big numbers it can really add up.

But it gets crazy when you are working with higher APR rates.

Example 2:

Starting fund: $1,000
APR: 50%

At the end of the year you will have $1,659.63 instead of $1,500 if you compunded. That means you have an APR increase of 15% just for compounding everday. Pretty crazy.

And the higher the APR the crazier the return. You can almost double your APR if the rate is high enough and you do see these number in crypto. So make sure if you are invested in a coin like that you trust long term and don't need it to be liquid that you keep compounding it instead of letting it sit in your wallet.

Posted with STEMGeeks