Case study
Adam is in his early 20s and wants to start saving for a house. He has an initial investment of $5,000 and plans to deposit $500 each month for the next five years. Assuming an interest rate of 5%, let’s look at how Adam’s balance differs based on whether interest is compounded daily, monthly or annually.
Account A | Account B | Account C | |
---|---|---|---|
Interest compounded | Daily | Monthly | Annually |
Initial deposit | $5,000 | $5,000 | $5,000 |
Ongoing monthly deposit | $500 | $500 | $500 |
Investment term | 5 years | 5 years | 5 years |
Interest rate | 5% | 5% | 5% |
Total balance | $39,931.81 | $39,919.83 | $39,788.28 |
Adam can earn more interest by choosing an account that compounds interest daily. In fact, after five years, he ends up with an extra $143.53 compared to an account that compounds interest annually.