Advertisement

Now, let's make it quarterly...

Compounded quarterly (four times a year)
means that, at the end of each quarter (three
months), they'll add
3% to your account. 
(Remember that this is
3% of what's in the
account at that time.)

 

Jan: $1.00 ... end of Mar: 3% , 1.00 + .03( 1.00 ) = $1.03 ... end of June: 3% , 1.03 + .03( 1.03 ) = $1.0609 ... end of Sept: 3% , 1.0609 + 0.3( 1.0609 ) = $1.092727 ... end of Dec: 3% , 1.092727 + .03( 1.092727) = $1.12550881
 

Do you see that, the more times the account is compounded, the more money we make?  Sure, it's only a really small increase, but, if we invest a million dollars...  Then, it's going to make a big difference!

OK, so how can we figure out compound interest without having to go through each little step?  If we had invested that dollar for 20 years, that chart thing would have been a real pain!

The answer is:  SPLIT FACTOR!

Compounded money grows the same way alien amoebas grow!  But, since it's money, it'll make more sense to call it the "growth factor."