With annuities, you invest a little at a time. We invested a total of $1200.
Let's compare this to a one-time investment like the one's we did in the last section:
If we make a one-time investment of $1200 at 12% compounded monthly, how much will we have at the end of one year?
Remember the formula:
initial amount = $1200
At the end of each period (every month), we'll be earning 1%...
So, each $1.00 will turn into $1.01...
growth factor = $1.01
number of periods = 12
Hey, we made more money! Isn't it better to invest a little at a time?
The reason we made more money is that the $1200 went in at the BEGINNING of the year. So, the balance was higher the whole year.
BIGGER BALANCE = MORE INTEREST
But, the realistic question is: Would you HAVE the whole $1200 at the beginning of the year? If the answer is "yes," then invest the whole thing. If the answer is "no," then do it a little at a time. This is usually easier for most people.
|If the amount you want to invest is realistic|
for you (like only $100 a month as opposed
to a chunk of $1200), then you are far more
likely to invest it!
By the way, the term "annuity" is used when something pays YOU a little each month, too. It works both ways. (But, be careful because some people use the word "annuity" as a cloak for bad insurance investments! You can read more about this on Finance FREAK.)