EconomyEinstein

Let's say that you have $100.00 and I agree to pay you 5% on that money. At the end of the year, that $100.00 plus the 5% ($5.00) will equal $105.00. That is the definition of compounding yearly. What if I pay you 5% compounded every six months? Now that doesn't mean that I pay you 5% every six months! Oh no, that means I'll pay you interest on the half year at the half amount, which means instead of 5% once a year, I'll pay you 2.5% after six months (June) and 2.5% at the end of the year. At the end of June your $100.00 becomes $102.50, and at the end of the year that $102.50 turns into $105.06!. Yeah, so what? 6 cents! But when you start talking about compounding quarterly, monthly and daily, it makes a decent difference. Below is a table show at the end of the year what your $100 is worth under varying compounding scenarios......

Period %	No. of periods	Compounding Interval	Accrued sum
5%	1	Yearly	$105.00
2.50%	2	Six months	$105.06
1.25%	4	Quarterly	$105.09
0.416%	12	Monthly	$105.10
0.096%	52	Weekly	$105.12
0.014%	365	Daily	$105.24

These are small amount but 5% compounded yearly versus 5% compounded daily on a $5,000 investment equates respectively to $5,250.00 or $5,262.00 Leaving those investments alone for five years yields $6381.00 versus $6455.00 If that doesn't get your interest maybe this will: banks and credit card companies compound to THEIR advantage as well.