Question

Tom's investment account at his bank has compounding interest. He isn't sure if this is a positive thing for his investment. What is the BEST advice you can offer Tom?

a. ask your bank to compound the interest less frequently.
b. withdraw your investment immediately because compounding interest is a scam.
c. invest in a bank that doesn’t offer compounding interest so there is less risk.
d. keep your account open and you will earn more on interest you’ve already earned.

Answer 1

Compounding interest is beneficial for investments as it allows earnings on both the initial amount and the accumulated interest over time, leading to potentially substantial growth like turning a $3,000 investment into $44,923 over 40 years at a 7% annual rate.

Step-by-step explanation:

When Tom's investment account offers compounding interest, this is generally a positive feature. Compounding interest means that over time, Tom earns interest not just on his initial investment, but also on the interest that has previously been earned.

This can significantly increase the growth of his investment. For instance, if Tom invests $3,000 at a 7% annual rate, after 40 years, his investment could grow to approximately $44,923 due to the power of compound interest. Therefore, the best advice for Tom would be option (d): keep your account open and you will earn more on interest you've already earned.