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JLeslie's avatar

Can you help with a math question about compound interest?

Asked by JLeslie (65408points) September 25th, 2023

For whatever reason my brain is not functioning on all eight cylinders.

Here is the question: If you have a sum of money, let’s say $100,000, and you have the interest go into a separate account that earns the same interest as the original account, will you have the same amount of total money at the end of five years with two accounts as if you kept all of the money in the original account?

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7 Answers

elbanditoroso's avatar

Identical, within a couple of cents.

Use this calculator

LostInParadise's avatar

Yes, it makes no difference. If p is the principal, i is the interest and t is the time duration, you get (1+i)**n p. If you split p into p=p1 + p2, it works out to the same amount.

elbanditoroso's avatar

If you want to invest in the Brooklyn Bridge, I can make you a really good deal :-)

LostInParadise's avatar

That formula should have been (1+i)**t p

Zaku's avatar

Unless your bank unilaterally changes their policy and adds fees or changes rates, as in my experience, they do.

CyanoticWasp's avatar

In terms of ‘the amount of cash you have’ at the end of the period, most answers are correct: the numbers work out so that the amounts are equal—keeping in mind @Zaku‘s astute observation—but the value of the cash will have been eroded by compounding inflation.

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