In reviewing the 2017 Berkshire Performance summary, you would be amazed at the impact that compounding has over a number of years. In their report, they show three return calculations: the Berkshire per share “book value” which was a 19.1% compounded annual return, the Berkshire per share “market value” which was a 20.9% compounded annual return, and the S&P 500 compounded annual return of 9.9%. These were from August 31, 1964 to December 31, 2017.

A customer recently asked how to use TValue to determine the balance and annual interest contributions if they invested $100,000 in an annuity that was compounded annually for 15 years.

Interest is defined as the cost of borrowing money. It can be either simple interest or compound interest. Simple interest is calculated on the principal amount of a loan only. Compound interest is calculated on the principal amount and also on any accumulated interest of previous periods that was not paid, and can thus be regarded as “interest on interest.”

The magic of compounding can work to your advantage when it comes to your investments and can be a potent factor in wealth creation. While simple and compound interest are basic financial concepts, becoming thoroughly familiar with them will help you make better decisions when taking out a loan or making investments, which may save you thousands of dollars over the long term.