Exploring the Basics of Compound Interest

The video explains compound interest, a financial concept where interest is earned on both the initial principal and the accumulated interest. It highlights how compound interest can benefit savings and investments, using examples with M&Ms to illustrate growth over time. The video also warns about the potential negative effects of compound interest on debt, particularly with credit cards, emphasizing the importance of managing finances wisely.

What is a simple definition of compound interest?

• A fixed interest rate applied over time

• Interest earned on the principal amount only

• Interest earned on both the principal and the accumulated interest

• A variable interest rate changing yearly

Which accounts can earn you compound interest?

• Savings, checking accounts, and certificates of deposit

• Savings and checking accounts only

• Real estate investments

• Stock market investments only

What is the impact of compound interest on savings over time?

• Decreases the total amount

• Keeps the total amount constant

• Increases the total amount significantly

• Has no impact

What is the key to benefiting from compound interest?

• Continuously investing small amounts

• Withdrawing money frequently

• Investing a large sum initially

• Avoiding stock market investments

After one year, how many M&Ms did Caitlin have if she started with 100 and the interest rate was 10%?

• 110 M&Ms

• 100 M&Ms

• 120 M&Ms

• 105 M&Ms

What happens to Caitlin's M&Ms after 10 years if she adds one M&M every month?

• She will have 500 M&Ms

• She will have 259 M&Ms

• She will have 300 M&Ms

• She will have 451 M&Ms

What is the effect of a 20% interest rate on credit card debt?

• It compounds, increasing the total debt

• It remains constant

• It decreases over time

• It is beneficial for the cardholder

How much extra did Caitlin pay on her credit card debt due to compound interest?

• 9 M&Ms

• 5 M&Ms

• 10 M&Ms

• 20 M&Ms

How can compound interest negatively affect you?

• By decreasing expenses

• By improving credit score

• Through high-interest debts

• By increasing savings

What should you remember about managing credit card expenses?

• To use multiple credit cards for purchases

• To only pay the minimum balance

• To pay off the balance monthly to avoid compound interest

• To spend as much as possible