🧮 HOW DID WE GET THESE FIGURES?
The answer is: COMPOUND INTEREST
Compound interest is the key component to the figures you see represented in this habit calculator. At first you might of thought this calculator adds up the total amount of money that you would spend on a habit but in actuality, this habit calculator takes the total you would spend on a habit and applies annual compound interest to that number.
To explain the differences we will be going over some graphs on this page to show visual and verbal explanations of how compound interest is different from simple interest and just adding totals.
The ultimate goal of this calculator is two parts:
1) to give you a good reason to learn finance by using examples everyone can relate to.
2) to give you a good reason to examine your personal habits and adjust accordingly.
We hope this answers any questions that you might have but if you still have a question unanswered please contact us here.
For the following examples we will be using a scenario where a person is spending $200 a month and for the compound interest rate we will be using 8% annual interest.
WITHOUT COMPOUND INTEREST
What spending looks like with just dollars being added up:
| Period in Time | Value of Account |
|---|---|
| Year 5 | $12,000 |
| Year 10 | $24,000 |
| Year 15 | $36,000 |
| Year 20 | $48,000 |
| Year 25 | $60,000 |
As you can see in this graph there is $200 a month being spent over the course of 25 years.
Twelve months in a year equate to $2,400 per year, $12,000 per five years, or $24,000 per ten years.
By doing this math you can see that a $200 a month spending habit would equate to a 25 year (300 month) total of $60,000!! That’s a lot of money, but wait until you see what happens when we add compound interest into the mix…
WITH COMPOUND INTEREST
What spending looks like with yearly compound interest:
| Period in Time | Value of Account |
|---|---|
| Year 5 | $14,080 |
| Year 10 | $34,768 |
| Year 15 | $65,165 |
| Year 20 | $109,829 |
| Year 25 | $175,454 |
Now, with this graph we apply an 8% annual interest and compound it. When we say compound it, that means we add the new total each year including the interest earned. Regular interest without compounding is called simple interest.
For example:
Year 1 $2,400 is saved. We add 8% interest which is $192 (8% of 2400 is 192).
SIDE BY SIDE COMPARISON
What spending looks like with yearly compound interest
| Period in Time | Value Without Compound Interest | Value With Compound Interest |
|---|---|---|
| Year 5 | $12,000 | $14,080 |
| Year 10 | $24,000 | $34,768 |
| Year 15 | $36,000 | $65,165 |
| Year 20 | $48,000 | $109,829 |
| Year 25 | $60,000 | $175,454 |
As you can see, in this graph there is $200 a month being spent over the course of 25 years. Twelve months in a year equate to $24,000 per year. By doing this math you can see that a $200 a month spending habit would equate to a 25 year total of $60,000!! That’s a lot of money, but wait until you see what happens when we add compound interest into the mix.
