Compound Interest: How Lydia's Savings Grow Over Time
What is the annual percentage rate of Lydia's savings account?
The savings account has an annual percentage rate of 5.1% with interest compounded monthly.
How much money did Lydia deposit into the account?
Lydia deposited $2,000 into the account.
How much money will Lydia have in the account in 1 year?
Lydia will have $2,156.41 in the account after 1 year.
Understanding Compound Interest and Lydia's Savings Growth
Compound interest is a powerful financial concept that allows investments to grow over time. In Lydia's case, she deposited $2,000 into a savings account with an annual percentage rate of 5.1% that compounds interest monthly.
The formula for compound interest is:
A = P*(1+r/n)^(n*t)
Where:
- A: the final amount
- P: the principal amount (initial deposit)
- r: the annual interest rate (as a decimal)
- n: the number of times the interest is compounded per year
- t: the time (in years)
By substituting the values into the formula with P = $2,000, r = 0.051, n = 12, and t = 1 year, we calculated that Lydia will have $2,156.41 in the account after 1 year. This growth is due to the power of compound interest, where interest is earned not only on the initial deposit but also on the accumulated interest.
It's important to understand how compound interest works when making financial decisions to maximize savings and investments. By leveraging the power of compounding, individuals like Lydia can watch their savings grow steadily over time.