Which option is an investment with compound interest?
Responses
a checking account
a mutual fund following the S&P 500
a savings account
a rental property
a mutual fund following the S&P 500
The option that is an investment with compound interest is a savings account.
The option that involves an investment with compound interest is a savings account.
To understand why a savings account is an investment with compound interest, we first need to understand what compound interest is. Compound interest is the interest that's calculated on both the initial amount of money invested (or deposited) and any accrued interest from previous periods. In other words, it's interest on top of interest.
A savings account typically earns compound interest because the interest is added to the account balance regularly (e.g., monthly or annually), and then the subsequent interest is calculated based on the new total balance. Over time, this compounding effect can significantly increase the amount of money in the savings account.
On the other hand, a checking account does not typically earn compound interest. Instead, it usually provides limited or no interest on the balance held in the account.
Regarding the other options you mentioned:
- A mutual fund following the S&P 500 can potentially generate investment returns, but whether it involves compound interest depends on the specific fund. Mutual funds usually earn returns through capital appreciation (increase in the fund's net asset value) and/or dividends, rather than through compound interest.
- A rental property is an investment, but it doesn't involve compound interest. Rental properties generate returns through rental income and potential appreciation in property value, not through interest calculations.
So, in summary, a savings account is the most common investment option that utilizes compound interest.