Investment Strategies Comparison

Investment Scenario

• John and Lisa each invest $1,000 with a 10% annual return.
• John withdraws the interest earned each year, keeping only the principal ($1,000) in the bank.
• Lisa reinvests all interest earned, allowing compound growth.

John's Investment Strategy

• John earns $100 in interest each year ($1,000 x 10%).
• After 30 years, John has earned $3,000 in total interest ($100 x 30 years).
• John's total earnings after 30 years are $4,000 (initial principal of $1,000 + $3,000 interest).

Lisa's Investment Strategy

• Lisa earns $100 in interest in the first year, like John.
• Lisa reinvests the interest, increasing the principal amount for subsequent years.
• This leads to compounding interest, where interest is earned on both the principal and previously accumulated interest.
• After 30 years, Lisa has $17,449.40 – over four times more than John.

Key Takeaways

• Compounding interest allows for significantly greater returns over time.
• While withdrawing interest provides immediate income, it limits long-term growth potential.

This quiz compares two different investment strategies applied by John and Lisa, focusing on the impacts of simple versus compound interest. Explore how their choices lead to vastly different outcomes after 30 years of investment. Understand the power of compounding interest in maximizing returns over time.