Do you know how compounding interest works? If you do, you are in the minority. A recent study of over 50 thousand individuals in 30 different countries testing their financial knowledge and behavior found that only 42% of respondents could correctly answer the following question:
Will a $100 savings account compounding at an interest rate of 2% a year total more or less than $110 in five years?
The correct answer, of course, is more. The reason is compounding interest. At the end of the first year you’d have $102 ($100 + 2% of $100). At the end of year two you’d have $104.04 ($102 + 2% of $102). For the full story, click here.