If I am to earn 5% annually and I started with $1000, how much would I have after 5 years? Is it too good to be true?
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Well, the six-month T-bill is currently at 4.5%. Get it with a Treasury Direct account.– S SpringCommented Nov 16, 2022 at 21:30
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2 Answers
Is it compounding interest or do you get it paid out annually? Does the amount stays the same?
If it gets paid out it would be $1250, the formula is $1000 * 1,05 * 5
If its compounding interest it would be $1276,23, the formula would be $1000 * 1,05^5
5% is not abnormal - but it depends on what kind of investment it is. Interest is in theory tied to risk - so the higher the interest, the higher the risk
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They said the interest on the first year will be added to the 2nd year. Is that what compounding interest mean? Do you think 5% is high that it could pose risk? Thank you so much for noticing my question. Commented Nov 16, 2022 at 13:04
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That sounds like compounding interest. 5% is over the risk free interest in most of the world - so it would pose a risk (but without further knowledge of the investment i cant tell you)– ThomasCommented Nov 16, 2022 at 13:16
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I see, I see. Thank you so much again for your answer. I will check more on the investment I'm trying to enter. Commented Nov 16, 2022 at 13:42
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2If you know very little about investments (as you apparently do) I strongly recommend that you invest with a "safe" institution, such as your local bank or a very reputable brokerage. You may not get the best rates, but you will also not be cheated or taken advantage of, which unfortunately is very common– HilmarCommented Nov 16, 2022 at 14:02
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4@ChristineTibigVickers "they" is worrying. Who is "they"? A lot of "they" are scammers, although scammers usually promise you 1000%, not only 5% :) Commented Nov 16, 2022 at 14:05
If the 5% is paid out every year, then your profit is 5% of $1000 x 5 years, or $50 x 5 = $250.
If the profit compounds, that is, it is reinvested, then you collect zero during the five years, but at the end you have 1.05 ^ 5 x $1000 = (approximately) $1277, so your profit is $277.
5% return is not unbelievable. Over the last few decades the stock market has averaged 7% per year. Normally, the greater the risk the greater the promised return. If someone is promising you a guaranteed 5% return, I'd say that's a bit high and I'd look into it before giving them large sums of money.
