The Effects of Interest Rates on Money

This article goes together with one written a while ago titled The Effects of Time On Money. We are going to use the same scenario used in that article except we are going to change the interest rate variable instead of the time variable. So lets assume you save $1 a day for ten years. To make things more simple we will make a $30 investment at the end of the first month and another $30 every month there after for ten years. Under our first scenario our savings account will pay us 4%. At the end of ten years this will be our results

Principal:$3630.00
Interest:$846.94
Total:$4476.94

In our second scenario we will find a savings vehicle that pays 8% with all other facts the same. At the end of the ten years here are our results

Principal:$3630.00
Interest:$1961.56
Total:$5591.56

This scenario presents almost a 25% better performance than the alternate scenario if we gave a longer time horizon the higher interest rate would outperform by a much larger margin. Just to illustrate this fact this we'll extend the time period to twenty years

4% Account      
Principal:$7230.00
Interest:$3876.59
Total:$11106.59

8% Account
Principal:$7230.00
Interest:$10706.22
Total:$17936.22

As you can see over a longer time horizon the higher interest rate is now almost doubling the performance of the lower interest rate. Now you can see the importance of finding a good interest rate for your investments and savings.