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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?

Christine Tibig Vickers
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2 Answers2

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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

mhoran_psprep
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Thomas
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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. – Christine Tibig Vickers Nov 16 '22 at 13:04
  • 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) – Thomas Nov 16 '22 at 13:16
  • I see, I see. Thank you so much again for your answer. I will check more on the investment I'm trying to enter. – Christine Tibig Vickers Nov 16 '22 at 13:42
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    If 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 – Hilmar Nov 16 '22 at 14:02
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    @ChristineTibigVickers "they" is worrying. Who is "they"? A lot of "they" are scammers, although scammers usually promise you 1000%, not only 5% :) – user253751 Nov 16 '22 at 14:05
  • There seem to be quite a few banks that are offering 5-year CDs with rates approaching 5%, some of them are even (US-centric) backed by FDIC. – chepner Nov 16 '22 at 14:43
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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.

Jay
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