ELI5: Compounded Interest rates

Im in a MBA finance class and here's my understanding of it.

APR is annual percentage rate. It could be calculated yearly/monthly and daily. The more frequent it is, the better.

APR 10% and compounded YEARLY
Say you deposit $1,000 in a savings account, at the end of the year you'll earn $100 in interest because it's 10% of $1,000 and it's compounded ONCE per year hence yearly.

APR 10% Monthly
Say you deposit the same $1,000 in a savings account at another bank, at the end the first month, you'll earn $100 in interest and will increase each month. Here's why:

January: You deposit $1,000
Total in savings account: $1000

Feb: $100 earned in interest
Total in savings account: $1,100

March: $110 earned in interest. Why? Because it's now 10% earned off of $1,100. Total: $1,210

April: $121 in interest. Why? Because we compounded 10% off of March's total which was $1,210, 10% off that is $121 and so on....

Clearly, the more frequent it is, the better UNLESS you're owing a bank then it'll work against you. Sorry its not the ELI5 explanation you were expecting.

/r/personalfinance Thread