How can the future balance of a deposit be maximized when earning compound interest?

When considering how to maximize the future balance of a deposit earning compound interest, increasing the frequency of compounding is key. When interest is compounded more often, the interest that accumulates in each compounding period is added to the principal. This means that subsequent interest calculations are performed on a larger principal amount, effectively generating "interest on interest."

For example, if interest is compounded annually, the interest earned during the year will only affect the principal once a year. However, if the same interest is compounded semi-annually, quarterly, or monthly, the interest for each period is applied to the balance more frequently, allowing more opportunities for interest to accumulate on the previously earned interest.

In contrast, compounding less often leads to a smaller overall balance since interest will not be added to the principal as frequently. Switching to simple interest does not allow for interest accumulation on previously earned interest, which inherently limits potential earnings compared to compound interest. Similarly, depositing for a shorter duration reduces the time available for the interest to compound, ultimately leading to a lower future balance.

Therefore, compounding more often directly correlates with a higher future value of the deposit, making it the best strategy for maximizing the balance.