Bank Account
A simple stock-flow model that simulates the growth of money in a bank account under compound interest at various annual rates over 12 years.
THE IDEA
Bank Account
A model of a savings account with compound interest.
Structure
Stock: money in bank account(t) = money in bank account(t – dt) + (interest added × dt)
Initial value: money in bank account = $100
Time parameters: t = years, dt = 1 year, Run time = 12 years
Inflow: interest added ($/year) = money in bank account × interest rate
Converter: interest rate = 2%, 4%, 6%, 8%, & 10% annual interest (for five comparative model runs).
When to use it
Estimating how much a lump sum grows over time at a given rate when planning savings goals.
Comparing the effects of different annual returns when choosing investments.
Teaching compound interest by using the model to visualise exponential growth.
Understanding system dynamics through a simple reinforcing feedback loop.
FROM THEORY TO EVERYDAY LIFE
In practice
Comparing interest rates
Starting with $100, run the model for 12 years at interest rates of 2%, 4%, 6%, 8%, and 10%. Observe the final balance under each rate. At 2% the balance reaches about $126.82, while at 10% it grows to about $313.84.
A MOMENT TO REFLECT
Put it to work.
If you double the initial deposit from $100 to $200, how does the final balance change for a given interest rate?
What would happen if interest were compounded monthly instead of yearly? Modify the model to explore.
How long would it take for the money to double at each interest rate? (Use the Rule of 72 as a check.)
CONTINUE THE CONVERSATION
Source texts
- Thinking in Systems A Primer