The interest is paid once at the end of the year. You will have $1000 + $1000 * 0.05 = $1050.
Usually banks pay interest daily or monthly, but for simplicity let us stick with interest paid once at the end of each year. Also, assume that for the each year, interest is paid on the total amount of money in the account (including the interest for the previous year). At the end of the second year you will have $1050 + $1050*0.05 = $1102.50. Here is what your account looks like at the end of the first several years:
| year | Interest for the Year | End of Year Amount |
|---|---|---|
| 1 | 1000*0.05=50 | 1050.00 |
| 2 | 1050*0.05=52.5 | 1102.50 |
| 3 | 1102.50*0.05=55.125 | 1157.625 |
| 4 | 1157.625*0.05=57.88125 | 1215.50625 |
| 5 | 1215.50625*0.05=60.77531 | 1276.28156 |
What if you are interested in becoming a millionaire? How long will it take to reach one million dollars? There are formulas for this. (Computer spreadsheets have these formulas built in, as do financial electronic calculators.) But pretend that you don't know that.
Take a guess — how long will it take to reach a million dollars?