Thursday, July 24, 2008

The Power of Compound Interest

Do you have money in your fixed deposit account? Do you realize that the interest you earn every year in the same but the money you earn from your money in fixed deposit is increasing and becoming more and more every year? That is the power of compound interest.

The higher the interest rate, the more powerful the compounding. In addition, the more money you invest, the compounding will be more powerful too. So, it is up to you to find higher interest investment vehicles or get more money and invest.

How Your Money is Compounded:

For example, you invested $1000.00 in year 2000 and at interest rate of 3.5% per year. Your earning from interest will be like the table below:

No. of Years Your Investments and Carry Over from Previous Years Interest Rate per year Your Investment at the end of the year
1 $1000.00 3.5% $1035
2 $1035 3.5% $1071.23
3 $1071.23 3.5% $1108.72
4 $1108.72 3.5% $1147.52
5 $1147.52 3.5% $1187.69
6 $1187.69 3.5% $1229.26
7 $1229.26 3.5% $1272.28
8 $1272.28 3.5% $1316.81

If you do not have compounding, then your earning from your investment will be much more lesser. Your earning will look like the table below:

No. of Years Your Investments and Carry Over from Previous Years Interest Rate per year Your Investment at the end of the year
1 $1000.00 3.5% $1035
2 $1035 3.5% $1070
3 $1070 3.5% $1105
4 $1105 3.5% $1140
5 $1140 3.5% $1175
6 $1175 3.5% $1210
7 $1210 3.5% $1245
8 $1245 3.5% $1280

From the table above, you can see that you are actually earning lesser if no compounding is done to your investment. You might be saying that it is only a small difference. You might be right but if your investment is large value, for example $100,000.00, how much money will you lose if no compounding? That will be a lot right?

So, make use of compound interest to make your money grow faster. You can use the formula of Future Value to calculate compound interest and predict your investment in the future.

0 comments:

Related Posts with Thumbnails