Compound Interest – The Truth behind the Concept
The lure of compound interest
Compound interest is one of the biggest lure for people who wish to use their money for income generation. Mathematically, compound interest can get you a steady income that will make all of your life comfortable. In other words, compound interest can be your golden egg laying duck, which makes your retirement financially secure and you never run out of money. The power of compound interest is understood by everybody who wants to save and increase the amount in their bank accounts. By making use of it intelligently, you can sustain yourself comfortable for years. Compound interest does get you high returns but how far you can rely on it for securing your retirement is a million dollar question.
The concept of compound interest
The concept of compound interest is simple. In normal interest rates, interest is calculated only on the principle amount. In compound interest system, interest is calculated on the principle amount as well as the interest accumulated over the months. So, the figure is significantly higher. Compound interest is calculated on a quarterly and half yearly basis. So, for example, if you save $10,000 at an interest rate of 8%, then your monthly interest will be $800. So, in all, you will have $10,800 in your account at the end of the first month. Similarly, in three months, your interest will increase to $2400 and the net amount in your bank will be 12,400. If compound interest is calculated once in three months, then it will be calculated not on $10,000 but on $12,400. This comes up to $960 per month instead of $800 that you would have got under normal interest scheme. If this kind of increment over the principle amount happens four times a year, then you will have significant amount of money over a year. To calculate precise compound interest, a mathematical formula is used. If you start saving at the age of 25 or 30, by the time you retire 30 to 35 years later, you will be able to lead a comfortable life. Your money will double and triple surprisingly fast.
Factors influencing compound interest
Keeping the principle amount constant, there are two major factors that influence compound interest. The first factor is frequency of compounding and the second factor is time duration. The more frequent your compounding system is, more will be your earning. Similarly, higher the duration of deposit, higher will be the money you get. It is recommended that you have an account for at least 25 years before withdrawing the amount.
How to make compound interest make money foar you?
There are three ways in which you can make compound interest pay for you. First is to fix your account for a long duration. Second way is to add some amount of money to the account every month and the third way is to invest whatever interest you get out of it repeatedly. By following a smart investment plan, you can be a millionaire even if you begin with just $10,000 at the age of 25.
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