Nov 18, 2017 06:26 PM
(This post was last modified: Nov 19, 2017 06:56 AM by Captain P..)
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Introduction
As Einstein said, compound interest is the eighth wonder of the world.
Introduction
As Einstein said, compound interest is the eighth wonder of the world.
Making the 1% richer than they already are. Whilst many fail to understand compound interest.
I will explain how compound interest works and provide you with several examples.
Interest
Interest
The concept of compound interest might seem confusing to the majority of the planet. But I will explain it so each and everyone of us will be able to understand and use this to his or her advantage in life. As the name suggest, we're working with interests. There are two sorts of interests, simple interest and compound interest.
Simple interest is fairly easy to explain, you have your original loaned out amount and you get paid a steady % over this amount.
For example, you borrow someone $1200 with a 6.5% interest rate, the run time is one year.
This means that each month of the year they will pay you 100$ + 6.5% (1200 X 1.065 = $1278:12) = $106.50
Compound interest is more difficult, as this will usually happen with bigger numbers. Sometimes even companies loan their money out against compound interest so they can earn more money on top of their money.
Formula:
[img=250x131]http://www.thecalculatorsite.com/images/compound-interest-formula-diagram.png[/img]
Compound interest is interest upon interest, meaning that you will earn more on your loaned out money than you did if you would loan your money out as a simple loan.
For example, you borrow a company $500,000 against a 6.5% interest rate, the run time is 10 years.
As the run time is 10 years, the company has to pay you $50,000 per year, or $4166,67 per month. Let's just keep it to annually.
The first year the company has to pay $50,000 x 1.065 = $53,250 - profit of $3,250.
The second year (yearly amount $50,000 + interest earned $3,250) x interest rate 6.5% = $56,711.25
The second year (yearly amount $50,000 + interest earned $3,250) x interest rate 6.5% = $56,711.25
Profit of $6,711.25 + $3,250 (from previous year) = $9,961.25
With simple interest, in two years you would have profited $3,250 x 2 = $6,500.
This means that compound interest has gained you an extra $3,461.25 whilst the run time is the same between simple and compound interest.
YouTube: Introduction to compound interest
Hope this will help some members understanding.
Thank you.
Feel free to ask questions!
Hope this will help some members understanding.
Thank you.
Feel free to ask questions!
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