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Power of Compound Interest : How to Make Your Money Work for You

Power of Compound Interest : How to Make Your Money Work for You

 Have you ever heard the saying, " It takes money to make money" Yes, the concept of compound interest matches this saying perfectly. This powerful as well as magical phenomenon has the potential to turn your finances in to powerhouse, allowing you to take rest while your money works for you. In this article, we will delve into topics: what is compound interest, compound interest formula and some effective ways to maximize the compound interest.





WHAT IS COMPOUND INTEREST ?

Compound Interest is one of the most powerful force in the dynamic world of finance. It is an exponential process of earning interest of interest, which means your money will grow over time. This phenomenon can pave way for remarkable long-term growth, even with relatively small amount of money. It is like a snowball rolling downhill, picking up the pace and size as it goes down. In short, the longer you invest your money, the more it multiplies.


COMPOUND INTEREST FORMULA

These formulas are the key to building a secure financial future.

1. WHEN INTEREST IS COMPOUNDED ANNUALLY/YEARLY

C.I = A - P

A= P(1 + R/100) ^ n

Where 

  • A = Amount or Future Value of the Investment
  • P = Principal or Initial Value Invested
  • R = Annual Interest Rate
  • n = Number of Years Investment is held
Example:- If you invest $1000 at 7% interest compounded annually for 5 years then compound interest will be :-

P = $1000 , R=7% , n = 5

C.I = A - P

A = P (1 + R/100) ^ n

A = 1000(1 + 7/100) ^ 5

    = 1000(1 + 0.07) ^ 5

    = 1000(1.07) ^ 5

     = 1000(1.402551)

     = 1402.55

Therefore, Compound Interest  C.I = 1402.55 - 1000 = $402.55


2. COMPOUND INTEREST FORMULA HALF YEARLY  

When Interest is Compounded half yearly

C.I = A - P

A = P(1 + R/200) ^ 2n

Let's have a look at the same example for which we calculated the  compound interest , when the interest is compounded annually.

Example: If you invest $1000 at 7% interest compounded annually for 5 years then compound interest will be :-

P = $1000 , R=7% , n = 5

C.I = A - P

A = P(1 + R/200) ^ 2n

A = 1000(1 + 7/200) ^ 2*5

    = 1000(1 + 0.035) ^ 10

    = 1000(1.035) ^ 10

    = 1000(1.410598)

    = 1410.59

    Therefore, Compound Interest  C.I = 1410.59 - 1000 = $410.59



3. COMPOUND INTEREST FORMULA QUARTERLY

When Interest is Compounded Quarterly

C.I = A - P

A = P(1 + R/400) ^ 4n

Example: If you invest $1000 at 7% interest compounded annually for 5 years then compound interest will be :-

P = $1000 , R=7% , n = 5

C.I = A - P

A = P(1 + R/400) ^ 4n

A = 1000(1 + 7/400) ^ 4*5

    = 1000(1 + 0.0175) ^ 20

    = 1000(1.0175) ^ 20

    = 1000(1.41477)

     =1414.77

 Therefore, Compound Interest  C.I = 1414.77 - 1000 = $414.77


MAXIMIZING COMPOUND INTEREST

  • Invest for long-term : The longer you invest, the more your money will grow.
  • Invest in high growth investments : This will help your money grow faster.
  • Re-Invest from Interests/Earnings : This will help you to earn more money over time.
  • Invest Frequently : The more often you invest, the more period your money has to grow.
  • Automate your Investments : Make use of online platforms to automate your investments, even when you are busy or on vacation.
  • Be patient : Compound Interest takes time to grow, don't expect a big return immediately.


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