Investment 101

The basics of compound interest

By November 16, 2020 No Comments

The basics of compound interest

Compound Interest is the interest an investor earns on his original investment plus all the interests earned on the interest that has accumulated over time.

 

It is easier to think of compound interest as Interest on Interest.

 

Let’s break it down, shall we?

 

Compound Interest

 

Suppose you deposit N500,000 into your investment account at 3% interest compounded annually. In year one, your interest is = N15,000 bringing your total investment to N515,000

 

But in year two, the interest you earn is 3% x N500,000 x N15,000 = N15,450 (which is the original amount plus the interest you earned in year one). So, the second year’s interest is N15, 450 bringing your total investment to N530,450.

 

In year three, you earn 3% interest on N530,450 which amounts to N15,913.5 bringing your total investment to N546,363.5

 

Breakdown:

 

              N500,000 + N15,000 = Year one interest

 

              N515,000 + N15,450= Year two interest

 

              N530,450 + N15,813.5 = Year three interest

 

In total, you earn N46,263.5 (Compounded total interest in three years)

 

 

Bottom line:

Let’s say that after the first year, the annual interest rate rises to between 5% – 10%, your compounded interest will rise as well.

 

Now, if along the line, you continue investing more money to add to the original N500,000 you have in your investment on a regular (perhaps weekly/monthly) basis – you’ll witness your principal grow as your interest significantly compounds.

 

The effect of compounding becomes especially powerful over a longer time as the amount of earned interest becomes larger and larger. This then allows you to get to your financial destination faster.

 

That right there is the miracle of compound interest.

 

Final words:

 

Manage your investment via your Wealth Planner and never forget to keep your eyes on the long term compounded interest on your investment regardless of what the financial market and rates may look like. Remember, the market can shift at any time for good, and best of all, your investment keeps compounding.

 

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