Money is there to spend it, it is the life philosophy of many people, until a crisis comes and there is no more money left, neither to spend nor to live. An effective way to save and earn more money is using compound interest, which is based on the reinvestment of interest so that the capital grows exponentially.
I am going to tell you how to calculate compound interest and everything related to this type of interest so that you understand how it works and why there are people who call it the eighth wonder of the world. You can also download an Excel template that contains a calculator automatically.
What is the composed interest?
I have tried to find a definition of compound interest, but they seem very complex to understand, so I am going to explain it in my own words. If we understand that interest is the money we are pay to invest in financial assets such as a fixed-term deposit or an investment fund, compound interest is the interest that we do not charge, but reinvest with the initial capital. .In other words, instead of taking your profits every time they are paid to you, you leave it there with the investment so that this interest generates more interest in turn.
Imagine that you have invested €10,000 that gives you €300 interest each semester, if every time you collect that money you take it out for yourself, every six months you will collect €300, neither more nor less. When we talk about compound interest, it means that you leave that money there adding to those €10,000, therefore, the first semester you receive €300, but the second you receive €300 for the €10,000 you invested, plus the interest of the €300 of interest that you have reinvested, which as it is 3% each quarter would be €9 more.
Therefore, at the end of the first year you would have €10,609.
Have I explained myself?
For example, to get compound interest on your savings, you can save your savings in an interest-bearing account, like this interest-bearing account from the Nationale Nederlanden that offers you a bonus of up to €50 as a new customer. Or also through fund portfolios, where you only have to save part of your money per month and the managers worry about increasing profitability. If you want to open a fund and save commissions for a year, you can do so through Indexa Capital by clicking here.
What is it for
The main use of compound interest is to multiply money over time, it is something that works in the medium and long term and is know as the eighth wonder of the world. In everyday life we can understand it as money that we can invest in the long term for, for example, retirement, or changing residence.
If today you decide to invest €1,000 for 30 years at 10% per year, each year you would receive interest of €100. If you don’t reinvest those €100, but take them out each year, at the end of 30 years you will have saved the €1,000 of the investment, which will have given you €100 as a benefit for each year, which since there are 30 makes a total of €3,000. On the other hand, if you decide to reinvest that money you receive each year, at the end of the period you would have almost €17,500.
As you can see, you have gone from earning €3,000 to almost €16,500 if we extract the initial investment; here is the magic of compound interest.
As I already mention, compound interest consists of reinvesting interest, therefore, to calculate it you will have to get the percentage of the total invest, plus the sum of the accumulated interest. Performing the calculation is easy, and what matters is being able to determine how much a capital will grow if we take it into the future. And it is what I am going to show you now so that you can do it in a simple way.