Interest is a consequence of financial transactions between a person and an institution, such as cash loans, financing, debt, overdraft, etc.
Interest represents a percentage of the total amount and can be calculated as agreed with the client and institution.
Many people are unaware of the difference between simple interest and compound interest. In this article I will explain a little more about the latter.
What are compound interest?
Well, compound interest is calculated taking into account the capital update, which means that it does not interfere only in the initial value. It also interferes with accrued interest, the famous interest on interest.
Another name for this interest is “accumulated capitalization”, and they are often used in commercial and financial transactions, such as: debts, investments, loans, etc.
The compound interest is characterized by the month that are incorporated into the capital. With a rate in this format, its value is able to grow at a greater speed compared to simple interest.
It is for this reason that compound interest is excellent when thinking about investments, however, it is necessary to be careful when it comes to debt.
So, what is the difference between simple interest and compound interest?
The main difference between both types of interest is in relation to the basis for calculating the rate. This is due to the fact that in simple interest the fee is charged on the initial amount. And compound interest is charged at the last value of the month.
For example, if we are going to apply for a loan of R $ 10,000, and we consider that it has a monthly fee of 1%, in simple interest the amount increases by R $ 100.00 per month.
In the case of compound interest the amount increases by R $ 100.00 in the first month, and by R $ 101.00 in the second month, and so on later. Which means that in a period of 12 months you will have accumulated R $ 11,268.25.
How can I calculate compound interest?
For you to calculate the compound interest of any financial transaction you have to use the following expression:
M = C (1 + i) t
Where,
M: amount C: capital i: fixed rate t: time period
Remembering that:
Capital: refers to the initial value of a debt, loan or investment.
Interest : The amount obtained when we apply the rate on capital.
Interest Rate: Expressed as a percentage taking into account the period in which it was applied, which may be a day, month, two-month period, year, etc.
Amount: The capital that was added to the interest, in other words the Amount is equal to the sum of capital and interest.
How can I use compound interest to increase my income?
Interest should not always be viewed as a cause for concern. In the case of investments, compound interest is advantageous because it improves the financial situation over time.
Besides they work for you automatically, if you separate a monthly amount, even if it is small and applied monthly, you will have an even better future.
For compound interest to give you the maximum return, you need to pay attention to two important points: the interest rate and the time available.
As I have already shown, the impact of compound interest in relation to the simple interest system is different. This disparity is due to the difference in interest rates obtained over time.
Many people make the mistake of not investing early because they think they don’t have enough money to do so. However, it is possible to start with small values that will grow over time.
A little discipline and financial intelligence can have a profound impact over time. And also thinking that time goes by very fast, it is better to have an invested amount than to regret it in the future.
Investments that use compound interest to your advantage
Investments available in the financial market based on fixed income use compound interest. For example: CDB, Tesouro Direto, Poupança, LCA, LCI, among others.
If you are thinking about investing in the stock exchange, although you do not pay interest directly on investments, they also offer compound returns that can help.
It is important to mention that the investments offer compound interest, capable of benefiting the investment in the long term. The longer you let your money go, the better the result.
Compound interest on fixed income
In the case of CBD (Bank Deposit Certificate). This is a bond issued by a bank or broker that lends money to other customers. Which means that the institution borrows from you for other people.
It is important to take into account that the CBD is governed by the downward trend of the Selic Rate (basic interest of the Brazilian economy), which may be less attractive for some months.
To find the best option, it is necessary to check the characteristics of the investment, as well as the minimum grace period for the application and the minimum size of the contribution.
In the case of LCI and LCA, they are similar securities with partially different purposes for financial institutions. Since they do not affect your income tax, which can be interesting, but the minimum amount can, in certain cases, reach R $ 50 thousand.
If you are more interested in Tesouro Direto know that it is an excellent option for fixed income, as it has zero risk and daily liquidity. Nor does it vary according to the broker because they are offered directly by the Treasury.
Conclusion
It is possible that compound interest can be detrimental to your life when it comes to overdraft or credit card debt. However, if you are trying to leverage your financial life as an investor, they can be a key part of your success.
On a daily basis, compound interest is able to help us achieve incredible results if we know where to invest, as they will save our resources and benefit us. Because it is a motor that accelerates applications according to value and time.
In the case of your personal finances, it is interesting to invest according to your profile, your possibilities and organize the details to make the best investment taking into account compound interest.
Make use of apps and spending spreadsheets to better understand your financial life and stay focused on your money and all areas of your life in order to save more and have a better future.
This economy and discipline will have great results when investing. Always taking into account that compound interest gains more strength over the years. At first it can be difficult to see the difference, but after one, two, five years you will be grateful for your discipline.
It is from that moment that your money works for you and not you for the money. Enjoy the benefits that compound interest can bring to your life and care when it is otherwise.
