What Is Compound Interest With Example.Compound interest is the interest that is earned not only on the principal amount but also on the accumulated interest over time. In other words, it is the interest earned on both the initial principal and the accumulated interest over time.
What Is Compound Interest With Example.
For example, let’s say you deposit $1,000 into a savings account with a 5% annual interest rate. At the end of the first year, your account will have $1,050, including the $50 interest earned. In the second year, your account will earn interest not only on the $1,000 principal but also on the $50 interest earned in the first year. Therefore, at the end of the second year, your account will have $1,102.50, including the $52.50 interest earned.
If you continue to leave the money in the account, the interest will continue to compound on the principal and the accumulated interest. Over time, the power of compound interest can grow your money substantially.
A 10% return.
Assuming a 10% return, and imagining investing € 1000 in a fund, here’s what we get:
- First Year: 1000 € + 100 € Yield = 1100 €
- Second Year: 1100 € + 110 € Yield = 1210 €
- Third Year: 1210 € + 121 € Yield = 1331 €
- Fourth Year: € 1331 + € 133.10 Yield = € 1464.10
- Fifth Year: € 1464.10 + € 146.41 Yield = € 1610.51
- Sixth Year: € 1610.51 + € 161.05 Yield = € 1771.56
- Seventh Year: € 1771.56 + € 177.15 Yield = € 1963.56
- Eighth Year: € 1963.56 + € 196.35 Yield = € 2159.91
- Ninth Year: € 2159.91 + € 215.99 Yield = € 2375.90
- Tenth Year: € 2375.90 + € 237.59 Yield = € 2616.49
In ten years we have almost tripled the initial investment, and over the years, the compound interest grows more and more, as you can also see from the annual return, which is no longer on the starting capital, but on the capital plus the various interest generated.
It is therefore a long-term investment : the maturity must be 30 years or more, and consequently we must not be influenced by how our investment is going in the short term.
Compound Interest Formula
The calculation formula is: (1) IV = CP (1 + Y) ^ X where IV is the value of the investment after X years , while CP is the initial capital.
Y is expressed as a percentage and the symbol ^ + the symbol of exponentiation.Moreover, not everyone knows that there are actually three types of compound interest: the discontinuous compound interest year, the discontinuous convertible IC and the continuous or mathematical IC.
Finally, as I have already written in this article, the longer the investment and the more the multiplier of the compound interest grows, but in the event that you are the debtor, this plays against you.Banking anatocism, or the production of interest on interest by banks a few years ago and now prohibited by law, was based precisely on this system.
