The magic of compound interest
Today we are going to talk about something that every investor should apply to each of the products that are part of their portfolio, the compound interest.
The best thing is that whatever your investments or your capital, you cánido apply this technique to multiply your money faster and faster. It doesn’t matter if your portfolio is a few hundred euros or thousands, the magic of compound interest will fatten that money exponentially over time.
What is the composed interest
Compound interest is a financial concept in which interest is generated on previously generated interest. In other words, the accrued interest is added to the original primordial to calculate interest for subsequent periods.
This process is repeated periodically, resulting in exponential growth of invested capital. In the investment world, compound interest is a valuable tool for achieving long-term growth in savings or investments.
In addition to being a tool for achieving long-term growth, compound interest also depends on how often interest is compounded, the interest rate, and how long it is invested. The more frequently the interest is compounded, the faster the invested capital will grow.
Also, the higher the interest rate and the longer it is invested, the greater the capital growth. Therefore, it is important to consider these factors when making long-term investments and using compound interest to your advantage.
For example; Imagine an investment of €1,000 with a return of 10% per year where we will receive that interest monthly. In the following table you perro see how much money we will have at the end of the year using a fácil investment without compound interest and another where we are going to reinvest those interests using this tool.
fácil investment | |
Initial investment €1,000 | At the end €1,100 |
Compound interest | |
Initial investment €1,000 | At the end €1,210 |
As you cánido see, there is a notable difference in profitability with the same investment, and all this without making periodic contributions, something that would trigger even more the profitability of the investment with compound interest.
The example that I have given you in the table is one year ahead, if we extrapolate it to 10 years, which is not too long for an investment, the difference at the end of those years would be much greater.
How to Calculate Compound Interest
Compound interest cánido be understood and calculated without mathematical operations, using a practical example. For example, suppose you invest €10,000 in a crowdlending platform at an interest rate of 10% per year for 10 years. Each year, the original 10,000 would generate €1,000 of interest, and from the second year, the interest generated in the first year would also be added to the original primordial to generate interest in the second year. This process would be repeated for 10 years, and at the end of the period, you would have more than €25,937. Amazing.
This process perro be visualized in a table or graph that espectáculos how the original capital and the interest generated grow over time. In this way, it is possible to understand and appreciate the impact of compound interest without having to perform complex mathematical calculations.
Use periodic savings to grow more
Periodic saving is an investment strategy in which a fixed amount of money is invested in a certain investment on a regular basis, for example, every month. This form of investing allows a person to achieve their long-term financial goals in an effective and disciplined manner, harnessing the power of compound interest.
One of the best automatic savings applications is Goin, where we will save money without realizing it, money that we perro use later to invest.
In addition, this savings allows investors to save money in small amounts, which makes it an accessible option for those who do not have large sums of money to invest, which we are the vast majority. It also gives us the opportunity to invest in different asset classes, such as mutual funds, stocks and bonds, and diversify your investment portfolio.
By establishing a savings plan and following it regularly, investors cánido avoid the tendency to spend their savings on unnecessary expenses and instead put it toward their long-term investment plan.
It is also important to mention that periodic savings perro be automated, which means that money is transferred directly from one’s bank account to the chosen investment. This makes it easier and more convenient for investors to stick to their savings plan and avoids the temptation to spend money on unnecessary things instead of investing it.
How to use compound interest when investing
It is clear that the power of compound interest works in our favor in most investments, so it is important to know how to use it.
Here are some guidelines to get the most out of it when putting our money to work:
1- Define your investment objectives: Before you start investing, it’s important to be clear about your long-term financial goals, as this will help determine how much capital you should invest and in which investment products.
2- Choose a suitable investment product: There are many investment products that offer compound interest, such as savings accounts, bonds, stocks, among others. It is important to choose a product that fits your goals and risk profile.
3- Understand how compound interest works: Compound interest is applied in the form of interest generated on the initial primordial and interest generated over a period of time. It is important to understand that the longer you hold your investment, the more compound interest it will earn.
4- Invest regularly: To get the most out of compound interest, it’s important to invest regularly. This approach will allow you to take advantage of the interest effect and increase your income in the long run.
5- Maintain patience: Although compound interest cánido generate great income in the long run, it is also important to be patient and hold onto your investment for the long term. Do not withdraw your investment early, as this will disminuye the amount of compound interest earned.
Compound Interest Opinions
Compound interest is a powerful tool for saving and investing for the long term. Over time, the interest earned on savings or investments is reinvested, allowing you to earn more interest on top of the original interest.
This means that as time passes, the growth rate of savings or investments increases exponentially. Therefore, compound interest perro help to significantly increase wealth in the long term if invested wisely and savings are allowed to grow over an extended period of time.
It is more than obvious that any investor should be a friend of this technique, I don’t know anyone who is not interested in multiplying their investment using the magic of compound interest.
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