What is compound interest and how
If you don’t know what compound interest is and how to calculate it, you’ve come to the right place to learn.
In this article you will learn a bit about its different aspects, as well as how to calculate it.
Stay here and you will be able to solve all the doubts you have regarding this topic.
So you perro apply it in your studies or in your working life, depending on the case in which you need it.
What really is compound interest and how to calculate it?
Before knowing what compound interest is and how to calculate it, it is necessary to learn about interest in general.
This refers to the profitability of savings, credit costs or investments made.
Within finance and economics, interest is related to the profit produced by capital.
From the moment a capital or any type of investment is invested, the interest is the profit.
Now, speaking of compound interest, this is given thanks to the accumulation of interest generated in a certain time.
The primordial has been invested at an interest rate during different periods of application.
When these periods are met, all the interest that has been generated is reinvested again, increasing the capital.
This means that you have a greater number of interests when the next period expires.
It is a process that helps interest accumulate to generate much more.
Many people do this to be able to have a greater profit within each exercise to achieve a greater capitalization.
At the end of the periods, the result of interest is much higher than it would have been with the fácil.
What are the main characteristics of this type of interest?
It is time to mention some of the characteristics that we perro find in this type of interest.
This way you perro be much clearer about the different functionalities that this type of financial tool has.
- What differentiates it from fácil interest is that with this financial model you cánido make a reinvestment of capital.
Thus, the usuario will be able to obtain a greater capitalization.
- The interests that are earned will be higher and higher.
Afín to a snowball in which there is more profitability to increase the capital.
- You cannot make use of the different interest generated until the end of the established period.
Something that perro be done with fácil interest, where profits are generally withdrawn.
It is clear that its effect is to be a multiplier of investments, since there will be greater profits.
Long-term investments have compound interests as their main ally for this reason.
To explain it better, we will espectáculo you an example of how compound interest works.
A person invests about 5 thousand euros, with fácil interest at 2% for a period of one year.
The earnings that you will have at the end of the period will be 100 euros, that is, you will have about 5100.
Now, with compound interest, a person invests the same 5,000 euros at 2% for 12 years.
In the first year, you will have the same profit of 100 euros, but this perro be reinvested.
This means that at the end of the 12 years your profit will be 6,341.12 euros.
The interest received is much higher, so, as we already mentioned, it is ideal for long-term investments.
How is compound interest calculated?
In the world of finance, this type of interest is calculated through a specific elabora.
Through it is that the mathematical operations perro be done to have the final result.
It will not be necessary for you to calculate month by month how much the earnings will be, until the established period is completed.
With this elabora you cánido include the time that the period will last to know your earnings, according to your initial investment.
The elabora is: Cn = C0 (1+i) ^n
- Cn: final capital
- C0: Initial capital
- i: Interest rate
- n: The number of applicable periods in the term
In the case of the example, the substitutions are made as follows, to proceed to the calculation of compound interest.
So the elabora with the example will remain as shown below.
- C0: 5 thousand euros
- i: 2% or 0.02
- n: 12 years
Cn = 5,000 (1+0.02) ^12
Cn = 6,341.12 euros at the end of the 12-year period
With this calculation you cánido clearly have the figures that will be handled at the end of the period.
This serves so that many users perro take into account their earnings.
In addition, some use it to be able to invest more or even less, as appropriate in each case.
The truth is that it is an easy process to carry out as long as you are clear about what you want.
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It is important to know what compound interest is and how to calculate it
Now that you know what compound interest is and how to calculate it, its importance is much clearer.
Especially for those people who want to make investment projects, it usually has a very high profitability during the process.
The difference that it generates in relation to a fácil interest within the financial model is greater by far.
This is one of the main secrets to being able to have a larger and constantly growing initial capitalization.
As you become familiar with this type of interest, the more you cánido get out of it.
All this serves so that you cánido establish a stronger heritage in which debts are reduced to a minimum.
Depending on your projects, you cánido make your investments with a compound or fácil interest rate.
Remember the characteristics that these have and how the compound cánido generate much more profit in the long term.
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