What is to invest?

It is a common belief or story that saving is a way to invest for the future, which is not entirely true. While saving is the starting point for building up disposable income to explore various investment options, it is not in itself an investment. When you consider the time value of money, you’ll quickly realize that saving isn’t as good or lucrative for your future as you might initially think. Simply storing money and not using it in an interest-bearing mechanism means that it will have even less value in the future due to factors such as inflation and the cost of debt. higher and higher life.

This is why industry insiders and financial advisers often defend investing, as it means that your funds will “grow” and have the same value, hopefully more, at a future date when you decide to invest. ‘use. While investing locally is commendable, some may argue that you should explore international markets and try to invest in foreign currency trading, for example, to really capitalize on the strength of another currency as opposed to your local currency. , which may be declining or worse. than it has been in recent years.

Understanding Compound Interest

You may be wondering how and why a certain amount of money may be worth more in the future, and this is where the concept of compound interest comes in. then applies to the highest principal amount and leads to exponential growth in the amount. The interest generated can then be offset by inflation and other economic crises and be more beneficial than simply saving money with no prospect of growth over a period of time.

Invest early

That being said, that is why it is advisable to start investing early. The earlier you start investing, the more likely you are to accumulate compound interest. Also, a generalization is that when you are younger you have very little responsibility and can afford to take higher risks and explore various investment options. Since the investment comes with a certain level of risk, the returns can also be quite large.

When you consider forex and stock trading, for example, some people think you get better over time and the practice is perfect. Therefore, the earlier you start practicing, the more successful you will be later in life. Breaking through obstacles, incurring losses, getting used to market conditions and turbulence, as well as the ability to bounce back from potentially major financial setbacks are just a few of the things time saves you.

With the convenience of technology and the Internet, many believe that there has never been a better time than now to start investing. In addition to the workshops held on trading and the resources offered by brokers, potential investors are spoiled for choice to expand their knowledge and hone in on existing investment options, market conditions and even success stories. which can be used as a guide on the steps to take to achieve financial freedom, whatever that may be for you.

Mathematics is an integral part of programming. If you cannot solve simple problems in this area, you will have a much harder time than you need to.

Fortunately, learning how to do it is not too difficult. In this article, you will learn how to calculate simple and compound interest using Python, C ++, and JavaScript.

How do you calculate simple interest?

Simple interest is a method of calculating the amount of interest charged on a principal amount at a given rate and for a given period of time. You can calculate simple interest using the following formula:

Simple Interest = (P x R x T)/100 
Where, 
P = Principle Amount
R = Rate
T = Time

The problem statement

we give you principal amount, interest rate, and time. You need to calculate and print the simple interest for the given values. Example: Either principle = 1000, rate = 7 and timePeriod = 2. Simple interest = (principle * rate * timePeriod) / 100 = (1000 * 7 * 2) / 100 = 140. Thus, the output is 140.

The C ++ program to calculate simple interest

Here is the C ++ program to calculate simple interest:

// C++ program to calculate simple interest
// for given principle amount, time, and rate of interest.
#include 
using namespace std;
// Function to calculate simple interest
float calculateSimpleInterest(float principle, float rate, float timePeriod)
{
return (principle * rate * timePeriod) / 100;
}
int main()
{
float principle1 = 1000;
float rate1 = 7;
float timePeriod1 = 2;
cout << "Test case: 1" << endl;
cout << "Principle amount: " << principle1 << endl;
cout << "Rate of interest: " << rate1 << endl;
cout << "Time period: " << timePeriod1 << endl;
cout << "Simple Interest: " << calculateSimpleInterest(principle1, rate1, timePeriod1) << endl;
float principle2 = 5000;
float rate2 = 5;
float timePeriod2 = 1;
cout << "Test case: 2" << endl;
cout << "Principle amount: " << principle2 << endl;
cout << "Rate of interest: " << rate2 << endl;
cout << "Time period: " << timePeriod2 << endl;
cout << "Simple Interest: " << calculateSimpleInterest(principle2, rate2, timePeriod2) << endl;
float principle3 = 5800;
float rate3 = 4;
float timePeriod3 = 6;
cout << "Test case: 3" << endl;
cout << "Principle amount: " << principle3 << endl;
cout << "Rate of interest: " << rate3 << endl;
cout << "Time period: " << timePeriod3 << endl;
cout << "Simple Interest: " << calculateSimpleInterest(principle3, rate3, timePeriod3) << endl;
return 0;
}

Go out:

Test case: 1
Principle amount: 1000
Rate of interest: 7
Time period: 2
Simple Interest: 140
Test case: 2
Principle amount: 5000
Rate of interest: 5
Time period: 1
Simple Interest: 250
Test case: 3
Principle amount: 5800
Rate of interest: 4
Time period: 6
Simple Interest: 1392

Related: How to Find All the Factors of a Natural Number in C ++, Python, and JavaScript

The Python program to calculate simple interest

Below is the Python program to calculate simple interest:

# Python program to calculate simple interest
# for given principle amount, time, and rate of interest.
# Function to calculate simple interest
def calculateSimpleInterest(principle, rate, timePeriod):
return (principle * rate * timePeriod) / 100
principle1 = 1000
rate1 = 7
timePeriod1 = 2
print("Test case: 1")
print("Principle amount:", principle1)
print("Rate of interest:", rate1)
print("Time period:", timePeriod1)
print("Simple Interest:", calculateSimpleInterest(principle1, rate1, timePeriod1))
principle2 = 5000
rate2 = 5
timePeriod2 = 1
print("Test case: 2")
print("Principle amount:", principle2)
print("Rate of interest:", rate2)
print("Time period:", timePeriod2)
print("Simple Interest:", calculateSimpleInterest(principle2, rate2, timePeriod2))
principle3 = 5800
rate3 = 4
timePeriod3 = 6
print("Test case: 3")
print("Principle amount:", principle3)
print("Rate of interest:", rate3)
print("Time period:", timePeriod3)
print("Simple Interest:", calculateSimpleInterest(principle3, rate3, timePeriod3))

Go out:

Test case: 1
Principle amount: 1000
Rate of interest: 7
Time period: 2
Simple Interest: 140.0
Test case: 2
Principle amount: 5000
Rate of interest: 5
Time period: 1
Simple Interest: 250.0
Test case: 3
Principle amount: 5800
Rate of interest: 4
Time period: 6
Simple Interest: 1392.0

Related: How To Complete The FizzBuzz Challenge In Different Programming Languages

The JavaScript program to calculate simple interest

Below is the JavaScript program to calculate simple interest:

// JavaScript program to calculate simple interest
// for given principle amount, time, and rate of interest.
// Function to calculate simple interest
function calculateSimpleInterest(principle, rate, timePeriod) {
return (principle * rate * timePeriod) / 100;
}
var principle1 = 1000;
var rate1 = 7;
var timePeriod1 = 2;
document.write("Test case: 1" + "
");
document.write("Principle amount: " + principle1 + "
");
document.write("Rate of interest: " + rate1 + "
");
document.write("Time period: " + timePeriod1 + "
");
document.write("Simple Interest: " + calculateSimpleInterest(principle1, rate1, timePeriod1) + "
");
var principle2 = 5000;
var rate2 = 5;
var timePeriod2 = 1;
document.write("Test case: 2" + "
");
document.write("Principle amount: " + principle2 + "
");
document.write("Rate of interest: " + rate2 + "
");
document.write("Time period: " + timePeriod2 + "
");
document.write("Simple Interest: " + calculateSimpleInterest(principle2, rate2, timePeriod2) + "
");
var principle3 = 5800;
var rate3 = 4;
var timePeriod3 = 6;
document.write("Test case: 3" + "
");
document.write("Principle amount: " + principle3 + "
");
document.write("Rate of interest: " + rate3 + "
");
document.write("Time period: " + timePeriod3 + "
");
document.write("Simple Interest: " + calculateSimpleInterest(principle3, rate3, timePeriod3) + "
");

Go out:

Test case: 1
Principle amount: 1000
Rate of interest: 7
Time period: 2
Simple Interest: 140
Test case: 2
Principle amount: 5000
Rate of interest: 5
Time period: 1
Simple Interest: 250
Test case: 3
Principle amount: 5800
Rate of interest: 4
Time period: 6
Simple Interest: 1392

How to calculate compound interest

Compound interest is the addition of interest to the principal amount. In other words, it’s interest over interest. You can calculate compound interest using the following formula:

 Amount= P(1 + R/100)T
Compound Interest = Amount – P
Where,
P = Principle Amount
R = Rate
T = Time

The problem statement

we give you principal amount, interest rate, and time. You need to calculate and print the compound interest for the given values. Example: Either principle = 1000, rate = 7 and timePeriod = 2. Amount = P (1 + R / 100) T = 1144.9 Compound interest = Amount – Principal amount = 1144.9 – 1000 = 144.9 Thus, the output is 144.9.

The C ++ program to calculate compound interest

Below is the C ++ program to calculate compound interest:

// C++ program to calculate compound interest
// for given principle amount, time, and rate of interest.
#include 
using namespace std;
// Function to calculate compound interest
float calculateCompoundInterest(float principle, float rate, float timePeriod)
{
double amount = principle * (pow((1 + rate / 100), timePeriod));
return amount - principle;
}
int main()
{
float principle1 = 1000;
float rate1 = 7;
float timePeriod1 = 2;
cout << "Test case: 1" << endl;
cout << "Principle amount: " << principle1 << endl;
cout << "Rate of interest: " << rate1 << endl;
cout << "Time period: " << timePeriod1 << endl;
cout << "Compound Interest: " << calculateCompoundInterest(principle1, rate1, timePeriod1) << endl;
float principle2 = 5000;
float rate2 = 5;
float timePeriod2 = 1;
cout << "Test case: 2" << endl;
cout << "Principle amount: " << principle2 << endl;
cout << "Rate of interest: " << rate2 << endl;
cout << "Time period: " << timePeriod2 << endl;
cout << "Compound Interest: " << calculateCompoundInterest(principle2, rate2, timePeriod2) << endl;
float principle3 = 5800;
float rate3 = 4;
float timePeriod3 = 6;
cout << "Test case: 3" << endl;
cout << "Principle amount: " << principle3 << endl;
cout << "Rate of interest: " << rate3 << endl;
cout << "Time period: " << timePeriod3 << endl;
cout << "Compound Interest: " << calculateCompoundInterest(principle3, rate3, timePeriod3) << endl;
return 0;
}

Go out:

Test case: 1
Principle amount: 1000
Rate of interest: 7
Time period: 2
Compound Interest: 144.9
Test case: 2
Principle amount: 5000
Rate of interest: 5
Time period: 1
Compound Interest: 250
Test case: 3
Principle amount: 5800
Rate of interest: 4
Time period: 6
Compound Interest: 1538.85

Related: How to Invert an Array in C ++, Python, and JavaScript

The Python program to calculate compound interest

Below is the Python program to calculate compound interest:

# Python program to calculate compound interest
# for given principle amount, time, and rate of interest.
# Function to calculate compound interest
def calculateCompoundInterest(principle, rate, timePeriod):
amount = principle * (pow((1 + rate / 100), timePeriod))
return amount - principle
principle1 = 1000
rate1 = 7
timePeriod1 = 2
print("Test case: 1")
print("Principle amount:", principle1)
print("Rate of interest:", rate1)
print("Time period:", timePeriod1)
print("Compound Interest:", calculateCompoundInterest(principle1, rate1, timePeriod1))
principle2 = 5000
rate2 = 5
timePeriod2 = 1
print("Test case: 2")
print("Principle amount:", principle2)
print("Rate of interest:", rate2)
print("Time period:", timePeriod2)
print("Compound Interest:", calculateCompoundInterest(principle2, rate2, timePeriod2))
principle3 = 5800
rate3 = 4
timePeriod3 = 6
print("Test case: 3")
print("Principle amount:", principle3)
print("Rate of interest:", rate3)
print("Time period:", timePeriod3)
print("Compound Interest:", calculateCompoundInterest(principle3, rate3, timePeriod3))

Go out:

Test case: 1
Principle amount: 1000
Rate of interest: 7
Time period: 2
Compound Interest: 144.9000000000001
Test case: 2
Principle amount: 5000
Rate of interest: 5
Time period: 1
Compound Interest: 250.0
Test case: 3
Principle amount: 5800
Rate of interest: 4
Time period: 6
Compound Interest: 1538.8503072768026

Related: How to Find the Sum of All the Elements in an Array

The JavaScript program to calculate compound interest

Below is the JavaScript program to calculate compound interest:

// JavaScript program to calculate compound interest
// for given principle amount, time, and rate of interest.
// Function to calculate compound interest
function calculateCompoundInterest(principle, rate, timePeriod) {
var amount = principle * (Math.pow((1 + rate / 100), timePeriod));
return amount - principle;
}
var principle1 = 1000;
var rate1 = 7;
var timePeriod1 = 2;
document.write("Test case: 1" + "
");
document.write("Principle amount: " + principle1 + "
");
document.write("Rate of interest: " + rate1 + "
");
document.write("Time period: " + timePeriod1 + "
");
document.write("Compound Interest: " + calculateCompoundInterest(principle1, rate1, timePeriod1) + "
");
var principle2 = 5000;
var rate2 = 5;
var timePeriod2 = 1;
document.write("Test case: 2" + "
");
document.write("Principle amount: " + principle2 + "
");
document.write("Rate of interest: " + rate2 + "
");
document.write("Time period: " + timePeriod2 + "
");
document.write("Compound Interest: " + calculateCompoundInterest(principle2, rate2, timePeriod2) + "
");
var principle3 = 5800;
var rate3 = 4;
var timePeriod3 = 6;
document.write("Test case: 3" + "
");
document.write("Principle amount: " + principle3 + "
");
document.write("Rate of interest: " + rate3 + "
");
document.write("Time period: " + timePeriod3 + "
");
document.write("Compound Interest: " + calculateCompoundInterest(principle3, rate3, timePeriod3) + "
");

Go out:

Test case: 1
Principle amount: 1000
Rate of interest: 7
Time period: 2
Compound Interest: 144.9000000000001
Test case: 2
Principle amount: 5000
Rate of interest: 5
Time period: 1
Compound Interest: 250
Test case: 3
Principle amount: 5800
Rate of interest: 4
Time period: 6
Compound Interest: 1538.8503072768008

Learn to code for free: start with simple and compound interest

These days, the impact of coding is increasing exponentially. And at the same time, the demand for skilled coders is also increasing exponentially. There is a misconception among people that they can only learn to code after paying high fees. But this is not true. You can learn to code absolutely free from platforms like freeCodeCamp, Khan Academy, YouTube, etc. So even if you don’t have a big budget, you don’t have to worry about missing something.

Read more

About the Author

If you’ve heard of saving and investing, you’ve heard of the “power of compound interest!” But what is compound interest? How it works? Why is this important? And what is the compound interest formula? We will take a look.

What is compound interest?

People who already have money find it easier to get more of it just by letting their savings grow. That’s the power of compound interest.

If you lend your money, the borrower will reimburse you, with additional fees. These fees are interest, and it’s usually a percentage of the money you loaned them.

If you lend me £ 100 at 10% interest, I’ll pay you back £ 110 – that’s the original £ 100, which we call principal, plus £ 10 interest. You could keep loaning me the same £ 100 and earn £ 10 every time. After ten loans you would have the original £ 100 plus £ 100 interest. This is how simple interest works.

Compound interest is more powerful. If, instead of lending me just £ 100 the second time around, you lend me the full £ 110 at the same interest rate, then I’ll pay you back £ 121 – that’s the principal of £ 110, plus £ 11 of interests. Next time around, you’ll get £ 133.10. If you keep reinvesting principal and interest, your money will grow exponentially. Let’s look at the numbers.

After re-loaning ten times, you will have earned almost 160% on top of your capital. After twenty-five times, you will have won almost 900%! That’s the power of compound interest: the more you reinvest your interest, the faster your investment grows.

How to calculate compound interest?

You can calculate it step by step or use an online calculator (try the Motley Fool Savings Calculator!), But it’s easy to calculate yourself. Better yet, it will help you understand how the compound interest formula works.

Above, every time we lent money we would calculate the interest and then add it to the principal. We can do this all at once by multiplying the principal by (1 + interest rate). Let us call the principal “P” and the interest rate “r”. If we reinvest twice, we end up with:

P x (1 + r) x (1 + r)

We can write this more clearly as P (1 + r)²

To generalize this formula:

• P is the main
• r is the interest rate
• n is the number of times we compound the interest in each period of time
• t is the number of periods.

This gives us the compound interest formula:

P (1 + r / n)^nxt

Let’s look at our original loan, when you loaned me £ 100 at 10% interest. If it’s compounded annually, and you’ve loaned it to me for 10 years. You would end up with:

100 x (1 + 0.1 / 1)^{(1 × 10)} = 100 x 1.1^ten = £ 259.73

What if I paid the same interest rate, but compounded monthly rather than annually? If you lent it to me for the same 10 years, you would have:

100 x (1 + 0.1 / 12)^{(12 × 10)} = 100 x (1 + 0.1 / 12)¹²⁰ = £ 270.70

So, you see, understanding the compound interest formula helps you understand why you should check how often the interest is compounded rather than just the interest rate. By dialing monthly rather than annually, you earned an additional £ 11.

How to benefit from compound interest?

In fact, my friends don’t pay me interest when I lend them money – but my bank does! Compound interest makes your money grow in savings accounts, term deposits, and bonds. However, the same principles – and the same compound interest formula – apply to any investment if you reinvest your profits.

What’s the downside?

There’s always a downside, and compound interest is no different. It’s great if you’re the person earning the interest, but not if you’re the one paying it. Credit cards and loans can easily get out of hand if you don’t meet payments.

To avoid this, choose a 0% credit card to dodge the negative effects of compound interest.

To take with

The compound interest formula can help you understand what is happening to your money and why. If you keep reinvesting in a low-cost, high-interest account that compounds frequently, your wealth will increase. That’s the power of compound interest.

Some offers on MyWalletHero come from our partners – this is how we make money and make this site work. But does this have an impact on our grades? No. Our commitment is for you. If a product isn’t good, our rating will reflect that, or we won’t list it at all. Additionally, while we aim to showcase the best products available, we do not review every product on the market. Find out more here. The above statements are owned by The Motley Fool only and have not been provided or endorsed by any bank advertisers. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of the board of directors of The Motley Fool. The Motley Fool UK recommended Barclays, Hargreaves Lansdown, HSBC Holdings, Lloyds Banking Group, Mastercard and Tesco.

Use this compound interest calculator

What is compound interest?

Compound returns on investment

More NerdWallet Calculators

Complete with additional contributions

However, if you are an elderly pensioner, any donation over $ 10,000 per year, or $ 30,000 over five years, would be treated as private property and, depending on your overall asset and income situation, could affect the pension eligibility.

You say you don’t get any pensions, which means you could give your son whatever you want without any negative impact on your finances.

I am 21 years old and I dream of becoming a homeowner. I want to start thinking about investing my money. I figured out that, with my paycheck, I could probably afford repayments of around $ 1,200 per month. I have looked at home loans but with what I earn I cannot borrow enough money to afford anything in the real estate market. I have about $ 26,000 in a high interest bank account, but I don’t know what to do from here. What can I do to give myself the best return on my money?

If you’re ready to take a long-term view – and you wouldn’t panic and sell when the stock market is having one of its normal bad days – you might consider taking out a margin loan to buy a trust fund. ‘quality actions.

You can start small and spread your money over a range of blue chip stocks. Also, you would get a tax benefit, as part of the income stream generated by dividends from these companies would be franked.

You could then increase your base investment on a regular basis by reinvesting those dividends or making other contributions.

If you seek professional financial advice first and adopt a conservative loan-to-appraisal ratio, you should be fine.

My wife and I are ready to modernize our house. We only have $ 5,000 left on our mortgage, with the house valued at around $ 900,000 and a rental potential of $ 875 per week. I don’t know whether we should sell our existing house to buy the new house or refinance the existing house and make it an investment property. What are the capital gains implications of the latter option?

If you keep your house and rent it out, the deductible interest would be limited to that payable on the existing mortgage.

You cannot increase tax deductibility by mortgaging the original property to purchase your new home.

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Once you leave the original property, you will be liable for capital gains tax (CGT) on any increase in value from that date. However, it is possible to revert to this property in the future and claim the CGT six-year absence exemption but, if you did, the new property would be subject to CGT. Indeed, you cannot have two main residences at the same time.

Your best course of action would be to seek advice and liaise closely with your accountant.

Noel Whittaker is the author of Making Money Made Simple and many other books on personal finance. [email protected]

Earning interest remains one of the cornerstones of investing and allows you to earn passive income by placing your money in interest-bearing securities or accounts. Compound interest allows you to increase the value of funds held in interest-bearing accounts or securities. In this article, Benzinga takes a look at the benefits of compound interest and how it can increase your net worth.

What is compound interest?

Compound interest can best be described as “interest on interest”. In other words, the interest you receive on an investment, such as a certificate of deposit, is added to the original principal and subsequently accumulates or “accumulates” additional interest which helps to further grow your investment.

Compound interest is the result of reinvesting interest earned over a period of time instead of paying it. Thus, the interest paid in the following period is on the initial deposit plus the interest accrued on the account.

For example, if you open an interest-bearing savings account, the interest you receive on the account balance goes into the account and is added to the existing balance. You then receive interest on the accrued interest and on the initial deposit. Interest earned on the principal and interest amounts in the account increases or “compounds” to increase the account balance.

Compound interest can increase the value of your portfolio over time, especially if you primarily hold interest-bearing investments like certificates of deposit or bonds. By increasing the value of your portfolio by receiving both interest and compound interest, the amount of your equity held in these instruments should increase over time.

Where do you meet compound interest?

You often see compound interest in the different types of savings accounts that you can open at most financial institutions. You might also see compound interest paid on fixed income securities like bonds.

Note that interest can be compounded on any frequency schedule. Common examples of dialing frequency include daily, monthly, and annual dialing. You might even find a continuous composition.

Additionally, the number of compounding periods can dramatically affect the amount of interest you earn over time. Be sure to check how often the interest is compounded when you intend to make a long-term investment that earns compound interest. Compound interest can be obtained from a number of different types of investments. Several common investments where you can take advantage of compound interest or a similar benefit are listed below.

• High yield savings accounts

One of the safest and most readily available ways to earn compound interest is by using a high yield savings account. This type of investment may be suitable for people with a stable income who make frequent deposits into the account. To maximize your returns, choose a savings account that compounds interest daily rather than weekly or monthly, as your account balance will grow at a faster rate. Plus, having your money in a savings account at a bank usually gives you immediate access to your funds in an emergency.

• Money market chequing accounts

A current money market account usually pays compound interest. It also allows you to write checks and withdraw money using an ATM card, although you may have a limit on the number of transactions you can make each month, and you may incur charges. be charged if your balance falls below a certain amount. Since money market accounts typically pay a very low rate of interest, it is probably smarter to diversify your investments into higher yielding assets if you plan to increase your net worth through compound interest.

Bonds are units of securitized corporate debt that companies issue and pay a fixed rate of interest. The return on your interest on bonds can vary widely depending on the type of bond you choose to invest in and its inherent risk. For example, government-issued bonds offer the lowest risk and interest rates but the highest liquidity, while municipal bonds may carry more risk and less liquidity. The bonds with the highest yields are typically short-term corporate bonds that mature in less than a year and zero coupon bonds that sell at a discount and must be held to maturity. to get the full benefit of interest. You can get an aggravated effect by reinvesting the bond coupon payments in more bonds.

A stock is an investment that represents a share of ownership in a company. Many stocks provide regular dividends which consist of money the company pays out to its shareholders from its profits or reserve funds. If you reinvest those dividends in the stock, it has a cumulative effect. Dividend stocks generally have a higher risk compared to other compound investments because stocks can go up or down in value. If you think the market is fair and select a dividend paying stock with good fundamentals, then you could benefit from capital appreciation as well as compound dividends. You can also choose preferred stocks which may not be as liquid as common common stocks, but they could offer higher dividends and greater security in the event of a business wind-up.

Composition makes your money grow faster

When you deposit funds into an account or investment with compound interest, your money grows faster because you earn interest on your new balance that includes previously paid interest. Below is a formula that tells you how much your capital balance will amount to (P ‘) based on the initial capital amount P:

P ‘= P (1 + r / n) ^ nt

Or:

P ‘= the new principal amount

P = the amount of the initial deposit or the principal

r = the annualized nominal interest rate expressed as a decimal number

n = how often interest is compounded per year

t = the number of time periods elapsed in years

The total amount of compound interest (I) generated by this investment is then equal to the new amount of principal (P ‘) minus the amount of the initial deposit (P):

I = P’-P = P (1 + r / n) ^ nt – P = P ((1 + r / n) ^ nt – 1)

As an example of how compound interest can make your money grow faster, consider a situation where you deposit $ 50,000 into a savings account with monthly compounding at an interest rate of 2% per month. year for 5 years.

In this case, P = 50,000, n = 12 periods per year and t = 5 years. You also need to convert the interest rate r to decimal terms by dividing 2% by 100 to get r = 0.02.

You can now solve the compound interest equation for P ‘like this:

P ‘= $ 50,000 * (1 + 0.02 / 12) ^ (12 * 5)

P ‘= $ 50,000 * (1 + 0.001666667) ^ (60)

P ‘= $ 55,253.94

The total amount accrued as principal and interest on principal of $ 50,000 at an annual rate of 2% per year compounded 12 times per year over 5 years is $ 55,253.94. Note that compounding interest gives you $ 253.94 more than the $ 55,000 you would have received without compounding.

As you can see from the example above, receiving compound interest increases your money over time compared to what you would have made on an investment that only earns simple interest. Plus, if you receive compound interest more often, you receive even higher interest to help your money grow faster.

Choose compound interest over simple interest

Compound interest can be very powerful when you are investing or saving your money over long periods of time. Now that you know how much better it is to get compound interest over simple interest, you will probably want to look for compound interest to earn interest on your interest so that you can grow your savings as much as possible. As always, come back to Benzinga for more useful financial information.

Frequently Asked Questions

“Compound interest is the eighth wonder of the world. Whoever understands it, deserves it; whoever does not pay for it. “- Albert Einstein

This quote is one that many investors are familiar with. It succinctly sums up the power of compound interest and its potential. To fully understand this, you must ask yourself: How does compound interest work?

While many people can explain the function of composition, they are at a loss when it comes to understanding exactly how wealth begets more wealth. Do you know the compound interest formula? Do you know the “rule of 72”? Do you know how much your investments will consist of if you continue to make them on a regular schedule?

These are all questions you need to have the answers to if you are to truly understand the power of compound interest. Read on for these answers.

What is compound interest?

Compound interest is the interest on an invested balance that increases over time as each recalculation of that balance includes the previous interest payment. The longer the time horizon, the more opportunities there are for capitalization. Likewise, the higher the interest rate, the faster the compound total increases.

To understand compound interest, it’s best to ask a very simple question:

Would you rather have $ 1,000,000 today or start with a dime and see the balance double every day for 30 days?

This question is popular in beginner personal finance courses. The answer is, of course, the penny doubled for 30 days. Why? Because the magic of compound interest will leave you with a balance of over $ 10.7 million by day 30 – over 10n times the return on investment of taking the million dollars up front!

While this is an extreme example of 100% compound balance, it nonetheless shows the importance of compound interest. In your retirement accounts, compound interest is a powerful tool to grow your major investments. The earlier you start and the more you contribute, the greater the return on investment.

An example of composition at work

To get a better example of compound interest, let’s consider a more practical example. Let’s say Bailey invests a lump sum of $ 50,000 at a fixed rate of 5% per annum. Let’s take a look at how Bailey’s investment grew over different time horizons if she invests an additional $ 100 each month. After…

• One year, she will have $ 53,786
• Five years old, she will be $ 70,968
• 10 years old, she will be $ 97,878
• 20 years old, she will be $ 176,735
• 30 years old, she will be $ 306,611.

For many investors, a six-figure total return on investment is quite achievable through capitalization. With constant contributions, favorable rates of return, and a sufficiently long time horizon, the opportunities for return on investment are virtually limitless.

Want to see compound interest at work for your own investment? Check out our compound interest calculator to see how your contributions are made up over a specific time horizon.

The compound interest formula

As with all mathematical concepts, compound interest has a formula: P (1 + r / n)NT. In this formula …

• P = the balance of the initial capital
• r = the interest rate
• m = the number of times the interest is applied
• t = the number of elapsed time periods.

As you can see from the raw equation, time plays an important role in the composition. First, the frequency with which a quantity is composed is important to increase the main value. Second, the total amount of time invested (time periods) establishes how many times the balance increases. These two factors together are exponential, which is where the power of compound interest comes from.

Tips for optimizing compound interest

Believe it or not, there are ways to get the most out of compound interest. This is to manipulate the variables of the above equation.

Take the example of a dividend-paying stock. You can actually double the compounding capabilities of these securities with a Dividend Reinvestment Plan (DRIP). By reinvesting the dividends, you make up your main investment in the number of shares, which pays more dividends. At the same time, when the stock price appreciates, you also gain wealth.

You can also optimize the dialing frequency. For example, you can choose to invest in a fund that is compounded monthly rather than quarterly. This doubles the number of times the interest is applied.

The better you understand how capitalization works, the better you will understand where the opportunities lie to optimize it… and the easier it will be to capitalize on these opportunities within the framework of your preferred investment modality.

What is the “rule of 72”

The Rule of 72 is a handy little formula this is often used to guess a 100% return on investment. In other words, it estimates how long it will take to double your money. To figure this out, divide 72 by the growth rate of your investment (or interest rate). The result is the number of years it will take you to double your money.

The rule of 72 also works for calculating inflation losses. Divide 72 by the expected inflation rate, and that’s how long it will take for your uninvested dollars to lose half of their value.

The best investment vehicles for compounding

How does compound interest work? Now that you know the answer, it’s time to use it to your advantage. This means choosing an investment vehicle that offers the best prospects for capitalization. For most investors, this means any type of equity security that offers dividend reinvestment opportunities.

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The reinvestment of dividends is the ultimate form of capitalization. The more stocks you own, the more dividends you will receive. The more dividends you collect, the more you can reinvest in new stocks and perpetuate the cycle. Over time, you could end up with large holdings due to compounding. And, as an added bonus, turning off reinvestments will earn you regular income, made possible by your compound stocks.

On the surface, an interest rate is just a number. How this number applies to debt or equity opens up a world of possibilities. The first consideration is always whether it is simple interest or compound interest. Depending on which one you are dealing with, the results for your wealth can be very different.

Simple interest and compound interest are two very different concepts. Although they both represent accumulation, the method accumulation is different. For example, you would like your credit card to use simple interest to calculate your balance instead of compound interest! Likewise, you probably don’t want to invest too much in bonds that offer a return calculated by simple interest.

Let’s get to know simple and compound interest: what makes them different and how they apply to investments, both positively and negatively.

What is simple interest?

Simple interest is the calculation of the cost of a loan or total return on an uncompounded capital balance. This means that the principal balance does not change: no interest payment composes it over the life of the loan or investment. This is the most basic form of interest and it remains static.

Simple interest tends to benefit borrowers because it is not compounded. Instead of accumulating exponential fees over the life of a loan, you pay a known amount of interest on the original amount borrowed. As the loan balance decreases each month, the interest also decreases, as it is fixed on the outstanding balance.

Simple interest formula

The simple interest formula is as simple as you can imagine: I = Prt, or:

• I = total value of interest
• P = main value
• r = interest rate
• t = period

Examples of simple interests

• A certificate of deposit (CD) will produce a return on investment based on the amount of capital invested. The return is not compounded, and the interest rate and term are both fixed. If you invest $ 10,000 in a 2% CD for one year, your return will be $ 200.
• Auto loans amortize monthly, which means you know the principal and interest payments up front. If you buy a car for $ 20,000 at 6% interest for 60 months, you will owe a total of $ 3,200 in interest. Your monthly payment will remain fixed at ~ $ 387.

What is compound interest?

Compound interest is an investor’s best friend. This type of interest returns to the capital to create a larger balance which is able to generate higher returns in each compounding period. The longer the investment and the higher the interest rate, the more potential it has to create wealth.

Compound interest benefits long-term investors. Even if the interest rate fluctuates over time, there is a longer path to creating exponential growth. It is also possible to accelerate the composition with a continuous principal investment or by reinvestments, such as dividends. Compounding puts your money at your service.

Compound interest formula

The formula for compound interest is more complex than simple interest: P (1 + r / n)NT, or:

• P = the balance of the initial capital
• r = the interest rate
• m = the number of times the interest is applied
• t = the number of elapsed time periods

Examples of compound interest

• An index fund will create compound growth over time. If you invest $ 5,000 and keep investing an additional $ 250 each month for 40 years at an average interest rate of 8%, your final compounded amount will be almost $ 1 million!
• Want to create your own example of compound interest at work? Check out our compound interest calculator to see what happens to an investment when you adjust the principal, time horizon, interest rate, and more.

Pay attention to the main

Whether simple or compound, principal has a huge effect on the power of interest rates. For simple interest rates, the principal will determine the net return on your investment or the cost of borrowing. For compound investments or debt, the higher the capital, the faster the rate of accumulation.

Investors need to know interest rates regardless of which side of the financial transaction they are on. Consider the relationship between the amount of money in question and the interest rate that goes with it. In doing so, you will have the power to calculate things like return on investment or internal rate of return (IRR).

Know the best method to accumulate wealth

You will likely encounter both types of interest during your time as an investor. The key is to know what will benefit you the most in the context of your investment vehicle: simple interest vs. compound interest. If you’re looking for a low-risk, short-term investment, you might settle for simple interest. If you are looking for large gains over a long period of time, compound interest is where it is.

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Your access to simple or compound interest will depend on the mode of investment. Good luck finding bonds with compound interest opportunities! Likewise, beware of the cumulative power of debt. Take the time to understand the nature of the interest behind the number and how it affects your principal. Then do everything you can to maximize (or minimize) the effects of interest on your investment.

The most powerful force in the investment world is compound interest. In fact, Albert Einstein once called compound interest on “The eighth wonder of the world! “But what is compound interest? Why was it a wonder to one of the brightest minds of the modern age? To understand, it’s best to break the concept down into explanations at a time practices and mathematics.

If you are an investor, you need to know what compound interest is, how it works, and how to earn it. A large portion of your wealth building opportunities come from compound interest. Here’s a crash course on compound interest and how to use it in your plans to build wealth in the future.

The definition of compound interest

Compound interest is the continuous addition of interest payments to the principal balance. This starts a growth cycle where, every time the interest compounds, it is generated by a higher and higher balance. This is a definition best illustrated by an example.

Consider how much money you would have after 30 days if you start with a dime and double the principal each day. While you would still have only a handful of change at the end of your first week, on day 15 your balance would be $ 163.84. On day 20, it would be $ 5,242.88. And, by day 30, you would have more than $ 5.3 million to show for your composition. This example is one of the best to illustrate the power of compound interest, however extreme it is.

The reality is that most interest is made up a few percent at a time, over a longer period of time. For example, the stock you own may pay a dividend of 2.15% each quarter. Or, your index fund can return 9% per year. The key factor in creating wealth in this case is time. The more periods of capitalization, the more it is added to the principal balance and the higher the next compounded amount.

How to calculate compound interest

For those who prefer a mathematical look at the power of compound interest, there is a specific formula to calculate it: P (1 + r / n)NT. In this formula:

• P = the balance of the initial capital
• r = the interest rate
• m = the number of times the interest is applied
• t = the number of elapsed time periods

By investing standards, this formula is actually very simple. In most cases, the interest rate and the number of times interest applies are fixed, giving investors more control over other variables. You can continue to increase your principal balance over time by reinvesting. And, the longer you let your funds accumulate, the more that balance increases.

Examples of compound growth over time

Many investments offer opportunities for capitalization. It’s about recognizing the different options for compound interest and understanding how much and how often compounding occurs. Here are some basic examples:

• Marcy invests in an S&P 500 index fund for 20 years, with an average return of 7% per year. Her initial balance of $ 5,000 and monthly contribution of $ 250 will have increased to over $ 150,000 when she rechecks it.
• Dalton owns shares of XYZ Company, which pays a quarterly dividend of 2%. Over a five-year period, the stock itself increases by 50%. At the same time, Dalton reinvested dividends, which bought fractional shares and allowed him to grow his holdings exponentially.

Any investment that adds accumulated gains to capital to enable even more wealth creation is an example of capitalization. Whether it’s stocks, bonds, funds or some other investment vehicle, the goal is to grow capital through return on investment, to generate even more income.

Want a more comprehensive overview of the power of composition? Consult our investment calculator and enter your own investment numbers to see how compound interest affects your accumulation over time.

How to maximize the composition

Whether you use debt or equity securities, or use another mode of investing, there are several ways to maximize its potential. Here are some of the best strategies:

• Time spent invested. The more compound periods there are, the more accumulation per period. Translation: the more you keep building capital, the more money it will bring.
• Ongoing investments. Continuing to invest capital is a powerful way to accelerate accumulation. Not only will the membership increase the return on investment, but the continued contribution to the fund balance will also increase.
• Reinvestment. If your investment pays dividends or offers other reinvestment opportunities, take them! As the principal investment continues, these additional repayments will increase earning capacity.
• Optimal interest rate. The higher the interest rate (or rate of return), the more money from power is added to the balance of capital. Look for investments with a history of high interest rates.

There are dozens of other ways to optimize the mix that are specific to the investment. Look for ways to maximize the variables over which you have control: time, contributions, mode of investment and more.

Composition is the key to building wealth

Albert Einstein also had another quote on compound interest: “he who understands it wins it; whoever does not pay for it. “The concept is simple. In investing, compound interest works in your favor. If you’re trapped in debt, every month that goes by makes your debt worse. That’s why it’s so important to understand the makeup. in the context of building wealth.If you’re not on the good side of compound interest, you’ll have to work hard to get there.

And you can start by signing up to the U investment e-letter below. This daily newsletter will help you better understand financing and the power of investing.

What is compound interest? Apart from a wealth creation tool, it is your guiding force for the security of the future. Taking the time to make smart investments that capitalize on compound interest will give you the peace of mind you need to grow your money. Then it’s just a waiting game as you watch your wealth build up.

Explain the predicament of micro, small and medium enterprises (MSMEs) when opting for payment claims under the MSME Development Act, 2006, VIVEK SHARMA explains why, in practice, statutory compound interest enshrined in law is rarely enforced, and offers suggestions to strengthen the law and protect MSME interests in this regard.

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MICRO, Small and Medium Enterprises (MSMEs) play an important role in India’s GDP and exports. The Micro, Small and Medium Enterprise Development Act 2006 (MSME Act) has been in force for some time, with the objective of facilitating the promotion, development and improvement of the competitiveness of MSMEs. Various measures are enshrined in this law to achieve the given objective.

The Union government has the power to develop programs, guidelines and instructions to facilitate, promote and develop MSMEs, especially micro and small enterprises, by developing the skills of employees, management and managers. entrepreneurs, providing assistance or a marketing infrastructure to upgrade technology. installations and the development of clusters to strengthen upstream and downstream links. Credit facilities to MSMEs should be progressive. The state has the power to put in place preference policies for the purchase of goods and services produced by MSMEs for its ministries, assisted institutions and public sector enterprises. There are other mechanisms of funds and grants provided for by law and to be granted by the Union government.

The provision of the MSME law for the clearance of payment claims and its frequent violation

In order to preserve the vulnerability of MSMEs, payment for the supply made by a MSME must be paid by the buyer within forty-five days from the date of acceptance / presumption of acceptance of the supply, if it has not been agreed earlier between the parties. Late payment results in compound interest with rests to the supplier at three times the discount rate notified by the Reserve Bank of India.

The compound interest provision is a key disincentive provided by law to ensure that payments to MSMEs are cleared within the legal deadlines. However, like most things in the country, no deterrent seems to be effective enough as a substantial number of complaints are lodged by MSMEs with the Facilitating Boards asking for help to have their dues reimbursed by their members. buyers. It is also noted that a number of complaints fail to overcome the first hurdle itself, as the Facilitation Council finds no basis in it. For those who go through the process enshrined in law, the recovery of the compound of interest element appears to be a rarity in practice.

There can be no straightforward answer as to why MSMEs are effective in simply getting the principal amount deferred or any other amount and the statutory compound interest protection, more often than not, is eliminated in the process. Any agreement or resolution between the parties to possibly honor only the principal late amount is a legal issue; However, does this bode well for the Indian MSME sector? The objective of the law to capture MSMEs is lost since the clearance of only the delayed principal amounts guarantees that the vulnerability of companies remains. This is reflected in the continued laxity of some buyers towards offsetting MSME contributions, as buyers have moved away from the implications of compound interest in the past.

Read also : EU budget 2021 presents a steadfast landscape of health and MSMEs amid growing concerns

MSME reluctance to charge compound interest due to lack of bargaining power

One of the fears of MSMEs is that they may not be vying for new contracts with buyers, which once pushed them into legal process under MSME laws. It is for this reason that the compound interest element dilutes as a negotiating tool for an ongoing relationship.

However, there is little certainty that the relationship will continue after the deal. With a small customer base and low margins, MSMEs have little practical advantage in fighting large corporations or public establishments, as these buyers have a way to get revenge on them one way or another, despite some practice delay payments to MSMEs.

This is where policymakers have their work cut out for them. There must be a mechanism to identify buyers of black sheep and ensure that there is no play in the joints for these black sheep in the law. The pre-deposit of 75 percent of the buyer seeking to challenge the award made by the Facilitation Board is not sufficient as the agreement between the parties is reached before this stage itself. The bargaining power of MSMEs against large companies or public institutions is limited; this shadow persists when reaching consensus even during the process under the MSME law.

MSMEs need to be secure as the triggering of their rights under MSME laws cannot simply be sufficient reason by buyers to terminate them on future or present contracts. The duty of good faith and fair dealing is generally not accepted in common law countries as opposed to civil law countries. In view of this, the current mechanism provides sufficient maneuverability for buyers of black sheep to replace one MSME with another and continue with delayed payment cycles. This entire cycle, if allowed to continue for a long time, will ensure that MSMEs will never reach critical mass to attract large investors or funds to help them advance their growth.

Read also : MSME Financial Aid Program: Has the Indian Government Completely Missed the Bus?

At first glance, the law provides for an accelerated resolution mechanism, starting with the referral to the Facilitation Council to be decided within ninety days of the date of referral. There is a pre-deposit requirement of 75 percent of the amount in terms of an order or award if a party seeks to file a claim challenging the same in court.

Facilitating boards must be empowered

In practice, there is an extension for one reason or another. Since it is the Facilitation Council that is the backbone of the entire exercise of the MSME law, it should be given the necessary powers to sanction the release of the amount granted to MSMEs. This can save time as MSMEs will then not be required to go to court for enforcement proceedings. This will ensure that the benchmark and the end result in monetary terms will be dealt with before a single authority itself.

With the pandemic causing a slowdown or even a downward spiral in the business cycle, some MSMEs are likely to be pushed to the brink. The state must come up with policies to protect MSMEs and facilitate their borrowing. It is essential to support and protect MSMEs whose payment cycles are broken. After fulfilling their part of the contract, MSMEs more than ever need to be assured that their contributions are paid on time.

(Vivek Sharma is a Delhi-based lawyer. The opinions expressed are personal.)