|
Seach the Archives
Spiritual
Retreats 2008 |
See our incredible blog with lots of free stuff! Get it sent to your email here Receive our monthly email newsletter! What
information would you like?
|
|||||||||||||||||||||||||||||||||||||||||||
The Magic of CompoundingBy Harpreet Sandhu
I had known the principle of compound interest, and that it makes your money grow like nothing else, but it was a whole different experience to use specific numbers, and see them grow and grow... I decided to show you a few calculations to help illustrate the point. Compound interest is defined as: Interest being paid on interest... Very simply, how this works is, if you deposit $100 in the bank for 1 year at 10% interest, then at the end of the year you would have $110 (the original $100 + $10 in interest). Now if you left the $110 in the bank for another year, you would now have $121 (your $110 + $11 in interest). You now have an extra $1, which is the interest on the interest. In another year, you would have a total of $133.10 ($121 + $12.10 in interest). Now, you have $3.10 which is the interest on interest.If this process were allowed to continue for a length of time, the amount of interest on interest begins to grow exponentially. Let me illustrate with this table of figures. Lets say you wanted to begin a savings/investment account. Lets say that you could save $50 per month. What would you have in the course of time? The columns show the amount of money that you would have under different situations. Column 2 shows what you would have had if you stuffed your money into the mattress - 0% interest. Columns 3 and 4 show the various amounts if you were making 12% or 13% return on your savings/investments. The reason I chose to do the interest figures 1% apart, is to show you the difference in the final amounts, a 1% difference in interest rate can make. Of course no investment will give you a constant return on your investment. Chances are that your yield will fluctuate constantly, but this table simply illustrates the principle. As you can see, in the case of compound interest, time is your best friend. That is why, the earlier you start, the greater will be the effect of compounding on your savings. The percentage yield is your next best friend. The higher the percentage yield, the faster your money will grow. And, a valuable lesson to be learned here is, don't keep your money in your mattress! One very simple rule I have learned about compound interest is called the "rule of 72". What this does for us is: if you divide 72 by the interest rate that you are getting, the answer gives you the number of years that it will take to double your money. For example: if you deposited $1,000 in a bank account earning 3.6% interest, then it would take (72 divided by 3.6) 20 years for your money to double to $2,000. On the other hand, if you opened an investment account and were making say 12% on your investment, then it would take only (72 divided by 12) 6 years for your money to double. I hope that this has been informative and educational.
Column 2 - no interest accumulated
|
After reading Rick's article ("Start Investing Now"), I was inspired to write a short explanation on exactly how compound interest actually works. It turned out to be a lot of fun. Since I do not have a financial calculator, I landed up writing a little program to help me with the calculations.
Classes at the Academy for Psychic Studies are enrolling now!
"Freedom
is the Essence of Life"
Academy
for Psychic Studies | International
Spiritual Hypnotherapy Institute | Total
Prosperity Radio
American
Spirit Newspaper | Church
of Common Sense | Retreats
Page last updated February 8, 2008
Sterling Rose Press
PO Box 14341, Berkeley, CA 94712
800-642-WELL
publisher@americanspiritnews.com
© 2008 Sterling Rose Press