Magic Of Compound Interest

Compound interest is a fairly familiar term for those who invest and save. This is an extremely effective form of making money that not everyone knows about. So what is compound interest? How to invest effectively compound interest? Follow and find out in the article below of the Salt and Light Group.

What is compound interest?

The concept of compound interest is that interest is added back to the principal amount to earn additional interest on top of that interest already accrued in the next compounding period.

How important is compound interest? Ask Warren Buffett, one of the world’s most successful investors…

“My wealth has come from a combination of living in America, some lucky genes, and compound interest.” Warren Buffett, 2010

The power of compound interest in investing and saving

Compound interest is also known as “accumulated interest”. That is the golden key of financial investment applied by many people. When you start with some capital, combine time and interest, you will make huge profits.

For savings or investment banking, compounding is very powerful. If you know how to take advantage of it, it can bring you a huge fortune in the future. As a result, you can easily set and implement long-term goals in life.

As for compound interest, you may not see its benefits for the first few years. But over a long period of 10 to 20 years, you will see a huge amount of compound interest.

To keep track of your savings conveniently and easily, you can deposit your savings online with today’s best interest rates at Bank. In addition, the application of compound interest at Bank is also very simple. For example, you have a 1-month term deposit with an interest rate of 6.0%. Then, when the payment is due, if you choose to renew that amount the next month, you will receive interest when Bank renews it.

How to use the compound interest formula

To use the compound interest formula you will need the figures for your initial balance, annual interest rate (as a decimal) and the number of time periods (e.g. the number of years). Let’s take a look at the calculation process…

How compound interest is calculated

Multiply the opening balance by 1 to raise the annual interest rate (as a decimal) to the power of the number of periods (in years). If you only want to see the interest earned, subtract the beginning balance from the result.

The above set out as a formula is:

A = P(1+r)^t

This simplified formula assumes that interest is compounded once per time period, rather than multiple times per time period (e.g. once per year).

If you want to compound more than once per time period (e.g. monthly compounding for a number of years), you’ll need to use the advanced formula which incorporates the number of compounds per time period:

A = P(1 + r/n)^nt


A = future value of the investment/loan

P = principal investment or loan amount

r = annual interest rate (decimal)

n = number of times interest is compounded per year

t = time in years

^ = … to the power of …

It’s worth noting that this formula gives you the future value of an investment or loan, which is compound interest plus the principal. Should you wish to calculate the compound interest only, you need to deduct the principal from the result. So, your formula looks like this:

Earned interest only (without principal)

Interest = P(1 + r/n)^nt – P

Let’s look at how we can use this formula for monthly compounding, and we can then go through an example calculation…

Monthly compound interest formula

The formula for calculating compound interest with monthly compounding is:

A = P(1 + r/12)^12t


A = future value of the investment

P = principal investment amount

r = annual interest rate (decimal)

t = time in years

^ = … to the power of …

How to invest and save effective compound interest

To apply compounding effectively and generate high profits, you should apply the following principles:

  • Know your budget.

Good money management and personal spending will help you know your cash flow in the future. From there, you will easily form a complete plan when implementing a certain intention. In particular, if there is a risk, there will always be countermeasures to solve it quickly, reducing the damage as little as possible.

  • Choose a term that suits your financial capabilities.

In order for the form of bank savings to bring rich money, you need to carefully consider and choose the appropriate term. For the application of compound interest, you must choose a long term because your money will be more optimal.

  • Choose a high interest rate.

One of the rules for taking advantage of compound interest is to invest often and choose a high rate of return. Thus, the continuous reinvestment will help the amount to be more profitable. You need to be consistent and knowledgeable in market analysis or consult a lot of information to choose the right investment channel.

  • Actively apply compound interest on a regular basis.

When applying compound interest, you need to maintain it regularly and regularly through each period. It helps your capital increase quickly, earn high profits in a short time.

  • Be patient in the long run.

The unwritten rule of compound interest is patience in long-term investing. The longer the investment period, the higher the principal and interest.

How to use the power of compound interest 

  • Start as soon as possible. 

Compound interest is known to be the most effective form of long-term profitability. So saving or investing early will have a big impact on how much money you have in the future. Specifically, the power of compound interest will be most evident in savings deposit periods of 20 years or more. Thus, you will also have a reserve or investment fund available for future career development plans.

  • Deposit and renew regularly, both capital and interest periodically.

The efficiency and power of compounding only comes into play when you continually renew your principal and interest. This helps to increase the total capital of the next cycle, so that the profit of the new cycle is also higher than the old cycle. So make a regular deposit to ensure the compound interest maximizes its benefits. 

To conclude
This compound interest formula article has been developed and developed based on your requirement of suitable formulas and examples.

See more: opening doors for more first home buyers

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