Compound Interest Helps Multiply Your Cash Quickly- Easiest Way To Earn Free Money.
Popularly called the eighth wonder of the world, compound interest multiplies wisely invested money. The money you invest thus continues to build on itself without your extra effort or input.
For example, if you invest $1000 for a 5% interest, your capital will earn $50 annually. After a year you will have $1050 in your account. Interest starts compounding from here. If you leave the money in the account, you will earn 5% interest on $1050 the following year. After two years therefore, you will have $1102.50 in the account.
If you invest a lot of money, this type of interest will give you a lot of earning as you begin earning interest on your interest income. There are several factors that determine the returns you get from compound interest:
– The rate of interest offered on your investment determines the speed in which your investment grows.
– The time duration of investment is another determining factor. If you leave the money for a longer period of time, it will earn more compounding interest and grow faster.
Tax timing and tax rate also play a role in determining the returns you get from your investment. Investments where you do not have to pay tax at all or pay only at the end of the compounding interest are far better than those for which you have to pay yearly taxes.
Time Value of Money in Compound Interest
According to the time value of money, the time when the money is received plays a role in determining the value of money. The very foundation of this concept is compounding interest. For example, $100 in your hand today has a greater value than the same amount of money ten years later.
Money in hand can immediately be used for investment and dividend generation or even for spending on what you want. Money that can be used now can also go towards reducing interest rates on your debts or even towards charity. According to economists, you lose opportunity cost on the only if you postpone the receipt.
Compound interest investment is ideal for those who do not want to postpone using their money. This kind of investment allows you to use the money whenever you want to. This means the freedom of choice is with you. If you choose to, you can leave the money to earn interest till you actually need it.