Compound interest is the eighth wonder of the world
The of compounding interest is not a hype it’s something extraordinary.
“He who understands it earns and who doesn’t pays for it” was said by Albert Einstein. It’s indeed true.
What’s so magnificent in this and why is it the 8th wonder of the world ?
Compound Interest is a interest calculated on the principal amount and also all the accumulated interest over time
Let’s dive into an example.
Let’s say you invest your money in a fixed deposit.
Principal amount = 100,000
Interest per annum = 5 %
Tenure (Time) = 20 years
So, the interest per year will be 5000 on the principal amount. You can either withdraw the interest amount or reinvest it.
Now, if you reinvest it. Your principal amount will become 105,000. This amount will be taken as the principal for the next year. So in simple terms, you’ll get interest for 105,000 instead 100,000.
That would result in a hike in interest from 5000 to 5250. That difference was due to the reinvestment of the interest value. Now your capital is about 1,10,250 in 2 years.
But what about 30 years and beyond ?
It might be kind of difficult to calculate it for every year. So there is a simple mathematical formula that comes into play.
Now let me just tell you the final amount
Final capital gain after 30 years = $432,194
Wow! That was huge.
The more you stay with the compound interest the double it grows each year.
This is so magical and even compound interest works in stocks and other assets.
Now imagine if you invested a bigger sum like a million dollars ?
What will be the interest per year and after 30 years ?
