The mention of compound interest will usually arouse knowing nods in the room. However, if everyone seriously understood what compound interest is, then there wouldn't be as many people falling into the depths of bankruptcy due to credit card debts. Without a doubt, financial institutions are making the most out of this moneymaking concept to the disadvantage of the debtors a.k.a. general public.
Do you know what compound interest is, then? Essentially, it's interest generated on top of interest plus the principal sum over a length of time. To illustrate this, assume you have $10000 today and you're supposed to get an interest of 3% a year for this principal sum. This means you would have $10300 by the end of the year. So in the second year, the principal sum is $10300 and by the end of that year, you would have accumulated $10609. In year three, the accumulated sum would add up to $10927 and so forth. In the same vein, $10000 compounded on a basis of 10% per year would have generated two-fold of what you started with, in 7 years. Therefore when you hear banks claiming to make your money work harder for you, they are just employing compound interest.
While it's nice to imagine our money in the bank escalating away and making us richer, it also assumes that we do not make withdrawals, which dramatically reduces the impact of compound interest. How often have we withdrawn deposits made religiously due to �emergencies'?
How do we harness the benefits of compound interest? By taking note of how credit cards employ this very principle on our debts would be a prudent first step. Banks often claim to be diligently calculating interest on a daily basis, but one must question to whom does it benefit? Large firms are the ones using this exponential tool to their gain. The general public only has opportunities to take advantage of compound interest on a smaller scale, namely mutual funds and stocks that typically yield yearly dividends. On a similar note would be fixed deposits offering paltry yearly interest rates. Increments in salary happen once or twice at most in a year. Anything, which can be compounded to the general public's benefit, is often on a yearly basis. So what must one observe in order to jump on the compound interest plane to financial independence?
Conclusively, compound interest works better for us if it happens more frequently. Which is to say, twice yearly is better than yearly and quarterly is definitely better than twice yearly and so forth. Therefore ideal investment plans should have these features:
- Returns of at least 5%
- Compounding on a monthly basis
- Low risk with high winning percentage (no less than 90%)
- Flexible withdrawal for liquidity (i.e. one is able to stop anytime)
So let's start employing compound interest and be on your way to financial freedom.
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Source: http://www.articlealley.com/article_123683_19.html
Keywords: bankruptcy, calculating interest, cashflow, compound interest, credit card debts, credit cards, daily basis, debtors, dividends, emergencies, financial institutions, length of time, money in the bank, money work, moneymaking, mutual funds, nods, principal sum, principle, withdrawals.
