Compound interest, That is Roll English is a computing model based on the computing amount based on the initial principal and interest calculation cycle.Fu profit originally originated in Italy and was called “the eighth Miracle of the World” by the famous genius Albert Einstein.The compound interest is mainly affected by the compound interest rate and compound interest period.The higher the interest rate, the higher the compound interest amount, the more compound interest periods, and the faster the interest rate of interest growth.
Compound interest is relative to single interests.For example, the same initial principal, the same interest rate, and the same number of periods, the interest of the single profit is only calculated for the initial principal.The interest is calculated, so under the same conditions, the compound interest will get more interest amounts than the single profit.
For interest winners, such as depositors, lenders, and dividend stock investors, compound interests will increase interest income in index level models.For interest payers, such as loan repayers, compound interests increase their expenditure.
After reading this article, you will understand:
Directory of this article
- How to calculate compound interest?
- Compound investment calculation example
- What is the 72 law?
- How to use compound profit to get rich?Three-to-rich password
- What is the significance of investment in compound interest?
- What are the limitations of compound interest?
- More investment strategies
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How to calculate compound interest?
The calculation formula of the compound interest amount is:
Compound interters = [p (1 +ICureN] – P p
in:
- P is the principal of the initial investment
- I refers to the compound profit yield, which often uses monthly yields, or annual yields to measure
- NGenerally the length of compound interest, if the monthly yield is used,NRefers to the monthly number; if the annual yield is calculated, then, thenNAnnual number
It can be seen from the computing formula that the increase in compound interest is increased by index level.As the number of compound interests increases, the amount of compound interest will increase at a faster rate, which is the biggest difference from Single profit.
The difference between compound interest and monocycles
Suppose the initial investment amount is $ 10,000, and the annual interest rate is 5%.Take the annual interest calculation cycle as an example:
| Year | Compound interest amount | Single profit amount | The difference between compound interest and single-profit |
|---|---|---|---|
|
1 |
$ 10,000 x (1+5%)1– $ 10,000 = $ 500 |
$ 10,000 x 5% x 1 = $ 500 |
$ 0 |
|
2 |
$ 10,000 x (1+5%)2– $ 10,000 = $ 1,025 |
$ 10,000 x 5% x 2 = $ 1,000 |
$ 25 |
|
3 |
$ 10,000 x (1+5%)3– $ 10,000 = $ 1,576.25 |
$ 10,000 x 5% x 3 = $ 1,500 |
$ 76.25 |
|
4 |
$ 10,000 x (1+5%)4– $ 10,000 = $ 2,155.06 |
$ 10,000 x 5% x 4 = $ 2,000 |
$ 155.06 |
|
Mowing |
Mowing |
Mowing |
Mowing |
|
10 |
$ 10,000 x (1+5%)10– $ 10,000 = $ 6,288.95 |
$ 10,000 x 5% x 10 = $ 5,000 |
$ 1,288.95 |
The difference in calculation of different compound interest periods
When the number of compound interest periods is used, the compound interest obtained in the same time will also be significantly different.In most use scenarios, people often calculate the income on a monthly basis.Therefore, for the monthly calculation of the revenue, you need to transform the annualized yield to the monthly return rate:
Monthly yield = annual yield / 12
Generally speaking, for the same annual yield, as a calculating unit for the same annual yield, the results will be different.
For example, calculated based on the initial amount of $ 10,000 and an annual interest rate of 5%.
Calculate monthly compound interest
Monthly yield = annual yield / 12 = 0.417%
Following profit after a year = $ 10,000 X (1 + 0.417%)12– $ 10,000 = $ 511.52
Each year’s compound interest:
The amount of compound interest after one year is: $ 10,000 x (1+5%)1– $ 10,000 = $ 500
It can be seen from the calculation results that under the same initial initial amount, the same annual interest rate, and the same calculation cycle, different compound interest periods will generate different compound interests.
Compound investment calculation example
Let ’s take a look at a specific compound investment example.We take the investment in the American SP500 stock index SPY as an example.According to historical data, the average annual return rate of SPY from 1926 to 2018 is between 10 and 11%.%Is an example to calculate.
Suppose we initially invested $ 10,000, and at a rate of 10%of the annual average, we can calculate the interest of each year, the total assets at the end of each year, and the proportion of total assets.This is monthly calculated, but only the annual changes are listed as follows:
| years | Total assets
($) |
Each year’s compound interest ($) |
Total assets double proportion |
|---|---|---|---|
| & nbsp; |
100,000 |
& nbsp; | & nbsp; |
|
First year |
109,558.32 |
9558.32 |
1.1 times |
|
Second year |
121,030.51 |
11472.19 |
1.21 times |
|
Third year |
133,703.98 |
12673.48 |
1.34 times |
|
Fourth year |
147,704.54 |
14000.55 |
1.48 times |
|
5th year |
163,171.13 |
15466.6 |
1.63 times |
|
6th year |
180,257.28 |
17086.15 |
1.8 times |
|
7th year |
199,132.58 |
18875.29 |
1.99 times |
|
8th year |
219,984.36 |
20851.78 |
2.2 times |
|
9th year |
243,019.6 |
23035.24 |
2.43 times |
|
10th year |
268,466.92 |
25447.33 |
2.68 times |
As can be seen from the above table,
- The initial investment of 10,000 US dollars can generate a interest of $ 9558.32 in the first year, so that the total assets reached $ 109,558.32;
- When the compound interest increased to the seventh year, the total assets almost doubled, from the original $ 10,000, increased to $ 199.132.58 Items
- At the end of ten years, the initial investment of $ 10,000 has increased to $ 26,800, and assets have increased by 2.68 times.
What is the 72 law?
The 72 rule is a more convenient and effective calculation return on investment When the formula doubles, and it is only applicable to the annual compound interest calculation.The calculation method of the 72 rule is: divide the 72 annual yield value, you can know how many years it takes, and your own investment can double.The formula is as follows:
Asset double year = 72 / (annualized yield X 100)
Among them, the annualized yield is an average rate of yields that you can get every year when investing in financial products.For example, according to historical data, investing in the SP 500 Index Fund SPY, the annual yield can reach 10%, which is 0.1.
For example: For the annual return of 8%compound investment, the investment amount is $ 1,000, then the year of your asset doubles is as follows:
72 / (8% x 100) = 9 (year)
In other words, after 9 years of investment, your investment assets will double, that is, investors will receive a total of $ 2,000 in assets.
Precautions for using the 72 rule
i.Double calculation can accumulate
As an example, the initial amount of compound investment is $ 1,000, and the annual interest rate is 8%.After 72 / (8% x 100) = 9 years, the asset will increase to $ 2,000, and in the 18th year, it is $ $ $ 2,000.4,000, in the 27th, it will increase to $ 8,000.Without changes, this type of push can be calculated.
- At the time of calculation, the annual interest rate uses a percentage value, rather than the value after the percentage abdication.As an example, the 8%annual interest rate, the calculation formula, the number 8 instead of 0.08.
- When only the interest rates of other types of cycles are provided, as long as it can be converted to adult interest rates, it is suitable for 72 laws.
For example, the quarterly interest rate of compound investment is 4%, when the investment doubles, it takes 72 /4 = 18 quarters to be converted to 4.5 years;
Or 4%of the quarterly interest rate, converting adult interest rates is 16%, then 72 /16 = 4.5, which is also 4.5 years.
Therefore, in the 4%compound investment in quarterly interest rates, the assets will be doubled in 4.5 years.
II.72 Law is suitable for a variety of scenarios
The 72 Law is not only suitable for financial investment, but other calculations involving compound interest growth are also applicable.For example, the population growth rate of a certain country is 1%per month, so the annual growth rate is 12%.Because population growth is a compound profit mode, it can be used by 72:
72 / (12% x 100) = 6 (year)
That is, every 6 years, the population will be doubled.
At the same time, compound profit is also applicable to inflation The role of inflation is to reduce the purchasing power of assets, so the inflation rate is equivalent to the negative value of compound interest.For example, the annual inflation rate in March 2022 reached 8.5%.Here you can bring 8.5%into the 72 law.You can quickly calculate it.According to the annual inflation rate, how much time assets will be reduced by half:
72 / (8.5% x 100) = 8.47 (year)
In other words, if the annual inflation rate continues to remain at 8.5%, after 8.5 years, the assets will depreciate by half.
How to use compound profit to get rich?Three-to-rich password
Fu profit is the most basic and safest way of asset growth.The main influencing factor is interest rate value and compound interest period.Therefore, when using compound interest as asset growth methods, you can consider several points:
1.Improve the family’s cash flow
Cash flow is the source of investment in the principal.Investment in the capital is P in the formula.If you have a stable cash flow and invest in the method of fixed investment, according to the 72 law, you can maximize the assets.
2.Choose a high income investment method
The higher the annual rate of return, the more asset value-added can be brought in both single-profit or compound interest.Users can view the annualized return of investment or deposit objects (Annual Percentage Yield (APY).
According to the rule of 72,
- If the annualized return on investment is 6%, the time of double the principal is: 72/6 = 12 years, so the principal doubles after 12 years.
- If the annualized return of investment is 10%, the time of double the principal is: 72/10 = 7.2 years, so the principal can double in about 7 years.
3.Start investment as soon as possible
It can be seen from the calculation formula of compound profit that the longer the rolling time, that is, in the formulaNThe larger, the higher the growth rate of compound interest.Therefore, once you decide to use compound profit to increase assets, the earlier, the more compound interest.
If you or your family’s income is lower than a certain standard, you can consider opening the Roth Ira account and use the funds of the Roth IRA account to make a profit, thereby achieving free benefits of investment growth.
What is the significance of investment in compound interest?
Fu profit can bring advantages to your investment and become a powerful factor for creating wealth.The exponential growth brought by compound interest is also important to reduce wealth erosion factors, such as increased living costs, inflation, and decline in purchasing power.
However, compound interest may also adversely affect consumers with high interest rate loans (such as credit card debt).With a monthly compound interest rate of 20% of the $ 20,000 credit card balance, the total compound interest in one year will be $ 4,388 or about $ 365 per month.
In the investment account, investors who choose Dividend Reinvestment Plan (DRIP) are essentially investing in the power of compound interest, that is, any dividend income obtained from newly put into the investment market, continue to grow profit-making growthEssence
Investors can also experience compound interest through purchasing zero-interest bonds.Traditional bond issuance provides investors with regular interest payments based on bond issuance of original terms, and because these checks are paid to investors, interest will not make interest.Zero-interest bonds do not send interest checks to investors; on the contrary, this type of bonds purchase at prices below its original value and increased over time.Zero-interest bond issuer uses the power of compound interest to increase the value of bonds so that it can reach its full price at its expiration.
What are the limitations of compound interest?
The beneficiaries of compound interests usually gain interest, but in actual life, compound interest exists in both directions for ordinary consumers or investors.
For example, if you deposit the money into the investment account and let the principal increase the profit growth, you will get more benefits because of compound interest.
But if you are a lender, for example, if you use the bank’s credit card, you usually use compound interest calculations in loan repayment, so when you miss a certain repayment, compound interest may start from the repayment date.This is calculated.This is calculated.This is calculated.As a result, you need to pay more fees.Therefore, in real life, the repayment date reminder should be set to avoid the situation of the high amount of repayment due to delayed repayment.