Interest rates are important for everyone who is concerned about managing their income, whether you are an investor or borrower. Interests rates are important because they largely affect how much you earn and pay a lender. And who doesn't want to earn more and pay less? Here are a few tips you should know about compound interest.
Simple Interest
Simple interest is earned directly. For instance, if you buy a "certificate of deposit" for $10 000 from the bank with a simple interest of 3% they've agreed to pay every quarter, you'll get $75 (or 0.75%).
Compound Interest
Using the same $10 000 investment and 3% interest rate, when interest is earned under a compound model, it is not paid out but added to the investment principal balance. The new and higher principle is used when calculating the next payment. It is important to note, compounding can be done for any length of time, ranging from daily to annually.
In the first quarter, you'll make $10 075, in the second quarter $10 150.56 and so on. By the end of the year, you would have earned $303.39.
With compounding interest, an extra $3.39 may seem insignificant but more money is better in your bank account than in the bank.
Building Wealth
Time is critical when building wealth through compounding. The earlier you begin to put money in, the more you'll earn and, even then, the time it spends compounding will matter more than how much you put in to save. Ultimately, compound interest can and will exponentially grow your wealth.
