Investment is a method of raising money that is in great demand these days because it can make practitioners earn large profits in the long term. Even so, the risk of investing is also quite high; therefore, for those of you who want to invest, taking advantage of compound interest is the most suitable way.
Utilizing compound interest will make the value of your investment go up faster. Conversely, the use of single interest will be good if used when you want to make a loan. You must understand one thing that can affect single interest is the term of the loan. So, you have to make sure that the term of your loan on the application of single interest will not run too long.
Investors who have plans to start investing, especially in brokerage accounts, prioritize the power of planning first, you can do that without it. These investors will also benefit from compound interest but must purchase a coupon-free bond.
A no-coupon bond does not provide interest check delivery to the investor who requests it. However, this is replaced by available bonds that are discounted to their original value and will grow over time.
How Compound Interest Works?
The notion of compound interest is interest that is calculated using a basic calculation of the initial principal. It also includes all accumulated interest from your deposits or loans in the previous period. There are many variations of compound interest and are always changing or not fixed in each period.
As a more detailed description, compound interest is a percentage of the principal amount and includes all accrued interest from the previous period. In other words, each period of interest accruing, the amount of interest added to the initial principal is calculated based on the principal plus the interest from the previous period.
Benefits of Compound Interest
Compound interest has several benefits and can be used to calculate investments. Some of them are: Can increase the amount of investment in the long term. The growth in compound interest is believed to reduce the risk of inflation and the decline in purchasing power of the general public.
Factors Affecting Compound Interest
The following are some of the factors that affect the size of compound interest:
Frequency is the number of interest payments each year and will determine how much compound interest is worth. Interest is usually paid at a predetermined time limit, for example annually, six months, quarterly or monthly.
Compound interest occurs when you set aside some money in a savings account, account for retirement money, also capital in the stock exchange, and then let the money go. When the account you have gets dividends and an interest, you are continually reinvesting those dividends, thereby generating additional income more quickly.
You can deposit funds to invest only once and the funds will grow with different on the rate of interest and periods. For example, an investment of IDR 10,000,000 with 8% interest will grow to IDR 22,080,000, and after a decade; then Rp 48,754,000 after two decades and Rp 107,652,000 after three decades.
You need to set aside money for each month; and your coffers definitely grow faster. If you set aside Rp. 100,000 per month at the age of 21 years to invest in an instrument that pays 8% interest, then at the age of 65, your funds will be worth IDR 447,000,000. Increase the deposit every month to Rp. 200,000, your money will be doubled to Rp. 893,000,000.
The higher the risk of an investment you do, so the greater of potential income you will receive and also the greater the potential loss you will experience. For instances, the account of regular saving usually offers rates with low-interest and low risk regarding loss. Besides, doing investment on stock transaction is potentially giving you rates with double-digit on investment over the long term.
Looking at the review of compound interest above, you will now know the reason why compound interest can be very strong and in great demand by investors. You can also get the same thing as long as you want to learn about it and understand the risks. Never delay to start saving and investing. Include your children to enjoy the benefits of using compound interest. In the future, they will be very grateful to you when they are your age.