I’m sure most of you have heard already of Compounding Interest. It is a common lingo in banks, interest rates and of course, loans. But what does compounding interest really mean? Does it really have power?
Allow me to discuss with you in this article the hidden power behind compounding interest. Well, in layman’s term compounding interest means that the principal earns interest and then the interest that your principal earns also earns interest. Confusing? Well, let’s put it this way. Say I placed a P1000 on a bank that gives me a 10% interest on my deposit per annum. It means that at the end of the year my money would have earned P100 and my total money in the bank would be P1100 already. Next year, instead of earning P100 again, my money will now earn P110 in interest. Why is this so?
Because the P100 that my P1000 earned last year also earned interest this year. Makes sense? Therefore, when this cycle goes on and on, we can say that our money is already compounding.
Having said that, let us now delve deeper into understanding the power behind compounding interest. Before I start, allow me to share with you briefly the formula behind compounding interest. Oh, by the way, I didn’t invent this one. The person who came up with this formula is no other than our great grandfather “Albert Einstein”.
So what does the great Albert Einstein says about compounding interest. First, he says that compounding interest is the 8th Wonder of the World and Next, he gave a powerful formula how to predict the growth of your money using the power of compounding interest. So what is this formula?
It says that if you divide 72 by the number of interest your savings or investment is giving you then you can have the approximate number of years your money will double.
Ok, to give you an illustration, supposed that you have P100,000 and that you are 21 years old and you decided to place your money in a bank that gives you a 1% interest per annum. Now, let us try to know the number of years when your money will double. Applying the formula above 72/1 = 72 years!!! It means that your P100,000 will be P200,000 when you are already 93 years old. Hilarious right? But that is true and the sad part is, only a very few people know this.
In my next blog post, I will give you a more detailed discussion on the Power of Compounding Interest. So better keep an eye on it.
No comments:
Post a Comment