What is & quot; Compound Interest & quot; Media?

Definition:

Albert Einstein supposedly described compound interest as "the most powerful force in the universe." What is compound interest and how it can help grow your investments, retirement, or to become a millionaire?

Compound interest refers to the interest that generated the principal and interest.

"What?" Do not worry if it sounds like gibberish. Just stick with me for a second.

Suppose you deposit $ 100 in an investment account for retirement. The interest is payable at a rate of 10 percent per year. At the end of Year 1, you have $ 110.

You start the year 2 of $ 110 on your investment account $ - $ 100 principal, and $ 10 in interest. You have the full $ 110, main and end of year 2 interest invested throughout the year 2, your investment increases by another $ 11 for a total of $ 121.

Note that in a year you earned $ 10 interest, because the only money I had was the main thing. But in year 2 you earned $ 11 in interest, because you were the principal plus the interest for the first year. In other words, an additional $ 1 compound interest on interest.

You begin the year with $ 3,121 in your investment account. You earn 10 percent or $ 12.10. At the end of the year you have $ 133.10.

Notice how your payment has increased by 10 percent - $ 10 the first year, $ 11 the second year, $ 12.10 in the third year. That is because the decline in interest on previous interest.

The fourth year, your payment will observe 10 percent of the $ 13.31 (10 percent of $ 133.10, which means it will end the year with $ 146.41. Sure that you have won this time 46 dollars on your original investment of $ 100 is not bad!

What if you had not plowed his statements? In year 1, a yield of 10 percent is obtained. Keep the main thing, the original $ 100 invested, but you spend the extra $ 10 early in the second year, you have only $ 100 invested.

Do this every year - the original investment of $ 100, but the extra $ 10 at the end of the year 4, only $ 40, not $ 46.41 because it has not left the compound of interest.

"Big deal", you might think. "$ 6 is not much money."

True. But imagine, $ 10,000. At an interest rate of 10 percent compound at the end of your initial investment fourth year you will win $ 4,600 and $ 6 is now $ 600.

Better yet, imagine doing this with $ 100,000 would be. In a mixing ratio of 10 percent, you win $ 46,000!

Of course, most of the investments do not give constant returns of 10 percent - take this number only a simple example. Legend Warren Buffett predicted invested, that the stock market will give you a 7 percent yield to early and mid-21st century to learn to read this article as the yield effects, how long does it take for your money to double.

Also known as: compound interest, compound return, compounding annual growth rate

Examples:

You invest $ 50 interest rate of 10 percent. After a year you have $ 5, for a total of $ 55 in the second year, interest on your initial investment of $ 50 you earn (the "principal"), plus an additional $ 5 you won interest rate during the first year.

In other words, you earn $ 55 to 10 per cent, or $ 5.50, for a total of $ 60.50.

The "compound interest" is that the extra 50 cents, which is the interest that you have earned interest.

The compound of interest from more, your earnings will be even more dramatic (because the interest will).