Surely every investor in the investment business is always interested in compound interest. The term compound interest is an important indicator in various financial investment activities. So compounding What does this kind of interest mean? Let’s find out through the following article.
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What Is Compound Interest?
Compound interest or compound interest (English name is: Compounding Interest) is the amount of profit you receive after receiving the initial investment and continue to be reinvested. Simply put, the interest will be added to the principal and will continue to be calculated in the next investment period.
This cycle keeps repeating, the longer it lasts, the higher the profit. Thus, the concept of compound interest only appears when the amount of interest generated is added to the capital.
Compound interest is a familiar concept to many savers. Currently, banks all provide the service of depositing savings with interest or closing accounts to withdraw principal and interest. If you calculate smartly, you can make a big profit from compound interest.
Compound Interest Formula
The profit figure will be the most convincing answer to the power of this method of interest. To calculate compound interest you just need to apply the following formula:
FV = PV * (1 + i)^n
- FV stands for Future value which means future money value
- PV stands for Present value which means present money value
- i is the interest rate
- n is the number of compounding periods
For example: You have 10 million capital. You deposit for 3 years with an interest rate of 10%/year.
If you deposit simple interest, the amount of interest will be calculated as follows:
- Interest rate for the first year: 10% *10,000,000 = 1,000,000 VND
- Second year interest: 10% *10,000,000 = 1,000,000 VND
- Third year interest rate: 10% *10,000,000 = 1,000,000 VND
So total interest after 3 years, the interest you get is 3,000,000 VND.
Applying the compound interest formula, the same amount, you deposit in the bank with compound interest. The amount of interest you will receive after 3 years will be as follows:
- Interest rate for the first year: 10% *10,000,000 = 1,000,000 VND
- Interest rate for the second year: 10% * (10,000,000 + 1,000,000) = 1,100,000 VND
- Interest rate for the third year: 10% *(10,000,000 + 1,000,000 + 1,100,000) = 1,210,000 VND
Thus, after 3 years of saving, the interest received is 3,310,000 VND higher than that of simple interest.
What Is The Power Of Compound Interest?
Compound interest represents great power over a long period of time. In order to achieve the highest interest rate, it is necessary to combine the initial capital and deposit time. Because the initial amount of interest is not large, the time of first depositing the compound interest rate is not large.
However, with a small amount of interest accumulated over many years, it will bring an unexpected effect. An amount of interest continues to be profitable in the following years. The power of compound interest is that an amount of interest will continue to pay off for years and times after.
So what factors make up the BIG power of compound interest?
Obviously, interest is the top priority when saving money. The higher the interest rate, the greater the amount of interest received, this is obvious.
What is the nature of compound interest? It is reinvesting the received profit (by entering the capital), so the higher the profit, the bigger the profit will grow in the next periods.
This is the initial key element in the compounding cycle. The larger the principal amount, the higher the interest at subsequent periods.
Frequency is the timeline by which interest is compounded on principal. It could be daily, monthly, quarterly or yearly. The amount of profit will increase steadily if the frequency is repeated regularly, thereby bringing huge profits in the future.
The most important and influential factor in compound interest. With the basic example above, you will see that the amount of compound interest does not differ much from the simple interest. But when you seriously take advantage of compound interest, regularly saving for 10, 20, 30 years, etc., from a small amount of capital, your assets can increase to a terrible number.
The Best Way to Use Compound Interest
The power of compound interest is undeniable. However, not everyone can use it to bring about great economic efficiency. You can improve your utilization of profitable returns in the following ways:
Regularly plan for savings
You need to come up with a savings rule for yourself. Do not spend more than normal and spend on savings interest. Compound interest is only effective when used regularly over a long period of time.
The right time to save is now. You just need to spend a regular savings, gradually you will have a large capital and interest.
Do not delay for any reason
Are you surprised by the power of compound returns but feel like it’s not the right time to save? Those are just the reasons you give to delay saving. Take action now to be able to have large capital for the future.
Instructions for Savings to Enjoy Compound Interest
Currently, banks offer many savings packages with attractive interest rates to customers. Banks often have savings packages with different terms and interest rates, regular savings or compound interest savings. To enjoy the best interest, you should choose a long-term savings deposit term.
When saving, you need to pay attention to whether the current interest rate of the bank is high or low compared to other times. If the current interest rate is high, you should take advantage of choosing a long-term savings package. If interest is currently at the low point of the year, you should deposit for a period of 1 year.
Which Bank Should I Deposit With The Best Interest?
Each bank will have a different interest rate on savings depending on the development orientation and reputation of the bank. In general, savings interest rates of banks are relatively high and safe. Following are the long-term savings interest rates of some banks in Vietnam:
|LienVietPostBank||Regular term savings||10 years||7.5%/year|
|Vietcombank||Avoided have||5 years||6.80%/year|
|Eximbank||Avoided have||5 years||6.00%/year|
|HDBank||Deposits Security for the future||10 years||7.1%/year|
|ABBank||Savings Accumulating for the future||20 years||6.80%/year|
Depending on your preferences and trust level, you can choose different banks to deposit your savings. You can immediately refer to the savings deposit rate at the banks where you currently have accounts. To update the bank’s interest rates and savings policies, you can contact the call center or visit the transaction counters.
Compound interest is really a wise choice for individuals who need to save money for a long period of time. Hope you really understand compounding What is and what does compound interest mean? Wish you choose the most suitable savings package for yourself.
Information edited by: lamchutaichinh.vn