One of the main components of investment activity is interest, namely compound interest. What is it and what role do they play?
Compound interest is an easy way to increase the profitability of your investment. To apply it, you just need to not spend, but re-invest the income from securities, such as dividends on stocks or interest on bonds. Compound interest can also be applied when you deposit money with a bank. If the deposit has expired, you simply withdraw money along with the accrued interest and open a new deposit. But already for a large amount. Then interest on the new deposit will be charged not only on the original amount, but also on the interest that you received from the first one. That is, interest on interest. It is from this overlap that the name "compound interest" appeared.
It should be noted that compound interest is most beneficial for long-term investment. This is best seen by comparing them to simple ones. Therefore, I propose to analyze two small examples.
Let's imagine you invested your money - 100,000 rubles for 10 years at 15% per annum. There are no additional contributions, and the resulting profit is withdrawn. In the second case, the conditions are the same, but the profit is now not withdrawn. And it is added to the principal amount of the deposit and participates in the accrual of% every year.
In the first example, simple interest will be charged, in the second, compound interest.
It often happens that a person is faced with a difficult task, to choose a deposit with a simpler interest calculation, but with a high interest rate, or to choose a deposit with a lower interest rate, but with the possibility of capitalizing these very interests.
Before choosing, carefully study the agreement provided by the bank. Also evaluate your goals and objectives to better understand what works best for you.
Do not forget that interest can only bring benefits up to a certain period of time or after a certain period. Time plays an important role.
After all, the capitalization of interest can bring tangible benefits and benefits not to everyone, but only to those who are going to make investments for a longer period, as a rule, from 5 years or more. The beauty of interest capitalization is that the longer the deposit is, the more profitable you can claim.
Also, the bank may specify different conditions in the agreements, for example, if a depositor takes profit from his deposit earlier than 10 years later, this can lead to a significant decrease in his income, and maybe to a complete loss of income in the future.
Understanding how compound interest works will help you earn more on your investment. Almost any banker will tell you that a deposit at a lower rate but with the possibility of capitalization is more profitable than a deposit with a higher rate, but without the possibility of complex interest accrual.
