Grade 4 Lesson 4: #CompoundInterest
In the last lesson, we understood the concept of #interest in #finance. This week we will discuss #compoundinterest.
In the most basic sense, #compound #interest means interest on interest. If you leave your money in the #bank, the bank will give you some interest. Now, if you don’t take this interest out, next time the bank will give you interest on your original amount, as well as interest on your interest.
Let's say you put in $1000 in a bank and it is willing to give you a 10% rate of interest per year. At the end of the first year, you will get $100 as interest (10% multiplied by $100). If you decide to leave the $1000 (original investment) and the $100 (interest) in the bank, at the end of the second year, you will get an interest of $110 (10% multiplied by $1100). So instead of the $100 that you received as interest for the first year, you now get $110 as interest. As time goes on, the amount of interest will continue to increase every year, which in turn means you make more and more #money every year, on the initial $1000 invested.
Compound interest is one of the most important concepts to understand in Finance. It shows us that the longer you invest your money, the quicker your money grows.
The numbers may not seem that big if you look at them over 2-3 years, but they start to look much bigger when you look at them over several years. Let’s look at the above example but over a longer period. If you had invested the money for 10 years, you would get back $2590 or 2.59 times. If you had invested the money for 30 years, you would get back $17450 or 17.45 times. If you had invested the money for 50 years, you would get back $117390 or 117.39 times. This is the power of compounding.
Where can you get compound interest for your investment? Your bank will typically give you compound interest. On your #savingsaccount, as well as #FixedDeposits/ #TermDeposits/#RecurringDeposits. You can also get compound interest on certain #bonds.
It is typically always better to think of #investments #longterm. Let your money bring money and create more #wealth for you.
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