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Showing posts from November, 2011

What is Compound Interest?

Many of us do not understand or we take too lightly the enormous power of compound interest. Because we lack this understanding of its value in wealth building, it is one of the reasons why most of us are impatient and not motivated to save.
Investopedia explains that compound interest is interest that accrues on the initial principal and the accumulated interest of a principal deposit, loan or debt. Compounding of interest allows a principal amount to grow at a faster rate than simple interest, which is calculated as a percentage of only the principal amount. It is defined simply as interest earned on interest.
To illustrate, let us have this example:

You have a P20,000 investment that earns 10% interest every year. Find the compound amount and compound interest on the principal P20,000 invested at 10% annually for 10 years.

Those who are not familiar with compounding will compute it this way:
Interest for 1 year ----------- P20,000 x 10% = P2,000 Interest for 10 years --------- P2,000 …