The interest that is calculated on the principal amount and the accumulated interest of the previous years as well is called compound interest. Compound Interest can be your true friend who would help you to make money quickly over the amount invested by you since it is the cycle of earning interest on interest. Compound interest always helps an investment grow faster than that of a simple interest because the simple interest is calculated only on the principal money invested. But on the other hand, in case of compound interest, you are not only earning money on your initial investment but also earning on the interest accumulated over the previous year’s interest and thus, your wealth grows exponentially in case of compound interest.
One of the key points of Compound Interest is that if you start investing at an early age, you would surely get the maximum benefit from it. There are various tailor-made plans along with retirement and tax saving schemes as well and you can easily choose the best out of it as per your choice and preferences. It is always advisable to open at least one account and contribute consistently so as to take the maximum advantage of compound interest.
Advantages of Compound Interest:
- Enjoy Exponential Growth:
Since Compound Interest is calculated not only on the initial sum of money invested, but also on the interest accumulated over the previous years, hence it is seen that your wealth grows exponentially in case of Compound Interest. Therefore it is also one of the best ways to earn a handsome amount over a short period of time.
- Compound Interest is a Wider Term:
Compound Interest involves interest calculation based on the principal amount and accumulated interest over the previous years, and on the other hand, simple interest is only calculated on the principal amount. Thus Compound interest is considered to be a much wider term than simple interest.
- Compound Interest is your True Friend:
Whenever you are investing and you wish to earn a handsome amount as the interest, either you need to invest a huge amount of money or you need to invest over a long period of time. But in case of Compound Interest, you can easily earn a good amount of money investing as per your pocket over a short period of time. Therefore, Compound Interest would always be a true friend for investors.
Easy Steps of Compound Interest:
The steps to be followed for maximizing the advantage of compound interest are as follows:
- Your investment should always be consistent and it is highly advisable to invest for a minimum time period of 7-10 years.
- You should always have patience to monitor your wealth growth over the above mentioned time period.
- You should always remember to invest early in order to maximize your return.
Last but not the least; compound interest is well known for creating a snowball effect since the interest is earned on original investment plus the interest accumulated in the previous years as well. This is the reason that makes compound interest so effective and thus your best friend as well.