Compound Interest Formula Basics
The Real Power of Compounding
But this is not the all… Here I will show you what the real power of compounding is… So, we went through the example from above, where we invest $100 , for 20 years at 5% interest rate. Let’s change the example a little… Let’s say we want to invest $100 for 20 years again, but this time we can invest it at 10% interest. We are just changing the interest rate. So, what our amount would be after 20 years? At 5% it goes to $265, as we saw above. Now we double the rate, will the amount double? How do you think? The answer is NO . The amount will more than double and reach $672.75 with total ROI of 572% . So, this is the real power of compounding:
if you double the interest rate, your ROI more than doubles if everything stays equal
Using again the same example, if you double one more time and make the 10% rate 20%. Your $100 buck would grow to the astonishing amount of $3,833.76 On the table below you can see the three examples together. Just see what you would have after 20 years if you invest just $100, but at 40% interest rate:This is the real power of compounding, I think I explained it well and now you got it. So, the most important thing when you invest is to get the maximum interest rate you can. Even a small difference can make a big impact over time, in the long run. This is also true when you take a loan. Even a half of a percent can change big time the total amount you need to pay for your mortgage loan, just because it is for a long period of time, usually 20-30 years. So, be careful.
|Interest Rate||Initial Investment||After 20 years in $||Total ROI%|
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