What is Compound Interest?

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What is Compound Interest?

What is Compound Interest?

Getting out of debt relies on many things but most of all it relies on you doing your research and working out how the system works and where you can start saving money. Knowledge is power and the more you know about loans and debt the more money you can save and the better off you will be financially. Learning about compound interest for instance can help you to save money on your loans and can help you to better choose your bank accounts.

Firstly then – what is compound interest? Well essentially the term compound interest means interest that increases exponentially over time – interest that is added to the ‘principle’ amount of money in the pot so that the next year’s interest comes out of the combined amount.

To make it it a little simpler imagine you have a bank account worth $100 and it was in a savings account with 2% interest. After the first year that money in the account would be $102, but after the second year of compound interest it would be $104.04 – because 2.04 is 2% of $102. If the account didn’t have compound insurance then at the end of the second year you would only have $104.

Most interest is compound interest as this is the most sensible way for it to work. If you are taking out a saving’s account or in any investing your money then you want it to be compound interest so that you earn more than you otherwise would. You also need to take this into account though when you are working out how much money you are going to have after a certain amount of time – remember to factor this into your calculations when you are predicting your future finances.

Likewise you will also need to think about the loans you take out and the debt you get yourself into – as debt can also feature compound interest. This factors in when you miss your repayments and means that each time the fee increases so too will your interest. In other words miss your credit card repayment and you will have to pay more back next time. Miss it again though, and compound interest dictates that the amount it increases by will be even larger next time. This is also true with late payments in banks and even with fines etc – which is why they can grow so quickly if you don’t pay them. The lesson is to make sure you make payments and fines on time, and to factor compound insurance into your calculations.

Posted by admin   @   15 November 2011 0 comments
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