The power of compound interest is an important term that needs to be understood in managing finances.
Maybe at the moment, this term isn’t important because you’re still learning, but when you’re already holding your own money later, the power of compound interest will be key to whether you have a positive or negative financial position.
As the famous scientist Albert Einstein quotes, the power of compound interest benefits those who understand it, yet for those who do not understand it, it may be the cause of disaster.
Briefly the power of compound interest is the concept by which dividends or interest charges add to investment capital. From year to year when dividends are not issued, investment capital will continue to increase by itself.
The power of compound interest has a positive effect on investments because it allows money to double over a period of time as long as capital and dividends are not issued.
For example, Ali planned $1,000 for 5 years and during that period he did not want to withdraw the money and the dividends received.
Assuming an average annual return of 4 per cent per annum, the money has the potential to increase to $1,221, of which $221 is the accumulated dividend received annually.
So we need to invest to enjoy the benefits of this compound interest power and it is best to start investing as early as possible or from the first paycheck because a long period of time gives the capital a chance to grow bigger.
The opposite effect occurs when the concept of compound interest power begins to be applied in debt or loans.
This is because, unpaid interest charges will also increase the amount of debt. If the monthly installments are not repaid over a long period of time, the amount of debt will increase much larger than the original loan.
For example, the very simple conditions of using credit cards cause many to go into debt beyond their means. Because card users are allowed to pay only the minimum amount for the card to remain active, many choose to pay only that amount without realizing that the unpaid debt continues to increase.
So make sure you pay the full amount of the purchase when using a credit card in the future and never pay the minimum amount only. This is because the deferred debt will increase from month to month due to accrued interest charges.
Once successful, apply knowledge of the power of compound benefits in managing monthly salaries. Prioritize investing so that the power of compound interest can generate passive income and build strong finances for you.
When taking out a loan, take it based on your ability to repay it so that nothing is in arrears because the power of compound interest will add to the amount of unpaid debt.
