8th wonder of the world einstein3/22/2023 Save enough and you no longer need to workįIRE: Financial Independence, Retire Early is a burgeoning movement of people who understand how compounding interest works and plan to use it to retire early. Avoid these pitfalls and use compounding interest to your advantage. There are instances where people miscalculate debt and end up paying thousands of dollars in interest for a purchase that was originally only a few hundred dollars. Sadly, it can also be what traps many people in poverty. Yeah, you read that right - DOUBLE! Compounding interest can be the engine for immense wealth creation. If you earn 10% on your money you are actually expected to double your wealth every 7.2 years. You continue to make more money in interest every year because you are earning interest on your earnings from the previous year. The third year your earning will increase again to $12.10. The second year you will earn slightly more: $11.00 in interest (10% of $110.00). At the end of the first year you will earn $10.00 in interest (10% of $100.00). Say for example, you have a $100.00 investment that makes 10% every year. Interest is essentially rent paid for using money.Ĭompound interest is interest paid on interest. Conversely, when you have savings, you can use them to create value by loaning it out to a bank or investing in a business. As a result, loans are issued with the expectation that the full value is repaid plus a little more in return to account for the lost value associated with time. The basis is that most people would prefer to be paid today rather than tomorrow that money received in the future is worth less than money received now. Interest is a strange concept but rooted in a core finance principal called the time value of money.
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