Compound interest is one of the investment methods that is currently known as one of the trendiest ways to earn money. From the past until today, many successful investors and traders have been able to multiply their capital with this method. Because in this method, patience is the main foundation. To better understand this issue, consider this example: Get rich overnight! You may have heard this sentence many times in virtual spaces. The main question here is do you believe in this statement? In this article, we are going to confront you with the fact that there is no way to become rich overnight and explain the right way to earn money.
It is better not to deceive ourselves, because no wealth is acquired overnight. If you remember, in the Warren Buffett Lessons for Traders article, we fully explained the benefits of investing in the long term, which also applies to this section. In fact, compound interest means to earn profit from your profit; Now you may ask how are you? In the following, we will fully provide you with the calculation of compound interest and profit-making methods.
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What is compound interest?
Before you know how compound interest is calculated, it is better to get familiar with its concept. What is compound interest and what is its use? Compound interest is actually compounded or compounded interest. In other words, in compound interest, in addition to the calculation of the interest of the capital itself, the interest that accrues to the profits itself is also calculated. In the calculation of simple interest, only the interest and capital principal are important; But in compound interest, in addition to earning profit from the original capital, you also earn profit from the capital gain. If you use compound interest in the financial markets, especially the digital currency market, you will double your profit. But it is not possible to make money from this market without taking an advanced cryptocurrency training course, so watch this course to increase your profits.
Compound interest vs. simple interest
As we mentioned earlier, compound interest, i.e. interest on interest, is actually the new interest derived from the previous interest. But simple interest does not mean this and the interest you receive is actually the interest of the deposit you saved. Now imagine that in addition to the interest you receive from your deposit, you also receive interest from its interest. For example, with a capital of approximately 100 dollars and a 10% profit, you will receive 10 dollars in profit at the end of each year. In the end, your total capital is equal to 130 dollars, which is your simple profit from investment. But in compound interest, you are allowed to put your interest every year to get more interest on your original capital.
In this way, 10% interest is $10, which in the first year, $1 is added to your total assets and reaches $111, and in the next year, it reaches $121, and in the last year, it reaches $133. Now, if the amount of your initial capital is large, your final profit will be much higher using compound interest.
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How to calculate compound interest
To better understand the concept of compound interest, we start with an example. Imagine that you have a capital of 100 million tomans and you want to increase your money by trading. Now suppose you are allowed to trade with this money 4 times in a year and each time you earn 20% profit, what will you do? You may use the following two methods to earn profit from your initial capital:
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The first method
In the first method, you start trading for the first time and earn 20% profit; Then you either spend or save the profit, in either case you separate your profit from the trading capital. You repeat this 3 more times and in total, by trading 4 times, you will receive 80% profit (80 million Tomans), which usually most people use this method.
The second method
Now suppose you use the compound interest method to receive interest. Following the previous example, suppose you have 100 million Tomans and you want to increase your assets by investing and trading. In this case, after receiving the profit from the first transaction (the same 20%), you do not spend or save the profit. In fact, you enter the profit obtained into the transaction again, and in the second transaction, instead of 100 million, you enter the transaction with 120 million Tomans.
According to the compound interest method, if you still make 20% profit, your total money will be 144 million Tomans (that is, 4 million more than the previous method). Repeat this 2 more times; Finally, you realize that your total assets have reached 207,360,000 Tomans after trading 4 times. As you can see, in the first method, you earned only 80 million Tomans; But in the second method, your profit reached 107 million tomans.
Now, this amount may not make such a difference for you; But keep in mind that if you trade with this method for a few years in a row, you will definitely achieve significant wealth.
The story of chess and compound interest
Years ago, the person who invented chess took his invention to the king. After the game, the king became interested in chess and ordered that he be given the size of a silo of wheat. But the inventor proposed an alternative that was very strange and insignificant. Instead of a silo of wheat, he asked for a much smaller amount of wheat, such that they put some wheat in each chess house and double that amount in the next house.
According to the wish of the inventor, the king should put one grain of wheat in the chess house on the first day and double the amount on the next day in the next house. The king, who thought this amount was very small, agreed and started dividing the wheat. It got to the point where there was no more wheat in the silo and the king just realized what had happened.
Now imagine if you use this method for trading and investing in today’s world, what might happen to you in the future.
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Reasons for the importance of the compound interest method
As it was said, if you trade in your daily life using the compound interest method over several years and re-enter your profit into the trade, you will definitely become one of the richest people in the world. The most important point in this method is to have patience. It is recommended to make your trading strategies longer so that you can achieve more profit with the help of this method. According to Darren Hardy in The Compound Effect, any small positive change can create big positive results in the future. These small changes can be the way you spend or invest your assets.
So even if your capital is low, don’t be disappointed and start trading with the same low capital, you will undoubtedly see the positive results of this method by waiting. An important point that differentiates the compound interest method is the acquisition of profit from both the initial asset and the profit. While in the normal trading method, users only benefit from their initial asset.
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Formula for calculating compound interest
In this part, we are going to examine the compound interest formula separately, to make it easier for you to calculate it.
A
The amount of money you are going to get in the end by the compound interest method (total assets plus earned profits).
P
The total assets you have at the beginning of your work (following the previous example, the same 100 million Tomans).
R
They show the profit rate with R (following the previous example, your profit was 20% per trade). Keep in mind that R must be entered as a decimal (dividing 20 by 100, which is 0.2).
N
In this section, the number of times your profit is supposed to be compounded. In the example above, we said 4 times.
NT
The period of time in which you are going to trade and receive profit. Same as one year in the example above.
In this way, you can manually calculate your compound interest in the time frame you want to trade, without the need for a specific person or program. Of course, for ease of work, you can also use compound interest software.
How to calculate compound interest online
So far in the article, you have learned how to calculate compound interest. But is it possible to calculate the compound interest from easier methods? In answer to this question, it should be said that yes, people can calculate compound interest online using various websites. By using websites that have compound interest calculator tools, you can easily calculate compound interest for consecutive years or months. Below is a list of websites that can be used to calculate compound interest online.
- investor
- thecalculatorsite
- moneysmart
- nerdwallet
- getsmarteraboutmoney
- calculatorsoup
What is the difference between simple interest and compound interest?
The difference between compound interest and simple interest is in how they are calculated. Simple interest is calculated based on initial capital and investment amount. In other words, simple interest is a fixed interest over a period of time. To get a simple profit, it is enough to multiply the original capital by the profit rate to get the amount of our profit from the transaction. For example, if your capital is $1000 and the annual interest rate is 5%, your profit from this transaction is $50 per year. In contrast to compound interest, the interest increases over a period of time. The profit obtained is added to the original capital and the future profits are also changed freely; Because the original capital changes. In general, the interest is added to the initial capital in each period and the new interest rate increases in proportion to your interest. To calculate compound interest, you can use the formula A = P(1 + r/n)^(nt).
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