Read this article on Compound Interest and discover what is Compounding Interests or Commissions in order to exponentially grow your investments.
Well, we all have hear of the term “interest” in our daily lives, but how many people know what it is? Basically, interest is the thing, which is paid annually by our Bank over your principal amount. Now, there is something is more popular than interest itself and it is know as, “Compound Interest”. If you are looking to understand compound interest better then this article on “Compound Interest” is just for you.
What is Nominal Interest?
Most Banks and Financial Institutions offer and charge certain percentage of annual interest their accounts. Now, suppose a Bank’s interest rate is 4% per year and a subscriber deposits $100 in his account. A year after he or she will have $104 in their account. The $100 is for the principal and the other $4 is the interest. This type of interest is called, “nominal interest”. In the nominal interest the interest is charged each year on the principal only.
What is Compounding Interest?
Basically, Compound Interest is when the interest is charged on the total amount which includes both principal and accumulated interest. Therefore, assuming the same example from above where principal amount is $100 and the first year interest is $4, the first year’s interest will be the same as nominal interest. However, in the second year the interest is based on $104 instead of $100 in nominal interest system. This means our savings will grow faster with compounding than with nominal interest system.
Application of Compounding
Generally, compounding is vastly used in almost all of the Banks and Non-Banking Financial Institutions. Typically, nominal rates are used very rarely. The popularity of compounding is due to the fact that it promises higher return. Banks offers different types of compounding. Some offer compounding which occur once annually, other may even offer daily compounding. There in one thing that you need to remember. More frequency of compounding means more income. This means the bank which offers weekly compounding will give you better returns than the one which provides monthly compounding.
How to Calculate Compounding?
Basically, you can do compounding calculation using compounding formulas. There is many different formulas for each type of compounding. There is formulas for annuity, perpetuity and many more. You can find these formulas on the internet. However, if you are not into this much calculations then there is a solution for you as well. There is many online tools which lets you calculate compound easily within seconds. You just need to fill up the necessary details and press the calculate button, it will calculate your compound rates for you. There are many smartphone apps as well which lets you calculate compound rates from your smartphones. You can check out website like, “MoneyChimp”. They have famous online compounding calculators. Lastly, using this and other online tools, all calculations can be done for free.
Compounding Interest to Multiply Income
Generally, those who know the power of compounding regular use this strategy to grow their investments. Now, if you sometimes wonder how some people get rich very quickly? Well, the answer is through compounding their investment projects. Typically, people all over the world are using tried, tested and trusted online programs such as USI Tech, BitClub Network and FutureNet to earn regular Passsive Income. The return they earn from investments gets reinvested back into the business. This method of compounding is allowing millions of people all over the world to generate wealth very fast.
In conclusion, Compounding is the basis of modern Banking and Finance. Investors and investment managers both depend on this technique to manage the funds efficiently. This had lead to many ground breaking investment techniques and many frauds, scams and Ponzi schemes centered around this concept. We must educate ourselves properly on compounding, so that we can differentiate between the frauds from the genuine.
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