A walk down Wall Street is a testament to the business activities that are driven by huge financial investments. Daily, these investors are keenly watching the financial reports to ascertain the profitability or loss of their investments. Every businessperson desire to make a profit out of every investment, though the odds might present very unpleasant situations that might affect the return on investments (ROI).
Who does not like the sound of having an interest that enables you to earn more interest? Sounds fascinating right? The idea of compound interest is simply the interest that accrues on the principal and the accumulated interest of a deposit. Painting a vivid picture of this scenario is an additional interest in the original principal of a savings or investment. A lot of people tend to misconstrue compound interest with simple interest though there is a huge disparity between the two. From a business premise, let us do a mathematical analysis of these two.
THE SIMPLE/COMPOUND INTEREST ANALYSIS
The Simple interest analysis is hinged on the principal amount alone, its calculations are done with the principal while compound interest is when your earned interest accumulates more interest when the principal is reinvested. From this simple analogy, the latter gives more ROI hence is the go-to-go thing for most people seeking to invest.
Mathematical representation of compound interest
Formula A = P (1 +[r/n]) ^ nt
A = amount of money accrued after the number of years (n) invested with interest
P = principal amount (the capital invested)
r = the annual rate of interest
n = the rate of interest turnover (compounded)
t = the number of years the money is deposited.
Mathematical representation of simple interest
A = P (1 + rt)
A = amount of money accrued after the number of years with interest
B = principal amount (the capital invested)
r = the annual rate of interest
t = the number of years the amount is deposited
So, with this mathematical illustration, it is obvious that the compound interest gives more financial value and is a compelling statistic for an intending investor.
Taking advantage of the compound interest values in an investment opens a whole door of opportunities for an investor but to reap its benefits, one should consider a few things.
- Pay off outstanding debts and loans
- Have an idea of the financial mark before investment
- Take cognizance of the annual percentage yield of the investment
- Keep an eye on the investment to keep track of the financial market dynamics.
Taking a cue from the above steps, we will share some examples of compound interest investments.
INVESTING IN A HIGH-INTEREST SAVINGS ACCOUNT
This investment is done through a regular savings account in the bank, a deposit is made over a period with a higher return on the investment. The investor is expected to open a savings account either with the government, banks, or a financial institution. A lump sum of money is fixed over a duration of time and this deposit attracts a certain percentage of interest which is added to the principal amount. This type of investment is withdrawn at maturity.
The huge financial structure of most governmental infrastructures necessitates the need to acquire external funding to execute the projects. Following this exigency, a burden is placed on these government parastatals and this financial gap is met through the investment made by individuals into what is called a treasury bond or bill. It is perceived as a lucrative source of investment because of the mouth-watering return on investment.
Property investment has been around for a while now, it promises a good return for intending investors. Here, a property is sold or leased for a certain amount of money and this investment grows with time depending on the type of property that is been sold or leased. This can be juxtaposed with the Airbnb vacation rentals which provide lodgings and homestays for guests on a trip.
This has garnered a massive return on investment for the investors and the business model has been replicated across the board. This type of business requires a lot of maintenance and might not be as lucrative as the other compound interest investments. Nonetheless, it is still a good buy as it ensures your money is compounded as earlier explained.
The idea behind investments is all about taking a portion of your finance and putting it into a lucrative venture for a higher yield than what was earlier invested. Investing in shares which is a unit of stock means that you own a chunk of an enterprise in which you invest. As the company grows, you can assume the stock to supply a return on your investment with time.
Stock investment takes gain from a developing financial system, as the economic system grows, so do corporate profits which is because economic growth creates jobs and investment opportunities. This in turn creates earnings, which creates sales. This is another avenue to make compound interest on your investment if you know how the stock market works.
A bond is debt safety, just like an IOU. Borrowers use this type of investment to get money from investors and this is stretched over a period. When you purchase a bond, you are lending to the company, which in most cases is an enterprise or business venture. In return, the provider guarantees to pay you a certain charge of interest at some stage in the duration of the bond and to pay off the foremost, also called face fee or par value of the bond, whilst it “matures,” or becomes due after a fixed tenure.
CERTIFICATE OF DEPOSIT
A certificate of deposit (CD) is an investment that is done with the aid of banks and credit unions. They offer a price in exchange for the client agreeing to make a lump-sum deposit which is kept for a duration. All financial establishments are expected to provide a certificate of deposits, though it is up to the financial institution to decide on the best offer concerning how much that choice serves their interest.