🍋 What is compound interest?

What is compound interest?

Compound Interest is the interest on the principal plus the interest accumulated in each period. In other words, the interest earned in the first round is added to the principal, and in the next round the interest is charged on the new sum of the principal plus the original principal and the interest accumulated.

* * A simple example of compound interest

Suppose you invest $10,000 in an account that gives you 5% per year compound interest.

1. Year 1: * * You will receive 500 baht interest (5% of 10,000 baht), bringing the total amount to 10,500 baht.

2. Year 2: * * Interest will be charged on the balance of 10,500 baht. You will receive 525 baht interest (5% of 10,500 baht), bringing the total amount to 11,025 baht.

3. Year 3: * * The interest will be charged from the balance of 11,025 baht, and you will receive 551.25 baht of interest. The total amount will increase to 11,576.25 baht.

From this example, you can see that the more time goes on, the faster your money will grow because interest is accounted for by the increase in total every year.

How does compound interest affect investment?

Compound interest is a powerful tool to increase the value of your investments, especially in the long run. Investing with a return on compounded interest will keep your money growing, even starting with a small amount of money.

Caution

Although compound interest is very useful in investment, if we have debts such as credit cards or compound interest loans, it can also increase debt very quickly. Therefore, compound interest should be used in a way that benefits investment and avoids creating high-interest debt.

Hypothesis

- Initial investment: 10,000 Baht

- Compound interest rate: 5% per year

- No increase in investment each year (fixed principal);

- After 10 years: * * * The principal 10,000 baht grew to 16,288.94 baht.

- After 20 years: * * * The principal 10,000 baht has grown to 26,532.99 baht.

- After 30 years: * * * The principal 10,000 baht grew to 43,219.42 baht.

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