We always fantasize about living the life that we have always imagined. However, with all the monthly utility bills, mortgages, and even other expenses to take care of, we can sadly say that these factors will prevent us further from achieving our financial goals. However, with careful and proper financial management and planning, 0ne can simply dream of achieving millionaire status and be financially free. In order to this, one must be able to make their money work for them instead of the other way round and that is through compound interest.
What is Compound Interest?
A compound interest is an interest that is added along with the principal amount. You will be earning interest on top of the interest which you have already earned. In short, the addition of this principal amount is also known as compounding.
However not many people are able to see the amazing benefits of compound interest, probably because they do not understand on how it works. Here is how it works:-
If you put in RM10,000 in a fixed deposit account with a 7% interest for 2 years, you would end having RM11,400 after 2 years right? Not quite.
You would have RM11,449 in your account. With compounding interest, one can simply earn up to 7% interest on RM10,000 and in the second year you will earn RM 10,700 at the same rate. Compounding interest is the interest you are earning based on the interest itself, which was RM700.
The basic principle of compound interest is to earn additional interest on top of your previously earned interest. This means that whenever you earn your first interest payment, it will then be added to the principle, and this is how you can make money work for you by utilizing compound interest.
Taking Advantage of Compound Interest
When you use compound interest, it can greatly impact the amount of savings that you can accumulate over the long term and utilizing your time to over the long term by just simply increasing the amount of savings. The only disadvantage is that compounding savings can have a dramatic effect on your savings if you choose to withdraw early.
If you are able to start saving earlier, means that there will be more years of compounding interest. means that you can also gain a higher return on investment with a lower total investment amount at the start to help you even for people saving their money through an investment vehicle over the long period, such as saving for retirement.
How To Make A Million Ringgit with Compounding Interest?
Lets start you aside by having RM10,000 in your account with an annual interest of 7%. Following that deposit of RM10,000, this table will show how much money you will have to invest in order to reach millionaire status by the time you are 65.
To start, you should start when you have a larger starting amount with plenty of time to reap from it. Whenever you have the time and reasonable amount to set aside, the gains from compounded interest can be exponential with time.
It is better to start early so that your compound interest can work better for you in your favour. Accompanied with risk, you are able to earn a higher interest rate with your money and this will then be translated into more growth for our money with compounding interest.
There are certain factors too to take into account such as the time, initial amount you invested, and amount of interest and lastly, the amount of interest will also influence how much returns you will get.