What are the advantages of compound interest?

The main contribution of compound interest for the savings officers is the promise of exponential growth of their money. Once the interest is added to the account, it starts to earn interest alone, which increases the rate at which the account can grow. This applies to all types of savings tools, including savings accounts, money market funds and deposit certificates (CDS). The creditors also benefit from the compound interest, because the unpaid interest added to the loan balance will also receive additional interest, thus increasing the amount of the payable balance. Combined with and the modest program of regular savings, such an account can grow very quickly. This is what is meant when people refer to the "miracle of composed interest" .al - earns interest, which is essentially the cost of using money. The interest is "simple" unless it is added to the amount of principal and "composition" if so. Calculated as a percentage of the Chief Director, usually expressed as a percentage paid for a period of time.

for exampleA specific savings account can pay 5% annual interest, calculated and credited - or folded - quarterly. If the annual interest is enhanced in less than one year, it is evaluated, so a quarterly composition of a 5% annual interest would actually be 1.25% of the principal amount. 1.25% obtained in the first quarter is added to the amount of principal and becomes part of the base for calculating interest payments of the second quarter, etc. Savings tools are the time of time or less, although, like many CDs, usually only simple interest, calculated with one maturity and paid with the director.

Savings accounts and money market accounts, among other things, generally composed interest more often than CDs. When comparing accounts, the frequency with which the interest is composed is. If two accounts have the same interest rates, the account for which the composition is more frequent, will grow faster. The account with a 5% annual interest rate, which is quarterly composed, will grow faster than the one whose interest is composed every 6 months. Some institutions, howeverThey calculate interest very often, often daily, but attribute the account less often, such as monthly or quarterly, and thus somewhat dampened the compound effect.

The method used to calculate interest may vary between institutions. Several institutions set up a calculation on the lowest balance during the calculation period - that is, only the money that has been in the account all the time. Another IS method based on an average amount of daily balance, while some institutions count interest on the actual daily balance. All depositors, but especially those who often use their accounts, most benefit from the daily interest calculation. The average daily balance is another most advantageous method, while the lowest daily balance is least advantageous.

Interest is also a feature of loans. If the money is borrowed, the interest due is usually expressed as an annual rate due monthly. If the interest due is paid in time, there is no compound effect. However, if less than the entire interest amount is paid, unpaid particleAnd at the beginning of the next period to accumulate interest. It is a function of revolving credit loans such as credit lines for home capital (HELOC) and credit cards that are beneficial for creditors.