What is combining?

In financing and investing, the composition of the act of reinvesting your profits is to make further profit. The merger is often discussed in connection with compound interest on savings accounts or mutual funds. Understanding whether your investment pays simple or compound interest can have a huge difference in the amount of money that your investment or savings earns. Simply, imagine that you reduce $ 1,000 (USD) on your savings account, which earns 5% interest annually. You would earn $ 50 for your initial investment for your initial investment. As long as you kept the money on the spot, next year you would earn five percent of $ 1050, $ 52.50. In two years, because your investment has been combined, your investment would now be $ 1102.50.

If your investment does not complicate, you earn what is called simple interest, only interest on the initial investment. Instead of making your profits grow every rOK, your profit remains stable. Every year you would earn $ 50 for an investment of $ 1,000. In four years your account value would be $ 1200. However, if the bank complicates interest annually, the value of your account would be $ 1215.51 in four years. Longer interest can be deposited and the number of times combines how many times is that your investment will grow more significantly than if you only be interested. Reinvestment profits, when interest remains stable, is a great way to make more money through investment.

In fact, there is a relatively simple formula to find out how much you do when interest is. The formula is:

i = P (1 + interest rate) ^{y If interest is composed more than once a year, the formula is almost the same and looks like this:}

i = p (1 + interest rate) YT

the main difference is inThe fact that the exponent y (number of years) multiplies times, how many times a year (t) that the investment is composed. Note that if your initial investment of $ 1,000 was enhanced a day, you would have $ 1221.39 in four years.

The formula for composition of interest can be complicated a bit, especially if the number of times increases annually, and how the number of years you allow the investment to increase. The good news is that the Internet has different calculators of composed interests that will come to you if you do not have a scientific calculator on hand.

It is not only important to understand the composition from an investment point of view, to understand it when you borrow money. Credit cards, housing loans, car loans and the like can your interest. In this case, you want to find loans where interest deteriorates the smallest times, because you will tend to pay more. In addition, some loans charge all interest on the loan in advance. This applies to many car loans. Finally, you can pay several years of interest salaryEB before you actually make payments to payments on the principal of your car. Some loans will allow you to make additional principal payments, which can help reduce the total amount of interest you pay.

as an investor, the more times your interest compounds, the greater the profit. This is usually only the case if you allow the profit to be reinvested, so the interest is obtained for the main and profit. If you remove all profits from the investment, then you really only interest the amount invested.