As ever discussed previously about kinds of investments, below is an example of safe and high profitable investments with small capital equity and do continuously in a very long term, which is called compound interest. Which is more profitable? Investing $ 12000 each year with an investment rate of 12% or $ 1000 each month for 1 year at 12% compounding monthly? If the first choice is chosen, the money would be $ 13440, but if the second choice is chosen, the money would be $ 13496.85. Why the total amount is different? Why the second investment has higher profit? How to count compound interest?
If people want to save $ 12000 into a bank which gives 12% of interest rate, then the next year they would have 12% of interest rate which is $ 1440, so the total amount of their balance would be $ 12000+$ 1440 = $ 13440. Let’s compare if people want to save $ 1000 each month with 12% interest rate compound monthly.
12% of annual interest rate monthly compounded would be 1% interest rate each month. If $ 1000 is saves into their deposit at first month, then the next month it would be $ 1100 + $ 1000 = $ 2010 at second month, then at the third month it would be $ 2010 + $ 20.10 + $ 1000 = $ 3030.3, etc. So, by the next year, their balance would be $ 13496.85.
Actually 12% monthly compound interest rate wouldn’t give 12% at the end of the year, but it would give about 12.68%. In another words, investing money on compound interest would give higher profit, as long as it is being done as earlier as possible. Another example is given: Suppose, people put aside only the cost of a single candy bar about 65 cents each day, invested in a 5% yearly interest compounded monthly, it would be $3073 for 10 years and to $16470 in 30 years.
Those are several reasons why people who plant to have 40 years of retirement have to invest their 25% of monthly income, in order to have higher reached profit during their retiree by interest compound monthly.
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