Wednesday, November 5, 2014

Compound Interest at a Glance

Compound 10% interest without topping up annually.

Compound 10% interest with RM10k payment every year.

Amazing mathematics. Investors knows this toy.

How to calculate?

For case 1:
We start by investing RM10k. After one year, we get RM10k x 10% = RM1k.

Reinvest this RM1k into the investment, we get RM11k x 10% = RM1.1k after two years.

Put in RM1.1k again, we get RM12.1k x 10% = RM1.2k after three years.

Doing repeatedly for 10 years, we will reach RM25937.42 in the total asset.

Simple formula = 10,000 x (1.1)^10 years = RM25937.42

For case 2:
We start by investing RM10k. After one year, we get RM10k x 10% = RM1k.

Reinvest this RM1k + another top up of RM10k. We have RM10k + RM1k + RM10k(new). After two years, we got RM21k x 10% = RM2.1k.

Every year top up RM10k, with 10% compounding. We'll get RM185311.67. That's huge.

That's power of compounding interest.

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