How can investors receive compounding returns? This question was eradicating my mind a few months back. Maybe the same question has irritated you a lot. But you need not worry about. I got the solution, and I am going to share with you today.
Compounding interest is something that everyone should understand. It can give you many profits and can save you from many losses.
It is said that you cannot win the wealth overnight. You have to work step by step and smartly if you want to earn the wealth in a good amount.
Not talking much, let’s get to the point. If you want to know more about compounding returns or interest, come with me!
Shall we start?
How Can Investors Receive Compounding Returns, What It Is Actually?
According to finance experts ” Compound interest is the interest an investor earns on his original investment plus all the interest on the interest that has accumulated over time”.
But that is only a definition but not the answer to your question. Your query is how can investor receive compounding returns. I will explain you about this, scroll down to know more about this.
It is as simple as it sounds. Any dividends, profit, or interest can be reintroduced in the actual or original investment to create the compound profit.
We can stew them those profit by reintroducing them to “let the money multiply our money” rather than taking those dividends, profit, or interest in the form of cash payment.
Wait! Give me a chance to explain you this with the help of an example.
We have different variables that we should clear up
P: Initial amount (principal)
R: Annual interest rate
N: Number of times the interest is synthesized or compounded per year
T: Number of years the money is getting synthesized or compounded for
Now Imagine if we plop our money on the online saving account. Currently at Goldman Sachs. With the online money-saving the account, anyone can get 1.05%.
Assume that we commence with 25000 dollars, what we are going to gain after the period of one year.
You can easily calculate that 1.05% of 25000 dollars is 262.5%. We actually end up with the amount 25,263 dollars? Why so?
Since we are synthesizing this every month, we are getting some additional interest on that small interest that ends up amounting to 1. 27 dollars over one year. Now, do you have the idea about over 50 years?
If we do not have compounding interest, the total amount will be 38,125 dollars. But with the power of compounding interest, you earn more than 10% more and you get 42,251.77 dollars.
Now, how can investors receive compounding interest? You can put your money on an online account so that it gets synthesized every month. This is how to make money from money.
Si, in simple words, compounding returns is getting the income from the income. So, if you invest in the credit and at the end of the year you get some income, you can either withdraw that income or you can leave it in the credit only.
If you leave it, you can also have extra income from the first year which will be creating the income. This is how can investors receive compounding returns.
How Can An Investor Receive Compounding Return? What About The Bonds?
Well, the bonds do not have any compounding returns, you get the fixed interest income from the bonds like an online saving accounts with a fixed rate.
Let me explain you something humorous! Imagine! That you put 100,000 dollars into 30 years Treasury Bond of US, and you gonna receive 3% on out money per year. Let’s see that if we can compound the fixed income.
After buying this bond, we gonna earn 1500 dollars twice a year in the interest payments. But what is if we receive additional interest on those when we took those interest payments. Isn’t that compound interest? interest on Interest?
We receive 1% when we take 1500 dollars interest payment and bought 1-year treasury bond. One year later, we gonna receive the 1500 dollars and an additional 15 dollars for the total of 1515 dollars.
We will repeat this again and again 30 years for twice a year. If we bought the bond normally, we gonna receive the 90000 dollars in interest over 30 years plus the 100000 dollars principal additional.
With this cool method of compounding interest on fixed income, we would receive 115000 dollars as interest over 30 years plus 100000 dollars additional principal. That is the power of the compounding interest.
Wind Up Words…
So, it is as simple as it sounds, you can earn wealth in a good amount by dividend, gain, or reinvesting interest method.
It is just that how you do it. I have explained you everything with the proper example, this how you can work smartly, that is how you can make money with the money, how your money can multiply itself and can make a good wealth for you.
I have tried my level best to explain you the facts about compounding interest. This is how can investors receive compounding returns.
Tell me if there are still some bolts which need to be tightened. I would love to give answer of your questions. If you want to add up something t my knowledge, you can.
Till then, take care!