The power of compound l´interet

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L´Effet snowball.
L´Effet snowball.

Here I present to you the compound interest or l´effet snowball. C´EST probably the concept the simplest, but the most powerful of any finance. I strongly invite you to read until you understand, essential c´est, because it will make you really rich.

The super power of financiers, the compound interest or l´effet snowball. Not cela n´a nothing to do with n th Marvel or DC. C´EST just the most powerful concept of any finance. I strongly invite you to read this article until you understand, essential c´est, because it will make you really rich.

How to walk compound interest

If you place €10,000 to 2%, we touch €200 of interest. By removing these interests, then the following year there is still €10,000 on the booklet, which will report again €200. In ten years, it will be thus €10 × 200 = €2,000 of interest. These are simple interest.
But leaving the interests on the booklet, they will produce their turn of interests. These babies grow exponentially, as rabbits (I wanted to put as cockroaches to properly illustrate the rate faster, but c´est frankly less cute). The second year will be €10 200 on the libretto, which report €204 interest. Instead of winning every year the same amount, interest will increase with time. In ten years, it will affect so… €2,200.
It is barely 10% more than with simple interest. These reported €2,000, and the composition of the interests €200 more. One may think that this is nothing. Fake. Money placed for ten years at 2%, said while more than 20%, but not much more.
Perhaps it was not patient enough. If it had waited twenty years, it would have received in total €4 860 interests, or 20% more than with simple interest (20 × €200 = €4,000). It is better, but far d´etre a super power. The composition of interests therefore reported €860: Cherry is larger, but it is still only the icing on the cake.

How to turn an ordinary power in the true SUPER power

Repeat for children need to be patient and be willing to wait before spending his money. Like that compound interest report even more. Well Yes. Compound interest really have value only if it expected long (not just a few years) and the interest rate is high. Few savers understand that the interest rate is essential. A low rate as on the libretto has for a long time is a waste of time, so d´argent.
If you place €10,000 at 7% for twenty years, it will affect almost €29 000 of interest (it will be in total €39000). In this case the composition of interests reported nearly €15,000, or a little more than simple interest (20 × €700 = €14,000). It is more icing on the cake but a second cake.

Now suppose 10% over 30 years, you multiplied by 18 your money €10000 become € 180,000 well better not? But imagine that you read my article how to earn 15% annual with lever l´effet + how to earn 7% without risk. You begin to understand where I want to come? You multiply by 87 your sum (15% / year), yes 87 gives €870 000.

Just to make you salivate, imagine 20% multiply you the sum by how many? I give you, this is 100 or 150 or even 200, still not 300 but 380 Yes 380 this which gives us 3 800 000 euros, there c´est of super power not?

To find out how long it takes to double a sum it is a rule, that of the 72

Compound interest is the key to your fortune.

 

Curve compound interest

Curve compound interest

Curve compound interest

This curve makes want not? On this curve there are several d´interet rate as well as their growth according to the time you leave your investment (attention all profits are reinvested and we spoke always in net). There clearly qu´il n virtually no differences between small amounts d´interets then qu´au-top d´environ 5% curve s´emballe. Just to see the difference between 1% and 5% and between 5 and 10% to understand that the curve is really explosive.

Two problems and two solutions

Property course this curve is attractive, but in practice is it achievable? In theory Yes however the real problem is to start placing early l´argent and for that reason does not fall into the rat race. Ideally it would be interesting to work when l´on is still in these parents for example. Then it is necessary to continue a long time, and this despite the fact of living in his apartment and d´avoir of children.

Second we need to find rates and it less obvious c´est by periods that run, however I am there for you find solutions for example using leverage financial and/or tax l´effet (Pinel law e.g. with a credit).

What also is that the example on a placement at 7% it is

  • net of inflation
  • net of taxes and tax collection (hard, because the tax system is progressive)
  • and compounds (ie interest must also produce 7% net of inflation and taxes)
    Example we purchased €100 action which makes the 7% so there 7 euros which do not allow to purchase one share which will be 7% (need to wait to accumulate €100 considering that the purchase price does not vary) so to actually do much more than the 7% to have a compound rate

Formula

I propose a bit of mathematics, in fact compound interest are so important qu´il is a good idea to revise. You will see c´est a simple formula you learned in high school. This is the formula of the suites.

 

 

Simple interest

VF = Vi + Vin(1+ p)/100 = Vi + Vinp

Compound interest

VF = Vi * (1 + p) power n  

VF is the final value, Vi the initial value, p the rate of interest over a period, and n is the number of periods (years, semesters, quarters, etc.). The habit is to express the interest percentage rate, thus it will write 2% for p = 0.02 = 2%

Example:

EUR 10000 to 5% over 10 years

singles 10 000 + 10 000 * 0, 05 * 10 = 15 000

compound

10 000 * 1.05 = 10 500

10 500 * 1.05 = 11 025

11 0 25 * 1.05 = 11 576,25

11 576,25 * 1.05 = 12 155,06

12 155,06 * 1.05 = 12 762,81

12 762,81 * 1.05 = 13 400,95

13 400,95 * 1.05 = 14 071,00

14 071 * 1.05 = 14 774,55

14 774,55 * 1.05 = 15 513,28

15 513,28 * 1.05 = 16 288.94

or yet 16288,94 = 10 000 *(1 + 0,05) power 10

with 10%

10 000 * (1 + 0.1) power 10 = 25 937,42

with 20%

10 000 * (1 + 0.2) power 10 = 61 917,36

with 2%

10 000 * (1 + 0.02) power 10 = 12 189,94

with 20% and 20 years

singles 10 000 + 10 000 * 0.2 * 20 = 50,000

compound 10 000 * (1 + 0.2) power 10 = 383 375.99

 

Conclusion:

The time and the percentage d´interet are very powerful powers. L´Effet snowball in sum.

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