Last week you have seen that the differences in the use of interest can affect your investment balance at the end of the year, although all are equally promising 12 percent interest per year. The reason is simple: because the amount of interest you receive is different.

Different interest that you can then bring the term “effective rate.”  I.e. the ratio of the amount of interest you earn at the end of the year, with the amount of money you entered. How to calculate the effective interest rate is very simple: the interest you receive at the end of the year divided by the nominal value of your money at the beginning of the year.

So, if there is an investment product that promised 12 percent interest rate per year, then it might be the effective rate is not 12 percent. What you receive at the end of the year may be more than 12 percent. By knowing the effective interest rate, then the difference is you get to be really visible.

In addition, the effective interest rate also allows you to speed up your calculations. That is, if we use our earlier example of $ 1,000,000 as initial fund your investment, then for the next, we can just change it to $ 5,000,000.

You also do not need any more calculating how much interest you get when using the system daily interest rates, for example. You do not need to calculate interest over and over again until 365 times. Simply multiply by 12.74 percent, or multiply the USD 5 million was with 12.74 percent.

The sooner the better

Someone once said that the concept of interest rates is the biggest discovery in this century. This is not excessive. For example if you enter $ 1,000,000 at this time to the deposits that provide 12 percent per year (with an annual interest rate system), at the end of the first year that your balance will be USD 1,120,000.

At the end of the tenth year, your balance will be USD 3,105,848. At the end of the 20th, your balance will be USD 9,646,293. Then at the end of the year to 100, your balance will be USD 289,002,190.
What caused the balance of your investment could be so big? Time. The longer your money spinning in the interest rate system, the greater the interest you earn. If using a snowball sample was, the higher the peak of the mountain snow, the greater the snowball that later when he reached the bottom of the mountain. This is because the higher the mountain snow, the more snow that the velocity of the ball before he reached the bottom of the mountain. That is, the longer your investment period, the greater the balance of your investment later.

Most of the investment using the interest rate calculation system. For example, if you buy a house that is currently only worth USD 100 million, then at the end of the year, let’s say the house has become worth USD 120 million (a 20 percent value addition). At the end of the second year, the value of your home may already be USD 120 million multiplied by 20 percent. And so on, even though up to 100 years. This concept is the same for almost all investment products.

What does this all with you? If you’re saving for a particular purpose later on, so the earlier you start, it is also the longer your investment period, so it will be the better for you.

Little things mean a big

It is also necessary to realize the difference interest rates (inter-bank) that small could even differ greatly affect your investment balance. For example, let’s say at this moment you have a USD 2 million. You then open the 12-month deposits in two banks, Bank A and Bank B. Each $ 1 million.

Let’s just say, interest rates on Bank A is 9 percent per year, whereas in Bank B is 10 percent per year (1 percent difference). This means that, at the end of the first year, Bank A would give interest USD 100 thousand, and Bank B is only USD 90 thousand. The difference is USD 10 thousand. Small? Indeed.

But when viewed in the long run, differences in both investment balances of deposits would be very large. The longer the time, the greater the difference. At the end of the year to 20, for example, your balance is USD Bank A and Bank B 5,604,411 USD 6,727,500. Means there is a difference $ 1,123,089.

At the end of the year-50, the balance in the Bank A is $ 74,357,520, while the Bank B reaches USD 117,390,853. So the difference in both the bank balance is USD 43,033,333. Huge!

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