In past articles we have discussed about simple interest, now I will continue with a discussion about investment with compound interest method.

Compound Interests
The concept of compounding interests is a concept in which the interest you earn will be added to your principal, so that the interest earned in the next year will be even greater. Just like a snowball rolling from the top of the hill of snow. Further down the larger.

Now we’re back to use the example of money $ 1 million earlier. When you open a deposit worth $ 1 million with a 12 percent interest per year, the balance of your investment at each end of the year are as follows:

At the end of the first year, your balance is:
$ 1.000.000 + ($ 1,000,000 x 12 percent) = $ 1.000.000 + $ 120.000 = $ 1,120,000

At the end of the second year, your balance becomes:
$ 1,120,000 + ($ 1,120,000 x 12 percent) = $ 1,120,000 + $ 134,400 = $ 1,254,400.

At the end of the third year, your balance becomes:
$ 1,254,400 + ($ 1,254,400 x 12 percent) = $ 1,254,400 + $ 150,528 = $ 1,404,928.

So on every year, until finally at the end of the 10 Years, your investment balances will be $ 3,105,848. Bigger than using the simple interest method (which only $ 2.200.000).

Monthly Compound Interests
What you see above this is the concept of interest rates, the interest paid every year (yearly compound interest). However, there are also the interest rates paid interest each month (monthly compound interest).

For example, we will use the same numbers with the example above, where you put money $ 1 million. Only difference, you do not open it in the form of deposit accounts, but the savings.

For simplicity, let’s say it also provides savings interest rate of 12 percent per annum, payable monthly. This means that, at each end of the month, the interest you earn is not 12 percent, but 12 percent divided by 12, or 1 percent. This is because there are 12 months a year.

Thus, the calculation of your investment balance at the end of the first month are:
$ 1.000.000 + ($ 1,000,000 x 1 per cent) = $ 1.000.000 + $ 10,000 = $ 1,010,000.

At the end of the second month, your balance becomes:
$ 1,010,000 + ($ 1,010,000 x 1 per cent) = $ 1,010,000 + $ 10,100 = $ 1,020,100

And so on every month until the end of the month your balance becomes 12:
$ 1,115,668 + ($ 1,115,668 x 1 per cent) = $ 1,115,668 + $ 11,157 = $ 1,126,825.

If this continues until the end of the 10 Years (or 120 months), your investment balance to $ 3,300,387. More than if you use the annual interest rate.

Daily Compound Interest
What about the interest rate system that paid a daily basis (daily compound interest)? Many banks offer advertising savings products that provide a daily interest like this. The concept is similar to the monthly interest rate. The difference is, the interest is not divided by 12, but 365 (according to the number of days per year), until the amount is 0:03 per cent per day.

Now we will calculate how many you get. Once again, we use the example as above.

Your balances at the end of the first day are:
$ 1.000.000 + ($ 1,000,000 x 0.03 percent) = $ 1.000.000 + $ 329 = $ 1,000,329.

And so on until after a year (or the end of the day to 365) your balance becomes:
$ $ 1,127,104 + ($ 1,127,104 x 0.03 percent) = $ 1,127,104 + $ 371 = $ 1,127,475.

If continued until 10 years, then at the end of the day into 3650, your balance will be
$ 3,319,462. More than if you use the bank interest rate monthly.

From the calculations above we can see the difference between the method simple interest with compound interest investments. Now depending on your choice of which method is most suitable for your investment.

Related posts:

1. Calculate the Growth of Investment Funds (1)
2. Calculate the Value of Investments Based on Interest
3. Calculate the Value of Investments Based on Time