|Month||Date||Payment||Principal + Payments||Interest||Cumulative Interest||Balance|
Let’s take a look at a compound interest example:
You find a five-year sovereign bond with a face value of $20,000 that pays 3.25% interest compounded at the annual rate. Here is how that bond will grow until maturity:
* First year: $20,650
* Second year: $21,321
* Third year: $22,014
* Fourth year: $22,730
* Final year of maturity: $23,468
With simple interest, the balance on that bond would have been $23,250 on the maturity date. While this may not seem like much, once we increase the variable of the years of the $20,000 compound interest investment, we would see a balance of $98,977 in 50 years compared to just $52,500 with simple interest.
Now that we have taken care of the math portion of compound interest, we can now get into the matter of investment philosophy and practical strategy. With compounding, you will want to:
* Invest as early as possible.
* Contribute as often as possible.
* Check for better rates of return.
* Hold on to your investment.
Compounding is a conservative and somewhat passive form of investing, but it really works because it combines discipline with a realistic view of what is known as the time value of money. With simple interest, you are barely staying above the rate of inflation; with compound interest, you are already ahead of the curve.