Compound interest refers to the method of calculating interest in which the interest of a certain interest-bearing period is calculated by adding the principal to the total interest accumulated in the previous period, which is commonly referred to as "interest on interest" or "interest on interest".
Formula
Compound interest is calculated by calculating the principal and the interest generated by it together, that is, interest on interest.
The characteristic of compound interest calculation is that the sum of the principal and interest at the end of the previous period is used as the principal of the next period, and the amount of principal in each period is different when calculating. The calculation formula of compound interest is:
The present value of compound interest refers to the principal that must be invested now to reach a certain amount of funds in the future when calculating compound interest. The so-called compound interest is also called interest on interest, which refers to the method of making a new round of investment with principal and interest after a deposit or investment has paid off.
The final value of compound interest refers to the sum of the principal at the end of the agreed period after the principal has earned interest within the agreed period, and the interest is added to the principal and then the interest is calculated. Simply put, it is the sum of the principal and interest after depositing A at the beginning of the period with an interest rate of i for n periods. Formula: F=A*(1+i)^n.
For example: the principal is 50,000 yuan, the interest rate or investment return rate is 3%, and the investment period is 30 years. Then, the interest income obtained after 30 years, calculated by the compound interest calculation formula, is: 50,000×(1+3%)^30
Since the inflation rate and interest rate are closely related, like the two sides of a coin, the compound interest terminal value calculation formula can also be used to calculate the actual value of a specific fund in different years. Just replace the interest rate in the formula with the inflation rate.
Principal.
For example: To raise a pension of 3 million yuan in 30 years, assuming the average annual return rate is 3%, then the principal that must be invested now is 3,000,000/(1+3%)^30
- Compound interest effect When it comes to compound interest, most people know that it is a financial term. If you don’t know what compound interest is, you can study the microeconomics textbook on your own. You will benefit greatly from reading a microeconomics textbook from beginning to end.
Let me give you an example from finance to illustrate what compound interest is. Assuming you earn 10% per year on $1, you can earn 10% in the first year, and finally get $1.10, $1.21 in the second year, and $1.33 in the third year. The amount of income will continue to increase. If you calculate it at a compound interest rate of 30% per year for 30 consecutive years, you will not get 10 times or 20 times the principal, but thousands of times.
The compound interest effect also applies to the field of intellectual achievements. A company currently has 100 users. If the user growth rate is 20% per month, the company will accumulate millions of users in a short period of time. Sometimes, even the founder of the company will be surprised by such a large scale of business.
- All the rewards in life, whether it is wealth, interpersonal relationships, or knowledge, come from compound interest. If you are not 100% committed when researching, others who are 100% committed will surpass you. They will perform better than you not just a little, but a lot, because we are talking about competition in the field of creativity. In the creative field, the compound interest effect is very obvious, and the leverage effect is also very obvious.
(Richard Hamming: Knowledge and output efficiency are like compound interest. The more you know, the more you learn. The more you learn, the more you can do. The more you can do, the more opportunities you have. I don't want to give you a (compound interest) rate of return, but it is a very large number. If one of two people with the same ability spares one more hour a day to think, his output will be much higher than the other person in his lifetime.)
The concept of compound interest is very rich. The concept of compound interest originates from capital, but it is more than that. The compound interest effect is not limited to the capital field.
Life is like rolling a snowball. The most important thing is to find wet snow and a long slope. He used a snowball to metaphorically realize the accumulation of huge wealth through the long-term effect of compound interest. The wetness of the snow is a metaphor for a high annual rate of return; the length of the slope is a metaphor for the long time of compound interest appreciation. Most northerners played snowballs on the snow when they were young. When we slowly rolled a palm-sized snowball into a huge snowball, we all felt a sense of pride in our achievements.
