Do you know the power of compound interest in its entirety? It’s the greatest thing in the world…when it’s working for you. When it’s working against you, it can be one of the most devastating things in the world. A catastrophe, really.
Compound Interest is the addition of interest to the principal sum of a loan or deposit . Compound interest is interest on interest. It is the result of reinvesting interest, rather than paying it out, so that interest in the next period is then earned on the principal sum plus previously-accumulated interest.
I’m just going to take a few minutes to show the amazing power of compound interest. Then I’ll let people decide if they would rather it work for them or against them. Here it is. Compound interest. The good, the bad and the ugly.
Please listen, because I’m about to explain how it works…both for you and against you. Most Nigerian don’t actually understand how compound interest works.
Many people think that if you have N500,000 and you get a 10% interest, compounded over 10 years, you’re left with…N550,000. Not quite. It would actually be over N1, 354,000. Crazy, right? That’s compound interest for you. So what happens exactly?
Interest generally compounds annually, so that means you earn 10% on your principal. Keeping with the above example, the first year your principal is N500,000, but at the end of that year, you earn 10%. So that means the second year you’ll be earning 10% on N550,000. Making sense yet?.
Look at this example; you purchase a property at N20m and you put the property for rent at an annual rate of N1, 000,000. Generally, properties in Nigerian cities like Port Harcourt appreciate average of 10% per annual. In this example let take the average appreciation rate of 10%. At end of the ten years, the property of N20m would have worth about N51.8m plus annual rent of N1m in 10 years when compounded it will give you N16.6m totalling N68.4m and still counting.
Got the idea?
Here are a few ways compound interest can be your best friend:
- Investing – Just like in the above example, compound interest, over time, can lead to extraordinary results. You continue to earn interest on your money and it continues to grow as it compounds. That’s why a one-time contribution of N150,000 could easily grow to several times that over your life span.
Compound Interest as an Enemy
Just like compound interest works for you, it can work against you (which means it’s work for somebody else).When you’re investing, it’s nice to know that you’re interest compounds annually, when you’re in debt, it’s terrible to know that your interest compounds annually. If you have ever borrowed money before and you couldn’t pay as at when due, you will understand what I am talking about here. When the interest has gone far above the principal. Water don pass garri
The Line between Investing and Paying Off Debt
Here, I am not saying you shouldn’t take loan or borrow, what I am saying is for you to take a critical look at what you are getting from your investment vs the interest you are paying on what you borrowed. There so many cooperative societies out there that give their members loan with little interest of say 5-10%. You could get that and invest in high yielding investment like real estates.
Remember the power of compound interest and make sure it’s working for you, not against you.
Why not get in touch on how best to use compound interest to your advantage; firstname.lastname@example.org, 09055522231