Today, I am going to share with you what most finance courses out there, dont teach you.
The Mechanics Behind The Formula Of Compound Interest! 🙂
In one of my previous blog post, I have shared on how to calculate compound interest, without using a financial calculator.
This is the formula again.
Principal (1+interest)number of years
In this blog post, I am going to share with you the mechanics behind the formula of compound interest for a single cashflow. Before that, let me give you an example, on how compound interest works.
Example, you have $10,000 today, and you earn 9% compounded interest, annually.
For the first year, you earn 9% X $10,000 = $900 interest
On the second year, you will earn an additional 9% X ($10,000 +$900) = $981 interest
You earn interest, not just on the principal…but you earn interest on the (principal + interest)
So total in 2 years, you make, $10,000 X (1.09) X (1.09) = $11,881
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The above explanation is pretty straight forward and it is pretty easy to calculate if we compound it for 2 or 3 years.
If we compound for 2 years, we take 10,000 X (1.09) X (1.09).
If we compound for 3 years, we take 10,000 X (1.09) X (1.09) X (1.09).
If we compound for 4 years, we take 10,000 X (1.09) X (1.09) X (1.09) X (1.09).
BUT what if we compound for 60 years? What are we going to do, if we dont have a financial calculator? Take….
10,000 X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) ???
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The mathematician who developed this formula makes it easy for us.. Just use this formula…
Principal (1+interest)number of years
Example if you have $10,000 and compounding it for 2 years at 9%/annum.
The formula goes 10,000 (1+0.09)2
which is also 10,000 X (1.09) X (1.09).
For the first year, you make (10,000 X 1.09) = $10,900 inclusive of interest, and the second year, you make (10,900 X 1.09) = $11,881
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But if the $10,000 is compounded for 60 years, instead of inputting, 10,000 X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09) X (1.09),
just use this simple but powerful formula.
10,000 (1+0.09)60
Hope this explanation is beneficial for you…. 🙂
p.s. By the way, if you wish to discover a simple & halal way to create a positive monthly cashflow and calculate your net worth for FREE, then please click here…
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