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Stilettos and Compound Interest

By Melissa Gutierrez
Posted On Jun 07, 2016
Stilettos and Compound Interest

The story goes that Albert Einstein referred to ‘compound interest’ as the eighth wonder of the world. If one of the most exceptionally intelligent men to ever walk this planet refers to something as “man’s greatest invention,” it is worth to look into it zealously.

So, what exactly is “compound interest”?

Think as compound interest as “interest on interest.” Before the dollar signs start to cloud your cognition, let’s discuss the algorithm behind this magical formula.

Compound interest is calculated on the initial principal and also on the accumulated interest of previous periods of a deposit or loan. In other words, the principal amount and the interest rate are both accruing interest; resulting in significantly boosting investment returns in the long-term.

The rate at which compound interest accrues depends on the frequency of “compounding”; the higher the number of compounding periods the greater the compound interest.

For example:

The formula for compound interest is:  = P [(1 + i)– 1]

The compound interest on $10,000 compounded annually at 10% (i=10%) for 10 years (n=10) would be $15,937.42

The compound interest on $10,000 compounded semi-annually at 5% (i=5%) for 10 years (n=20 because it is compounded semi-annually) would be $16,532.98

While the return on investment is tremendous with compound interest, consumers should be aware of credit card debt with high-interest rates that are compounded monthly.

New You life hack: Did you know that by setting up a bi-weekly mortgage plan you can save a lot of money over the life of the loan? With the bi-weekly mortgage plan each year, one additional mortgage payment is made. That extra payment goes toward the principal of the loan, which reduces the amount of the loan balance quicker and also reduces the amount of interest charged over the life of the loan.

We will tackle credit cards next on the Stiletto Finance series.