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My WealthCompound Interest - The Most Powerful Force In The Universe

Posted May 2010

Find out why is Compound Interest the most powerful force in the universe. Find out why is bad strategy to rely on debts in your life.


If you want to finance your life from the loans, than you should know that you are choosing loser’s strategy. Why? The answer is simple: the Compound Interest is working against you.

Albert Einstein shocked his colleagues when he stated that the most powerful force in the world is Compound Interest. Everybody would expect that Einstein would choose the product of the physics as an example of powerful force, but he stated that Compound Interest, as economical phenomenon, is the most powerful.

So what is the Compound Interest? It occurs when the interest is added to the principal ( base amount ). From the next period the interest from the previous period is earning the interest itself. The addition of the interest to the principal is called compounding. The compounding is present with the loans; the interest is increasing the amount of the principal, therefore is increasing installment too. The same stands for investments.

Compound Interest is very powerful force. It is very useful for the party who is taking the leverage out of compound interest. But if somebody is taking advantage of you by leveraging compound interest, you are in the real serious problem.



Compound Interest is very powerful force. It is very useful for the party who is taking the leverage out of compound interest. But if somebody is taking advantage of you by leveraging compound interest, you are in the real serious problem.

Take a look at the bank advertisements for the loan. If the bank is advertising e.g. 8,5% of bank interest, what do you think do you understand the whole truth. It is true that they will calculate the 8,5% of bank interest, but this is on the annual level. So if you are taking the loan on the 8 years the bank is charging you 8,5% divided by 12, every month, on top of your principal. You are paying the installments every month, but since you are paying small portion, the interest is calculated on the whole remaining principal. This means that interest of this month is being calculated on the last month's interest, on top of the interest on the principal.

In reality this looks like this:

Bank Interest - The Effect Of Compound Interest

Now you see that 8,5% interest rate means 38,2% interest in a 8 years. Check the excel example of the Compound Interest for exact calculation of the interest over long period.

So, before you take a loan, think about this and try to justify do you really need this loan. You are paying back not only the loan, but accumulated interest to the Bank.

There are occasions when you cannot avoid the loan. But at least try to avoid situation where the advertisement and offers are pushing you into the financial pit that you really do not need. After all, merchants and banks exists because themselves primarily, you are only their source of income.

 

 

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