Who is not interested in growing their wealth? The answer is no one. All of us want to take as much advantage as possible and make our wallets grow faster and fatter.
That’s when compound interest comes in, or as you may know it: investing 101. But what if we told you there is something better than that – uninterrupted compound interest!
But what is the uninterrupted compound interest?
The basic principle of uninterrupted compounding is that your assets and their gains grow continuously on top of each other over time without stopping or slowing down. The power of uninterrupted compound interest can be harnessed in multiple ways and successfully help you grow your bank account.
In today’s article about uninterrupted compound interest, you will learn:
- How does compound interest work?
- Difference between simple and compound interest
- What is the power of “uninterrupted”?
- What are the sides of compound interest
- Available accounts with compound interest
- How to make use of your whole life insurance interest? – The Infinite Banking Concept
Read on and understand how to start saving the smart way.
How Does Compound Interest Work?
You are probably already familiar with the concept of compound interest. When you invest, you earn interest on your money, monthly, annually, etc. . From the first year, there has been an increase in interest.
In the second year, you start earning interest on the original investment and on the interest from the previous year. In the third year, you make interest on your initial investment and from the last two years.
Each time, you not only gain extra, but you also earn a higher return. This is one of the most popular methods for saving money for the retirement account, more significant purchases, or the capital for a small business and a considerable benefit of compounding.
Simple vs. Compound Interest
Simple interest is the interest rate multiplied by the investment or principal amount, whereas compounding includes interest earned during the previous compounding period.
Whereas simple interest is more commonly used in a loan where the interest is the same every period and there is no event of compounding. Compound interest is used in the contexts of investment and savings.
A = P(1 + RT) is the simple interest formula. This means that the account value equals the principal investment amount multiplied by one, plus the rate multiplied by time. Because it does not include the compounding factor, the simple interest formula is less complicated than the compounding interest formula.
The Compound Interest Formula
The account value, also known as a future value, is calculated using the formula.
A = P(1 + R/N)^(NT)
- The investment or principal balance at the commencement of the asset is denoted by the letter P. When calculating interest with a compound interest calculator. The principal is also known as present value.
- The interest rate earned on the investment is denoted by the letter R.
- The number N characterizes the number of times interest is compounded per period. For instance, many savings accounts compound monthly but have an annual rate.
- The number of time periods is indicated by the letter T.
The best examples are self-explanatory, so imagine you invest 20,000$ with a 2% rate of return compounding monthly. After two years, your account balance would be:
A = 20,000(1 + 0.02/12)^(12*2)=$20,815.52
The Power of “Uninterrupted”
Based on wealthwithoutrisk.ca review, the compounding power requires time for the magic to work. Most financial advisors recommend investing in the stock, bond, and cash markets. Mutual fund and managed accounts are the most popular investment vehicles.
Most investors strive to keep up with market indexes such as Canada’s S&P/TSX Composite index and the S&P 500 index. This is primarily because other financial services, such as GICs and high-yield savings accounts, provide 1-2 percent returns.
With inflation at 2% and taxes on gains, you almost have a negative return. Over long periods of time, the previously mentioned market indexes have averaged 7-9 percent. If you’ve had the good fortune to time your deposits correctly and the discipline to keep your money invested for decades.
You’ve seen these returns before. But, before you think you’ve done well, keep in mind that we have to account for management fees and taxes. The fees are known as MER ( Management Expense Ratio). These fees, which range between 2 and 2.5 percent, are deducted from your returns.
This can add up to thousands of dollars over the course of 30 years, which could have been left to compound indefinitely. Rather than chasing a high ROR, it is better to have a long-term mindset and invest your money in a place where it can grow without investment losses, taxes, or hidden fees.
Compound Interest Example
Compound interest may turn little investments into large sums of money over time, but only if you start investing immediately and stay involved.
The sooner you begin investing. The more time interest has to compound on interest. In the example below, a $10,000 investment increased by $1.698.59 from year 1 to year five and $2534,53 from year 5 to year 10. You will be elderly before you reach year 30 if you wait too long to start investing.
Compound interest can only be maximized if you keep staying invested and keep it uninterrupted. You’ll miss out on many potential earnings if you’re continuously transferring or withdrawing your funds whenever the market falls and not regularly adding more money to your account.
The Sides of Compound Interest
There are a few key factors when calculating compound interest and each one plays a unique role in the capital gains, and some variables can have a significant impact on your returns. Read on and learn all of them!
The initial investment
The amount of money you initially deposit in your bank account or how big of a loan you took out has an impact on how your balance will be able to generate earnings. While compounding accumulates over time, it is all based on the initial amount you deposit or borrow.
This is the rate of interest you earn or are charged. The higher the interest rate, the more money you earn or owe.
The rate at which interest is compounded: daily, monthly, or on an annual basis—determines how quickly more interest is gained. Make sure you understand how often interest compounds when you take out a loan or open a savings account.
The longer you leave money in a savings account or keep a debt, the longer it has to compound and the more you’ll earn or owe withdrawals and deposits.
The rate at which you accumulate principal or pay down your loan makes a significant difference in the long run.
The Benefits of Compounding Interest
Compound interest benefits both financial institutions and consumers. A bank or a service provider offers consumers products and services at low-interest rates in exchange for not withdrawing funds while simultaneously lending the deposited money to earn attractive interest income streams. Consumers can use compound interest in the cash account, savings accounts, or other forms of account to grow small savings into a beneficial retirement account or the capital for your small business over time.
Compound interest can be highly beneficial if you can give your investments enough time to grow. As mentioned, it has the ability to turn a small investment into a significant profit over a long period of time. What is more, additional contributions deposited into your account regularly will help you speed up your investments.
It accelerates the growth of your savings account funds because the rate of growth is calculated based on the money you accumulate over time in addition to the original principal amount. Compounding interest allows your money to grow exponentially as your initial investments and time pass.
The Drawbacks of Compounding Interest
One disadvantage of using compound interest options is that they can sometimes be more expensive than you realize. The cost of financial products is not always obvious, and if you do not carefully manage your investment, making interest payments can actually cost you money.
If you miss a regular payment by a day, your rate may decrease because compound interest is calculated before your payment is recorded. Depending on the size of your everyday expenses, this could cost you a lot of money. To avoid this, you must carefully time your monthly payments and adhere to your payment schedule.
Another problem is that compounding is intended for a financial institution. The monthly deadline credit card repayments are frequently designed to encourage you to keep borrowing and thus continue paying interest. For example, you can prioritize repaying interest plus a portion of the capital amount each month to reduce the amount of capital you owe.
Accounts With Compound Interest
When you make a deposit into an interest-earning account at a bank, such as a savings account or cash accounts, the interest is deposited into your savings account and added to your balance. This aids in the development of your balance over time.
Earnings in your 401(k) and other investment accounts compound over time as well. The percentage gains that stocks make from day to day are calculated based on their performance the day before, which means that they compound every business day. Additionally, there is no required minimum distribution.
You can get your penny doubled even faster if you reinvest your dividends and make regular deposits.
Money Market Accounts
Money market accounts are similar to savings accounts in most ways, but the money market accounts allow you to write checks and make ATM withdrawals. Money market accounts typically offer a slightly higher interest rate than savings accounts.
The disadvantages of money market accounts are that most have monthly transaction limits and sometimes charge a fee if your balance falls below a certain amount.
When you borrow, compound interest works against you. You must pay interest on any money you do not repay when you borrow money.
If you fail to cover your charges within the time period specified in your loan, they are capitalized or added to your initial loan balance. Following that, the future interest rate is calculated on the new, larger loan balance.
Dividend-paying stocks generate compound interest if dividends are reinvested. You can instruct your brokerage firm to reinvest all dividend payments and purchase additional shares automatically.
Your credit card company charges interest on the balance on your card every month. Your balance will remain the same if you never charge anything else to the card and pay the accrued interest each month.
However, if you do not pay enough to cover the new interest for the month, it will be added to your credit card balance. The following month’s interest is calculated using the higher amount. This can cause your balance to snowball over time and take you closer to earning million dollars.
How to Take Advantage of Your Whole Life Insurance Interest? – The Infinite Banking Concept
The Infinite Banking Concept enables the funds needed for you to fulfill your wishes.
Learning how to manage your assets and savings according to the rules of Infinite Banking creates a new world full of possibilities where nothing is out of your financial reach.
Infinite banking allows you to imitate how a traditional bank operates and borrows money, but without the need to depend on third-party services. You will be both a creditor and a lender.
Instead of borrowing from a bank, you borrow money against yourself and singlehandedly dictate cash flow while still allowing your whole life insurance policy to earn dividends (money) even though you are using that money elsewhere.
In other words, you build wealth while borrowing and repaying the money held in the cash value of your permanent life insurance policy.
That being one of the most significant benefits of the whole life insurance policy, you will never have to deal with banking fees or interest rates on loans. As a policyholder, you can borrow money using your own policy’s cash value.
Using this borrowing setup, you would never have to borrow money from a bank again and instead would borrow for yourself (your whole life insurance policy) and pay yourself back over time. Thus, being your own bank.
The goal of Infinite banking is to duplicate the process as much as possible to build the value of your own bank. The duplication process happens by lending and repayment of money typically held in the cash value of a permanent life insurance policy.
Infinite banking allows you to better work towards your individual and unique financial goals for yourself and your family and have control over your finances without dealing with banking services, fees or interest rates on loans.
Infinite Banking Involves:
- Overfunding (with after-tax funds) a high cash value whole life insurance policy from a life insurance company
- Accumulation of Cash Value(tax-free) throughout the years you are a policyholder of your Whole Life insurance policy
- Tax-Free Loans taken out against your whole life insurance policy’s cash value to use for your financial expenses.
By the process of borrowing for yourself, repaying, and so on – simply by being your own bank, you earn the financial freedom, savings and control of your money.
Implementing this banking strategy into your life gives you much better control over your finances and helps you build wealth using the life insurance policy.
In addition, we hope that finding out about The Infinite Banking Concept made you more curious about the alternatives to traditional banking services and willing to learn how to become your own bank.
If you want to learn more about The Infinite Banking Concept and improve your personal finances and grow your savings, you can click the links posted throughout the blog or sign up for our premium membership! We are looking forward to seeing you at the Wealth Nation community!