It is a common saying that money rules the world, and there is indeed some truth to it. Being financially lacking is not a desirable proposition, which is why people worldwide put their best efforts to work and earn a living to pay bills and put food on the table. Likewise, compound interest is a type of interest rate which can be added to the principal amount of the loan and hence has a significant bearing on wealth creation.
What is Wealth Creation?
Wealth creation refers to the process of accumulating wealth using different ways, compound interest being one of them. It means that you are making money, saving a substantial amount, and investing it back to get returns. To create wealth through financial products, you need to invest for a longer duration.
Why do you need to create wealth?
Given the uncertainties in life, a financial cushion is indeed welcome to reduce the negative impact. You could be employed today and lose your job tomorrow. Loved ones need good healthcare, education, and housing. All of these cannot be achieved without wealth. Creating wealth will also ensure that you lead a comfortable life after retirement.
There are so many ways of creating wealth. You can start a business and build upon it to create wealth. If you have a low-paying job, you can also create wealth by getting a better job in terms of payment. Another great way of creating wealth is by using the power of compound interest.
What is compound interest?
Creating wealth will also ensure that you lead a comfortable life after retirement. It works by reinvesting interest instead of availing of it and using it. For example, if you invest an amount of Rs. 2000 with an interest rate of 5%, you will earn an interest of Rs. 100 at the end of the first year. In the second year, your principal amount then becomes Rs. 2100, and this will again earn you an interest of 5% on the principal, which has increased by Rs. 100. The process continues every year with the principal amount increases.
Compound interest rate formula
There is a standard way of working out the compound interest, which is used worldwide. It is –
A=P (1+r/n) NT
In this compound interest rate formula, A is the final amount, P is the initial principal balance, r stands for interest rate. N is the number of times applied per period, while t is the elapsed time.
Compound interest in relation to wealth creation
Compound interest is an excellent method of investing and building wealth. You can decide to invest money for some time and have your interest paid out to you or add the interest to the principal amount every year. The investment period can vary and be long or short, as per your situation. The new secret to wealth creation with the power of compound interest is investing for a longer period and reinvesting your interest by adding it to the principal amount.
By reinvesting the interest, the principal amount increases, thus leading to higher interest being accrued. Having your interest paid out every year will not earn high returns. It is also more profitable to have a long-term investment as opposed to a short-term deposit.
Benefits of creating wealth using the power of compound interest
Low risks – Unlike other investments, like the stock exchange, where you can easily lose your investment, compounding is a sure bet. Your interests will be calculated every year and paid out to you or reinvested as per your request. It is a great way to invest money that you are not comfortable taking a risk with.
Secure future – Using compound interest to create wealth ensures you a secure future. If you choose a long-term investment, it is beneficial after retirement. You are assured of having sound money when the investment matures.
Helps to plan and complete a project – Having a considerable amount of money to complete a project like building a home, buying a plot of land or funding a college education is not easy. The power of compound interest enables one to plan and save for the finances needed. For example, if you intend to build a home after ten years, you can start saving from the first year itself, and by the end of the tenth year, you will be able to implement the project.
Flexible – Creating wealth using compound interest is flexibility personified. One can start with what they can afford. It allows you to have your interest paid out to you or re-invested back until the end of the tenor.
If you are wondering where to start from, worry no more. Several financial institutions like banks and NBFCs will guide you with the process. It is also important to find out the interest rates offered by different lenders so that you can go for the best. You can do this by visiting some financial institutions or their websites to get information on wealth creation and how it is facilitated by compound interest.