Compound & Simple Interest Explained
I noticed that a lot of people are confused when it comes to calculating compound and simple interest, I used to be confused too. Maybe mine could be traced back to the fact that I never liked mathematics during my secondary school days.
I disliked mathematics back in my high school and was always never interested when ever our Maths teacher walked into the class. Lol
Ironically, I ended up studying accounting at higher institution, I had wanted to study psychology but unfortunately, the course wasn’t accredited in my school.
Ok enough of my stories, the good news now is that I am now in love with some simple mathematics because it’s required for my kind of business.
When it comes to simple and compound interest, I don’t use the formula for calculation, I use my calculator and that method is exactly what I’m going to be teaching you today. After all, life has been made simpler with these kinds of calculators so why stress myself using those annoying mathematical formula. Lol
What is simple interest?
Simple interest is the interest calculated on the principal sum.
Simple interest is determined by multiplying the daily, weekly, monthly or yearly interest rate by the number of days, weeks, months or year that the investment or loan lasted.
Don’t get confused
Here is my own definition:
Simple interest is the amount you get daily, weekly, monthly or yearly on top of the amount you invested or loaned out. The amount you get is dependent on the interest rate and the period between when you gave the money out and when it was paid back to you.
Let’s use Zari Investment Club for a better understanding
Let’s assume you invested N1,000,000 with Zari investment club for a period of 10 years with an interest rate of 60% per year.
Every year you will get N600,000 which is the 60% of N1million. (Here is how I got the N600,000)
Go to your calculator and press 1,000,000 times 60 divide by 100….. you will be getting N600k
So the 60% of N1million is N600k
Now N600k times 10 years. That’s equal to N6million
So your simple interest for the period of that 10 years is N6million
You will now add N6million plus your initial investment of N1million, you will be getting a total of N7,000,000.
N7million isn’t too bad but it can be more than that if you use compound interest instead.
So let’s look at the compound interest version of this example shall we?
You invested N1million with Zari Investment club at an interest rate of 60% per year and you left the money for the same period of 10 years but to be compounded yearly.
Using compound interest, let’s calculate:
For the first year, you will get N600,000 which is the 60% of N1million.
But unlike simple interest, at the second year, you will be reinvesting the N600k along with the initial N1m and by the end of the second year, you will be having N960k interest.
At the 3rd year, you will reinvest the N960k plus the initial N1m and you will be getting N1.536k interest.
The interest will be reinvested along with your initial N1m uptil the 4th, 5th and till the 10th year.
At the end of the 10th year, you will be having a total of N109, 951,162.
You can see that the difference between the amount you got using simple interest and that of compound interest is a whopping N102,951,162
Let’s look at another example of simple and compound interest
Let’s assume you invested N100k with zari investment club at an interest rate of 60% per year and you plan to add N30k from your salary every month for the period of 10 years
Here’s what your investment will look like using simple interest
If you look at the table below you will see that we have 10 years in the year section and N15,190,000 in the end of year balance section.
What this means is that, using simple interest, you will be having a total of N15,190,000 at 10th year.
This means that, in the first year you contributed a total of N360k plus your initial investment of N100k and you got an interest of N177k
The same thing continued for the period of 10 years.
Let’s look at what you would get with the same amount using compound interest
So you invested N100k with Zari investment club and you decided to save N30k from your income monthly for the period of 10 years.( To be compounded yearly)
So if you allow your money to stay for the period of 10 years using compound interest
You will be having N97,611,290. That’s almost a hundred million naira. Wow!
The difference is that, in each year, you reinvested the interest you got both from your monthly contribution and your initial investment of N100k
Time is very powerful when it comes to anything and that includes investing
I wish a lot of our young ones will understand the power of time in building wealth and embrace the power of compound interest now that they are still young.
I wish had this opportunity earlier.
Buuut, nothing spoil. Lol
I have started saving and compounding too.
It is not all investment companies or clubs that compounds interest, ensure to enquire about this whenever you are about to invest. Never invest with a company that does not compound interest at least yearly.
From all the calculations we did above, you can see that compound interest supersedes simple interest.
Yearly compounding is the most common type of compounding and that’s the option we use at Zari investment club because it’s more transparent and easy to understand.
All the compound interest example we used above are all yearly compounded
You know most times we tend to have emergency needs and all the rest of them and then we would have no choice than to withdraw our principal sum or accrued interest before the due date and then miss out on the power of this compound interest
To prevent issues like this, it is better you create different investment portfolio for different needs.
For instance, have an account for your kids education, another account for your retirement, another one for your traveling, another one for housing and split your income so you can settle each of this accounts at the end of the month to avoid withdrawing your retirement investment for maybe health issue and then miss out on compound interest.
I don’t know if I’m making sense. Lol
Tell me what you think at the comment section.
Do you want to start saving for the future but confused about how much you will be making in the next couple of years?
Send me a message on whatsApp +2348094556807 let’s calculate together.
Alternatively, you can download the compound interest calculators which I’m currently using
The ones I’m using are LOAN AND INTEREST CALCULATOR & MULTI CALCULATOR they are all available on Google play store and IOS stores