Compound Interest refers to taking advantage of time to build up your wealth.
Also known as interest on interest, as time passes, your initial investment has some returns. Those investment’s returns can be invested again, bringing up your total wealth to: initial investment + investment’s return.
Later on, you can take the return of your current assets (initial investment + initial investment’s return) and invest it back, creating a never-ending process.
RUNNING THE NUMBERS
Let’s suppose you invest $100 at a 10% annual interest rate. When the year ends, those $100 would’ve accrued to $110. The art of compound interest is taking that money and reinvesting it again, in this case, those $110.
Another way of interpreting compound interest is by watching how a stock’s price increases. If a stock’s value increases at a pace of 10% annually, it means that every year it’ll be 10% more expensive.
RUNNING THE NUMBERS
Corp A Inc. has a stock that is worth $100. After the first year (if the annual yield is 10%), its price will be $110. However, by the end of the second year, it’ll be worth $121 ($110 x 110%).
POWER BI RUNS THE NUMBERS FOR YOU
Try running your number by yourself in this Power BI report! Input your initial investment, the interest rate, and you can also take into consideration yearly cash flows.
The equation used was:
