Compound Interest: A Double-Edged Sword?

Albert Einstein, the world-famous scientist , once said: “ Compound interest is the eighth wonder of the world . Those who understand it will make money, and those who do not understand it… will pay the price. ” The power of interest in finance is especially useful for those who know how to take advantage of it. However, for those who do not understand it or use it incorrectly, compound interest can become a financial burden.

In the program The Moneyverse, Dr. Can Van Luc - Chief Economist and Director of the Training and Research Institute of the Joint Stock Commercial Bank for Investment and Development of Vietnam ( BIDV ) - explained: " Only investors and depositors like compound interest, but no one likes borrowers. "

The keyword “Compound Interest” was chosen as the theme for episode 4 of The Moneyverse program.

Understanding Compound Interest

Compound interest is a method of reinvesting the interest earned from the initial capital. After each profit cycle, the interest is added to the capital to continue generating profit for the next cycle. Compound interest is calculated based on the principal amount plus the interest accumulated over the cycles.

So the key to compound interest is time and interest. Although the profits may not be significant in the first few years, over a long period of time, about 20 to 30 years, this amount will grow dramatically, making investors truly surprised.

In episode 4 of The Moneyverse, Dr. Can Van Luc explains that “ compound interest is interest on interest, interest on interest, and the accumulation of both principal and interest. ” When students mentioned the “8th wonder,” he also emphasized that not everyone finds compound interest a miracle. In particular, borrowers will often be under great pressure from compound interest when the debt increases exponentially.

Dr. Can Van Luc further explains the concept of compound interest in the program.

How to harness the power of compound interest?

To take advantage of compound interest effectively, investors should start saving and investing early, choose investment channels wisely and adhere to the principle of perseverance. In addition, paying off debt on time also helps minimize the negative effects of compound interest.

Dr. Can Van Luc recommends that investors should keep in mind a few basic principles, such as diversifying their portfolio, sticking to financial goals, clearly defining the level of risk and expected interest rate.

For example, when depositing money at BIDV, after each term, the principal and interest will be automatically reinvested in the next term. This helps the savings not only generate more interest but also create compound interest on the interest from the previous term. This is the power of compound interest, helping the initial amount of money grow quickly and sustainably.

Why don't borrowers like compound interest?

One of the most obvious examples of how compound interest affects borrowers is when using a credit card. If a cardholder withdraws cash from a credit card or fails to pay the balance in full on time, interest will be charged on the outstanding balance. Some banks have a policy of adding interest to the principal to calculate interest for subsequent periods, resulting in the borrower having to pay compound interest. This is why compound interest becomes a burden for borrowers, as the amount owed increases over time.

However, BIDV has a different policy when it only calculates interest on the customer's principal balance without adding interest to the principal. BIDV's credit card interest calculation formula is as follows: Interest amount = Interest-bearing balance x Number of interest-bearing days x Annual interest rate/365.

Dr. Can Van Luc is the representative of BIDV sitting on the jury of The Moneyverse tournament.

Compound interest is a powerful financial tool, but it needs to be understood and applied properly. Knowing how to take advantage of it will help investors achieve large profits over time. On the contrary, if not careful, compound interest can cause the borrower's debt to skyrocket, becoming a significant financial pressure.

BIDV is a strategic partner of The Moneyverse, with a program to create a useful personal finance education playground for students and young people.

The "Accumulated Savings" product at BIDV helps you take advantage of the power of compound interest immediately.

- Form a habit of saving; flexible contributions from only 50,000 VND/time, unlimited number of additional deposits.

- Attractive savings interest rates; enjoy preferential interest rates when accumulating home loans, study abroad loans...

- Deposit, track and withdraw money on BIDV SmartBanking app anytime, anywhere.

- Safe, accurate, absolutely secure

- Accumulate proactively each time or schedule automatic sending.

Ha An

Source: https://vtcnews.vn/lai-kep-con-dao-hai-luoi-ar905639.html