Compound interest: A double-edged sword?

Albert Einstein, the world-renowned scientist , once said: “ Compound interest is the eighth wonder of the world . Those who understand it will make money, while those who don’t… will pay the price. ” The power of interest in finance is particularly useful for those who know how to leverage it. However, for those who don’t 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 Vietnam Investment and Development Commercial Bank ( BIDV ) - explained: " Only investors and depositors like compound interest; borrowers don't. "

The keyword "Compound Interest" was chosen as the theme for episode 4 of The Moneyverse.

Understanding Compound Interest

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

Therefore, the key elements of compound interest are time and interest rate. Although the return may not be significant in the first few years, over a long period, about 20 to 30 years, this amount will grow dramatically, truly surprising the investor.

In episode 4 of The Moneyverse, Dr. Can Van Luc explains that " compound interest is interest generating more interest, interest compounding, and is the accumulation of both principal and interest. " When students mentioned the "eighth wonder," he also emphasized that not everyone sees compound interest as a miracle. Borrowers, in particular, often face significant pressure from compound interest as their debt increases exponentially.

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

How can you harness the power of compound interest?

To effectively utilize compound interest, investors should start saving and investing early, choose investment channels wisely, and adhere to the principle of perseverance. Additionally, paying off debts on time helps minimize the negative impacts of compound interest.

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

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 earn 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 grow quickly and sustainably.

Why do borrowers dislike compound interest?

One of the clearest examples of how compound interest affects borrowers is when using credit cards. If the cardholder withdraws cash from the credit card or fails to pay the full balance on time, interest is applied to the outstanding balance. Some banks combine interest with the principal to calculate interest for subsequent periods, resulting in borrowers paying compound interest. This is why compound interest becomes a burden for borrowers, as the amount to be paid gradually increases.

However, BIDV has a different policy in that it only calculates interest on the customer's principal balance and does not add 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, representing BIDV, is a member of the judging panel for The Moneyverse tournament.

Compound interest is a powerful financial tool, but it needs to be understood and applied correctly. Knowing how to leverage it will help investors achieve significant returns over time. Conversely, if not used carefully, compound interest can cause borrowers' debts to skyrocket, becoming a considerable financial burden.

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

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

- Develop a habit of saving; make flexible deposits starting from just 50,000 VND per time, with no limit on the number of additional deposits.

- Attractive savings interest rates; enjoy preferential interest rates when accumulating funds for home loans, student loans, etc.

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

- Safe, accurate, and absolutely secure.

- Actively accumulate points each time or schedule automatic recurring payments.

Ha An

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