Law of Compounding Interest

Law of Compounding Interest

Albert Einstein described it as “the greatest mathematical discovery of all time”. According to Wikipedia “Compound interest” is interest added to the principal of a deposit or loan so that the added interest also earns interest from then on. This addition of interest to the principal is called “compounding.”

How it works

Say for example you invested PHP 10,000 at 12% interest per annum.  At the end of the year (12 months) the interest of that would be (10,000 x 12%) PHP 1,200.  So by the end of the year you will have a total investment of PHP 11,200 (PHP 10,000 initial investment + PHP 1,200 interest earned).  Now if you do not withdraw the original investment (PHP 10,000) and the interest (PHP 1,200) and leave it for another year, you will have PHP 12,544.  So in two years your PHP 10,000 would have earned PHP 2,544.  Say you keep your PHP 10,000 for 20 years, your total investment would sum up to PHP 96,462.93.  See computation below.

YEAR	CONTRIBUTION	INTEREST PER ANNUM	TOTAL INVESTMENT AT THE END OF THE YEAR (MEANING 12 MONTHS)
1	PHP 10,000.00	12%	PHP 11,200.00
2	PHP 11,200.00	12%	PHP 12,544.00
3	PHP 12,544.00	12%	PHP 14,049.28
4	PHP 14,049.28	12%	PHP 15,735.19
5	PHP 15,735.19	12%	PHP 17,623.42
6	PHP 17,623.42	12%	PHP 19,738.23
7	PHP 19,738.23	12%	PHP 22,106.81
8	PHP 22,106.81	12%	PHP 24,759.63
9	PHP 24,759.63	12%	PHP 27,730.79
10	PHP 27,730.79	12%	PHP 31,058.48
11	PHP 31,058.48	12%	PHP 34,785.50
12	PHP 34,785.50	12%	PHP 38,959.76
13	PHP 38,959.76	12%	PHP 43,634.93
14	PHP 43,634.93	12%	PHP 48,871.12
15	PHP 48,871.12	12%	PHP 54,735.66
16	PHP 54,735.66	12%	PHP 61,303.94
17	PHP 61,303.94	12%	PHP 68,660.41
18	PHP 68,660.41	12%	PHP 76,899.66
19	PHP 76,899.66	12%	PHP 86,127.62
20	PHP 86,127.62	12%	PHP 96,462.93

Here’s another table.

Say for example you invest PHP 2000 a month, religiously, after 12 months you will have PHP 12000.  You will be a millionaire after 21 years, with just PHP 2000 a month.

YEAR	CONTRIBUTION (PHP 2000 A MONTH)	INTEREST PER ANNUM		TOTAL INVESTMENT AT THE END OF THE YEAR (MEANING 12 MONTHS)
1	PHP 12,000.00	12%	PHP 1,440.00	PHP 13,440.00
2	PHP 25,440.00	12%	PHP 3,052.80	PHP 28,492.80
3	PHP 40,492.80	12%	PHP 4,859.14	PHP 45,351.94
4	PHP 57,351.94	12%	PHP 6,882.23	PHP 64,234.17
5	PHP 76,234.17	12%	PHP 9,148.10	PHP 85,382.27
6	PHP 97,382.27	12%	PHP 11,685.87	PHP 109,068.14
7	PHP 121,068.14	12%	PHP 14,528.18	PHP 135,596.32
8	PHP 147,596.32	12%	PHP 17,711.56	PHP 165,307.88
9	PHP 177,307.88	12%	PHP 21,276.95	PHP 198,584.82
10	PHP 210,584.82	12%	PHP 25,270.18	PHP 235,855.00
11	PHP 247,855.00	12%	PHP 29,742.60	PHP 277,597.60
12	PHP 289,597.60	12%	PHP 34,751.71	PHP 324,349.31
13	PHP 336,349.31	12%	PHP 40,361.92	PHP 376,711.23
14	PHP 388,711.23	12%	PHP 46,645.35	PHP 435,356.58
15	PHP 447,356.58	12%	PHP 53,682.79	PHP 501,039.37
16	PHP 513,039.37	12%	PHP 61,564.72	PHP 574,604.09
17	PHP 586,604.09	12%	PHP 70,392.49	PHP 656,996.58
18	PHP 668,996.58	12%	PHP 80,279.59	PHP 749,276.17
19	PHP 761,276.17	12%	PHP 91,353.14	PHP 852,629.31
20	PHP 864,629.31	12%	PHP 103,755.52	PHP 968,384.83
21	PHP 980,384.83	12%	PHP 117,646.18	PHP 1,098,031.01

Secret of Starting Early

Say there are two friends, Juan and Maria.  Maria started investing at the age of 25 and Juan started a little later like after 10 years.  By the time Maria turns 35, her PHP 10,000 is already amounting to PHP 31,058.48.  After another 10 years, both Juan and Maria are 45yo by then, their investments would be below:

Juan @45yo

YEAR	CONTRIBUTION	INTEREST PER ANNUM	TOTAL INVESTMENT AT THE END OF THE YEAR (MEANING 12 MONTHS)
1	PHP 10,000.00	12%	PHP 11,200.00
2	PHP 11,200.00	12%	PHP 12,544.00
3	PHP 12,544.00	12%	PHP 14,049.28
4	PHP 14,049.28	12%	PHP 15,735.19
5	PHP 15,735.19	12%	PHP 17,623.42
6	PHP 17,623.42	12%	PHP 19,738.23
7	PHP 19,738.23	12%	PHP 22,106.81
8	PHP 22,106.81	12%	PHP 24,759.63
9	PHP 24,759.63	12%	PHP 27,730.79
10	PHP 27,730.79	12%	PHP 31,058.48

Maria @45yo

YEAR	CONTRIBUTION	INTEREST PER ANNUM	TOTAL INVESTMENT AT THE END OF THE YEAR (MEANING 12 MONTHS)
1	PHP 10,000.00	12%	PHP 11,200.00
2	PHP 11,200.00	12%	PHP 12,544.00
3	PHP 12,544.00	12%	PHP 14,049.28
4	PHP 14,049.28	12%	PHP 15,735.19
5	PHP 15,735.19	12%	PHP 17,623.42
6	PHP 17,623.42	12%	PHP 19,738.23
7	PHP 19,738.23	12%	PHP 22,106.81
8	PHP 22,106.81	12%	PHP 24,759.63
9	PHP 24,759.63	12%	PHP 27,730.79
10	PHP 27,730.79	12%	PHP 31,058.48
11	PHP 31,058.48	12%	PHP 34,785.50
12	PHP 34,785.50	12%	PHP 38,959.76
13	PHP 38,959.76	12%	PHP 43,634.93
14	PHP 43,634.93	12%	PHP 48,871.12
15	PHP 48,871.12	12%	PHP 54,735.66
16	PHP 54,735.66	12%	PHP 61,303.94
17	PHP 61,303.94	12%	PHP 68,660.41
18	PHP 68,660.41	12%	PHP 76,899.66
19	PHP 76,899.66	12%	PHP 86,127.62
20	PHP 86,127.62	12%	PHP 96,462.93

By the time they both retire at the age of 65yo, their investment would have been:

Juan @65yo

YEAR	CONTRIBUTION	INTEREST PER ANNUM	TOTAL INVESTMENT AT THE END OF THE YEAR (MEANING 12 MONTHS)
30	PHP 267,499.30	12%	PHP 299,599.22

Maria @65yo

YEAR	CONTRIBUTION	INTEREST PER ANNUM	TOTAL INVESTMENT AT THE END OF THE YEAR (MEANING 12 MONTHS)
40	PHP 830,812.24	12%	PHP 930,509.70

At 65 Juan would have PHP 299,599.22 and Maria would have PHP 930,509.70.

See the big difference?  Maria is PHP 630,910.48 richer than Juan when they retire at 65yo.  And again that is just PHP 10,000 one time investment.

Well of course your money will never earn 12% per annum in a normal savings account, not even in a time deposit account; you will have to find some other ways of investing your money like in stocks, mutual funds or equity funds. 

I get my financial advise from Bo Sanchez.  If you want to become a member click the link below.

http://bit.ly/bosanchez_enah

Never ever invest in an “easy money” scheme where they promise so much in return.  It’s a scam.

Disclaimer:

This is not a professional advice.  The above data are based on my own understanding.