How Compound Interest Works?

Anyone who has ever had a savings account has received compound interest. For example, suppose you place RM1000, which is your present value (PV), in a savings account that pays 4% interest annually. How will your savings grow? At the end of the first year you will have earned 4% or RM40 on your initial deposit of RM1000, giving you a total of RM1040 in your savings account. That RM1040 is the future value of your investment that is the value of your investment at some point in time.

Assuming you leave the RM40 interest payment in your savings account, known as reinvesting, what will your savings look like at the end of second year? You begin the second year with RM1040, and you add the interest you earned in the second year (4% on RM1040 for a total of RM41.60 in interest) and you end up with RM1081.60.

Calculate Compound Interest with Monthly Contribution

Compounding interest is very powerful. If you learn and practice to use the power of compound interest, then your investment will grow larger. So, it may create wealth with just require some time and dedication only.

Imagine that you are 20 years old now and you place RM100 every month in an account that earn you 2% annual interest. In just 5 years when you reach 25, you will have RM 6415.24 in your bank account which you can use as a down payment for your first car.

If you decide not to use the money in 5 years time but continue to save RM100 every month for 15 years, you will have RM 21106.25 when you are 35 years old. You may then use this as an initial deposit towards your first property investment worth RM250,000 perhaps.