The People’s Frenemy: Compound Interest

One word that most people grunt when they hear, is 'interest'. The negative connotation is overwhelming alone. But what if I told you that it has another meaning that may interest you?

Compound Interest

When you first read it, it sounds like this could cause even more trouble, which is true, but compound interest is like a frenemy. Let’s focus on the friend part first. In simple words, compound interest is basically interest on interest. As an investor, that means money on money.

The way it works – as an investor – is that both your original investment and the interest you’ll receive will continue to grow simultaneously as time passes. Let’s take a look at an example for a better understanding.

Let’s say you invest EGP 5,000 with an annual 10% interest rate for 50 years. In the first year, you will have EGP 5,110 – that’s the original investment of EGP 5,000 and the added interest of EGP 110. That doesn’t seem like much, right? Well, when it comes to investing with compound interest, time is your best friend. So, if you look at that EGP 5,000 after 50 years, you will have accumulated EGP 586,954.26. Not too shabby, huh!

Et Tu, Brute?

As I said, compound interest is your frenemy. While it’s a great way to make money over a long period, it could also be a way that puts you in a hefty debt over time. That is if you’re a borrower. If you took out a loan or have a credit card with an exponentially high-interest rate, you’ll find yourself in a pretty dire situation.

So, if we assume you have a credit card balance of EGP 25,000 carried at an interest rate of 10% compounded monthly, that would result in a total compound interest of EGP 2,617.83 over one year alone.

The Bottom Line

Compound interest is a double-edged sword. It’s a way that allows you to build and/or increase your wealth. But keep in mind that it could put you in debt if you don’t pay your debts ASAP. Time is key when it comes to compound interests. If you’re an investor, the more time you have, the better. But if you’re a borrower, it’s the opposite.

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