Warren Buffett - the greatest and richest investor in the world today - when asked why he became rich, answered "There are 3 points. First, America has great opportunities. Second, thanks to good genes, I can live a long life. Third, it's compound interest "

So what is compound interest that is so important?

The compound interest rate is the interest generated from the original capital and added to the capital, then the total capital generates interest, then the new interest is added to the capital and then the new total capital generates the interest. Continue like that for a long time, sometimes up to a dozen or a few decades.

The formula for calculating compound interest

The most basic formula for calculating compound interest is

FV = PV (1 + i) ^ n

Inside:

  • FV: the future value of the investment
  • Reporter: the present value of the investment
  • i: interest rate per period
  • n: number of periods

Thus, it can be seen that 3 variables that strongly affect the future value of our investment are initial investment amount, investment interest rate, and duration (number of periods).

The "horror" of compound interest

For example, we put in trading and use the interest rate that many of you think is a "stork" in the initial example is 3-6% 1 month then try to see how much we have 10 years later.

  • If it is 3% then after 10 years 1000 USD => 34,710 USD.
  • If it is 6% then after 10 years 1000 USD => 1.088.187.75 USD

Just 1000 USD and trade steadily with a profit of 6% a month within 10 years, you will become a millionaire with assets at this time are over 23 billion. From 23 million VND to 23 billion VND

The trick here is that, when the capital we grow up with the initial period interest, the interest rate on that "big" capital will make it grow even more quickly.