Interest

#WOTW - WORD OF THE WEEK

Definition

Interest is the money that you earn or

pay when you borrow or lend money.

Explained

Another way of looking at it, is that essentially interest is a token of gratitude to the lender from the borrower for sacrificing their funds

and compensating the lender for the value, the money has lost-whilst borrowing the money. (Refer to: Time value of money).

Interest is calculated as a percentage of the principal amount, which is the original

amount of money borrowed, lent or invested.

The interest rate is the percentage of the principal amount that is earned or paid

over a period of time, typically one year.

Types of interest

There are two main types of interest: simple and compound. Simple interest is calculated on the original principal amount only. For example, if you borrow R1,000 at a simple interest rate of 5%, you will pay R50 in interest each year. Compound interest is calculated on the principal amount plus the accrued interest and the time period. For example, if you borrow R1,000 at a compound interest rate of 5%, you will pay R50 in interest in the first year. In the second year, you will pay interest on the original principal amount plus the R50 in interest that you paid in the first year, for a total of R52.50 in interest. Compound Rewards (ICP) is calculated on every monthly contribution to your (ICP) Portfolio-which we call 'Rewards'. For example, if you contribute R1,000 at a reward rate of 9% in August you will receive R90.00 in rewards. The following month if you contribute R100 at a reward rate of 9%, you will receive R9.00 in rewards.

How interest affects the value of your money

Interest can have a significant impact

on the value of your money over time, both positively and negatively.

Positively, interest can help your money

grow over time.

Negatively, interest will increase the

cost of the loan/debt.

Here are a few examples how interest can

have an impact on the value of your money: If you save R10,000 at a 5% annual interest rate in your bank account, your savings will grow to R16,288 after 10 years. However, if you invest the same amount of money in a index fund at a 10% annual interest rate, your investment will be worth R25,937 after 10 years.

NB: Values are determined using

compound interest.

How to use interest for savings/investments

There are a number of ways to use

interest to save and invest your money. Here are a few examples: Savings accounts: Savings accounts are a low-risk way to save your money and earn interest. Most banks offer savings accounts with different interest rates, so it is important to compare rates before you open an account. They are also more liquid, meaning that you can access your money quickly and easily. Certificates of deposit (CDs): CDs are another low-risk way to save your money and earn interest. CDs typically offer higher interest rates than savings accounts, but you must agree to keep your money in the CD for a specific period of time. Money market accounts: Money market accounts are a type of savings account that offers higher interest rates than traditional savings accounts. However, money market accounts typically have higher fees and require a minimum balance. Investments: Interest is also a factor in many investments, such as bonds and stocks. When you buy a bond, you are essentially lending money to a company or government. The company or government will pay you interest on the loan until it matures. When you buy a stock, you are buying a piece of ownership in a company. Companies typically pay dividends to their shareholders, which are essentially a form of interest.

When you are ready to commit to saving and investing, it is important to understand how interest works. By using interest to your advantage, you can grow your money

over time and reach your financial goals.

Furthermore [Bonus]

Interest is a powerful tool that can be used to save and invest money. By understanding how interest works, you can make more

informed decisions about your finances.

Here are a few additional tips for using

interest to your advantage: Pay your bills on time. Late payments often result in late fees and interest charges. Pay off high-interest debt first. This will help you save money on interest in the long run. Start saving early and consistently. The earlier you start saving, the more time your money has to grow. Even if you can only save a small amount each month, it will add up over time. Invest your money wisely and reinvest your earnings. Consider your investment goals and risk tolerance when choosing investments. When you earn interest on your savings or investments, reinvest those earnings to earn even more interest. Rebalance your portfolio regularly. This will help ensure that your investments remain aligned with your goals and risk tolerance. Share this post:

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