## Tuesday, April 23, 2013

### Interest – Part 2 Compound Interest

Compound interest is interest upon interest. That is, when an interest payment is added to the principal and then the whole thing (principal + interest) earns interest.

How does it work?

If you invest Rp 1,000,000 and the compound interest is 10% a year, then

Year 1 : Rp 1,000,000 + (Rp 1,000,000 x 10%) = Rp 1,100,000

Year 2 : Rp 1,100,000 + (Rp 1,100,000 x 10%) = Rp 1,210,000

Year 3 : Rp 1,210,000 + (Rp 1,210,000 x 10%) = Rp 1,331,000 and so on

Compound interest is what can make you rich when you invest. One of the most important elements in compound interest is time. The longer the time, the greater the impact.

That’s why the best time to invest is yesterday!   Since you cannot go back to yesterday, then the next best time is NOW!

Perhaps you have heard this story…

One day a father and his son went to play golf. Before they started the game, the father asked his son.

“Son, would you prefer getting a lump sum Rp 50,000,000 or getting Rp 1,000 on the first hole and doubling it for next hole until you reach the 18th hole?”

After thinking for a few seconds, his son said, “Rp 50,000,000, Dad.”

“That’s why you still need to learn, Son. I’ll show you why.”

“If you choose doubling that Rp 1,000, at the 18th hole, you will have Rp 131,072,000 and if you total all the money from hole 1 to 18, you will get a sum of Rp 262,143,000. You will get about 5 times more.”

What can we learn from this story?

1. It’s OK to start small. The most important thing is to start NOW.

2. When you have more money, save and invest more!

3. You may not be able to get an interest of 100% like in the story, but there are financial instruments that can get you better return than bank saving rate.

Learn and Grow!

Inge Santoso, B Com, CFP®