Christians are called to be good stewards of God's resources. A steward can be described as someone who manages the resources of another. "The earth is the Lord's and all that is in it, the world and those who dwell therein"-Psalms 24:1 (The New English Bible). To effectively manage God's financial resources, it helps to have some understanding of modern day financial concepts, strategies, and mathematical formulas. Compound interest is a great ally in catapulting you toward achieving your financial goals. Through an understanding of compound interest, God can pour out a blessing upon you, which you will not be able to measure! Albert Einstein once called compound interest "the world's most impressive invention" and dubbed it the "eighth wonder of the world." Compound interest means all the money you've invested earns interest and then the combined amount of the original investments plus your interest earns more interest. Compounding means interest added to interest. Compound interest does not produce linear growth like the pattern 1, 2, 3, 4, 5, 6, and so on; it produces geometric growth through compounding like the pattern 1, 2, 4, 8, 16, 32, and so on. Usually, the more frequently your money compounds when earning interest, the better. For example, daily compounding is normally better than monthly compounding, which is better than quarterly compounding, which is better than yearly compounding.
A basic formula for compound interest is as follows:
FV = ID (1 + R)T, then FV ? ID
Where:
FV = Future Value
ID = Initial Deposit
R = Rate (interest rate earned)
T = Time (number of years invested)
Assuming the following investment--$10,000 Initial Deposit, 6% interest Rate, 5-year Time period, the math would work as follows:
FV = $10,000.00 x (1 + 0.06)5
Formula results by year are as follows:
Year 1 $10,000. 00 x (1 + 0.06)1 = $10,600.00
Year 2 $10,600. 00 x (1 + 0.06)2 = $11,236.00
Year 3 $11,236. 00 x (1 + 0.06)3 = $11,910.16
Year 4 $11,910. 16 x (1 + 0.06)4 = $12,624.77
Year 5 $12,624. 77 x (1 + 0.06)5 = $13,382.26.
Then FV ? ID = $13,382.26 - $10,000.00 = $3,382.26 (Total Interest Earned).
The effect of the individual parts of the formula in combination with each other produces synergistic results in the outcome that are greater than the sum of its parts individually. In other words, small increases in any of the components can have a dramatic incremental effect on the total compound interest earned.
Another useful tool in approximating the magic of compounding is the "Rule of 72." Albert Einstein is credited with discovering the compound interest Rule of 72 and said, "It is the greatest mathematical discovery of all time." The Rule of 72 is a mathematical way of approximating the number of years it takes an investment to double in value. You estimate the number of years for an investment to double by dividing 72 by the annual rate of return. For example, if you expect to earn a 10% return on your $10,000 investment, then 72 divided by 10 = 7.2 years for your investment to double in value to $20,000. Conversely, if you expect your $10,000 investment to double in 7.2 years and you want to know the interest rate needed, you simply take 72 divided by 7.2 = 10% interest. You can even use it to compare stock market interest rate returns to other investments. For example, assume you are looking at lots with a real estate agent. The agent tells you the properties have doubled in value during the last 14 years. You could get a quick estimate of the increase per year in value by doing the following math: 72 divided by 14 = 5.14% per year.
There is one formula that is infinitely more important than even the "Rule of 72": "1" cross + "3" nails = "4" given. Praise God!
Bill G. Page is the author of Making Money Work: A Christian Guide For Personal Finance. This book explains the "Rule of 72" and many other financial concepts. It includes a CD ROM so you can easily calculate compound interest and lots of other complicated financial formulas. The book can be ordered from www.MakingMoneyWork.us or you may request the book from your local Christian bookstore-available to retail stores through Spring Arbor and Appalachian Christian book distributors beginning in September 2005.
This article is adapted from Making Money Work: A Christian Guide For Personal Finance with permission of Willie Glenn Page, Inc. Copyright 2005.
Bill G. Page
Making Money Work: A Christian Guide For Personal Finance (book and CD ROM)
http://www.makingmoneywork.us
When you received an energy (heating) bill last winter, were... Read More
It doesn't take much for you to get behind on... Read More
Saving money is not easy and is made more difficult... Read More
Do you have a 401(k) retirement account? Are you vested... Read More
Millions of people give a lot of thought to financial... Read More
Vacations Made Easy: Buying a Florida Investment PropertyA relaxing beach... Read More
My personal opinion is that in today's new economy, it... Read More
**If it's Spam, it's a Scam!- If it sounds too... Read More
If you were to ask 100 women "What would you... Read More
1) HOW TO LOOK FOR A JOBA) The Chronological Curriculum:1.... Read More
I thought I was through with exams when I finished... Read More
Your food budget is the most flexible area of your... Read More
Sticking to a budget can be difficult, but with so... Read More
It is estimated that we, as consumers, waste an average... Read More
There have been an estimated 9.9 million victims on America... Read More
As a parent you are bound to face a few... Read More
Identity theft is a serious crime that continues to grow.... Read More
Despite how easy it is to balance a checkbook, very... Read More
One of the simplest ways to improve your professional image... Read More
Financial freedom cannot be achieved without budgeting. Budgeting involves tracking... Read More
Now that we are in the month of June I... Read More
The price of gas continues to climb, and with continued... Read More
Recent security breaches at several credit card companies continue to... Read More
Sorting out your personal finances can be a tricky and... Read More
We all know that money doesn't grow on trees, but... Read More
O'Hare Chicago prom limo ..If you've been to a shopping mall lately, you've probably... Read More
It is estimated that we, as consumers, waste an average... Read More
If you were to ask 100 women "What would you... Read More
In this age of information, keeping track of your finances... Read More
What is finance and what do you need to know?... Read More
Ben Stein has a book called How to Ruin Your... Read More
Are you a check fanatic? Don't worry, you aren't alone.... Read More
Are you having problems with debt? Are you afraid to... Read More
I've been going through and interesting growth period lately that... Read More
Our global society has had a wake up call in... Read More
Identity theft is a serious crime that continues to grow.... Read More
Frugal living is more than a lifestyle. It's a passion.... Read More
There have been an estimated 9.9 million victims on America... Read More
For most of us the process of getting out of... Read More
Women have a love/hate relationship with money. Most of us... Read More
At a time when the entire world's attention is focused... Read More
Shopping for groceries is an inevitable fact of our ever... Read More
Six Scholarship judges were sitting around an oval table. Forms... Read More
Holy Shenanigans! More STUFF?Loosing one's business due to lack of... Read More
Finding a stable and secure income that will come year... Read More
With prices increasing all the time, saving money can be... Read More
Have you seen the recent article on a new "green"... Read More
The gas that we fill our tanks with every week... Read More
If you die without making a Will in the UK,... Read More
When people speak about the increasing age expectancies, they generally... Read More
Personal Finance |