Interest on loans, on the yields on investments and deposits are of prime importance to everyone. Consumers and producers, individuals and producers alike are particularly interested in the interest accrued on their investments earnings and loans. It is a big concern for businesses who take loans for business operations. Interest can serve as a good servant by helping run your business for profits or a bad master running down your business for unpaid business loans due to high interest charges. But overall, you can take advantage of some interest rate calculations and that will benefit your business or personal finance, the advice here is to limit the downsides.
There are two methods of calculating interest for most consumers. The first is the simple interest. This is calculated by multiplying the interest rate by the principal of a loan, debt or an investment. In regards to investments, the returns on many fixed income instruments like bonds and dividend price appreciation are calculated with simple interest. Calculating interest this way would be great for those with loans as it would keep total payment down, but bad for those with investments who would like to see big, higher returns.
Let’s take for example; you invest Ghc10,000.00 into a 30-year investment vehicle with a 5%.
I= P*r*t
Where P= principal amount, Ghc10,000.00
R= the interest rate, 5% per year, or in decimal form, 5/100=0.05
T= the time involved, 30 years
To calculate the simple interest rate here, we multiply Ghc10,000.00*0.05*30= Ghc15,000.00
Secondly there is the Compound Interest -CD. This is calculated against accumulated unpaid interest as well as the original principal. Also, certain investments, like savings accounts, certificates of deposit and reinvested dividend stocks, utilize the benefits of compounding interest. This interest calculation benefits you in the opposite way of simple interest; it is great for investments, but horrible when it comes to loans. Business owners should be particularly careful here.
With compound interest you are earning more from the interest you’ve already earned. When investing, compound interest with a large initial principal and a lot of time to build on, can actually lead to a huge amount of wealth with time down the line. The advice here is to be disciplined to invest for longer periods. Say, one has plans to start a business in the next 5-10 years’ time; one can invest in an instrument with the aim of earning enough on the compound interest to commence the business. Earnings are usually calculated monthly, quarterly or yearly.
Let’s take for example, you invest Ghc10,000.00 into a 30-year investment vehicle with a 5% annual compounded interest rate, then at maturity you would take home Ghc43,219.42 (Ghc10,000.00 principal plus Ghc33,219.42 in interest). It doesn’t matter whether you are putting some money into short- term or long-term investment instruments, compound interest will work for you if you discipline yourself financially to allow it.
The bottom line here is CD interest may work in your favor but also has the potential to be an enemy and collapse your business or drain your savings if it works against you in loans and other debts. Always attempt to pay a little more than the minimum each month on loans and also be prepared to seek financial advice to make sure the rules to be applied in your investments would work in your favor. Additionally, remember to be on top of your loan repayments and be sure of the terms of repayments. If things are murkier in your dealings with a finance house seek better clarifications by consulting a financial planner. Remember to keep an eye on your investments. Your financial future will be certain if you have control over your personal finances.
Author: Paa Swanzy-Essuman || p.swanzy@ghanatalksbusiness.com
