Compound interest is a critical component of one’s financial success, but there are so many misconceptions and misunderstandings about it. Though it is a simple concept, people are confused about how it works and how to make the best of it.
Here are five popular myths related to compound interest.
1. It is irrelevant when interest rates are low
Presently, the rate of interest on savings accounts is not so high, but that doesn’t imply compound interest doesn’t work. For example, if you have some amount in your bank account, it will not add much at a low rate. But if you keep depositing the interest amount for ten years, it turns out to be something you won’t otherwise have. At a higher annual percentage rate, you can do better, but compound interest helps even when rates are low.
2. Compound interest is always profitable
Compound interest is great when you save but is a curse when you are in debt. Upon borrowing at compound interest, your debt hardly reduces in the early stages even if you make regular repayments. There are different types of NBFC in India offering loans at lower interest rates.
3. Earnings from compound interest are absorbed by other charges
Banks and financial institutions charge several types of fees. However, this does not mean earnings from interest disappear. It simply means you should select an account that pays a higher rate of interest and doesn’t charge much.
4. Compound interest is the most powerful force in the Universe
Some claims suggest that Einstein described compound interest as something supreme in the world. However, there is no evidence of any such statement made in his works. So, compound interest and simple interest are great, and it needs no backing.
5. Compound interest is pointless during inflation
The Reserve Bank estimates the target goal for inflation. If a person doesn’t earn this amount from investments or savings, does it mean he is going backward? While it is true that if the interest rate paid from savings is not equal to the current rate of inflation, you won’t find the money worth it, but regular savings is certainly beneficial in many ways.