Ever wonder why some people are so hard core about saving cash (including me)? Ever wonder why some people seem to pull money out of thin air, particularly those in traditionally wealthy families, but you never do? Although not completely the reason, compound interest has a lot to do with it.
Compound interest is the idea of adding accumulated interest back onto the principal, so that interest is accumulated on interest from that point on. Confused yet? Another way of describing it is with an example. Say you put $10,000 dollars in a high-yield savings account (the only place it should be if it's in a savings account) at 4% annual interest. Under traditional interest principles, you could expect to make $400 in one year from the $10,000 you invested in the savings account.
Utilizing compound interest principles, however, that $400 becomes $408.08 (assuming the interest is compounded daily - this number will be different depending on when the interest is added back into the principal). Wow, $8.08 cents isn't much, you might be thinking, but take that out ten years, and what would be $10400.00 is now $14917.92. You've now earned an additional $4917.92 where you would have had only $4000. An extra $917.92 for doing nothing isn't bad, is it?
Again, this may not seem like a lot, but as you increase the principal and it grows, the earnings can start to add up fast. Imagine the case where you have $20,000 or $100,000 in the bank. The compound interest can be substantial. As these figures grow, your wealth grows too. At some point, if you become rich enough, you can live solely on the interest earned by your wealth (Imagine earning 4% interest on a billion dollars - that's $40,000,000 or forty million dollars a year!).
So, it is important to, as you accumulate wealth, to get that wealth working for you, even while you are sleeping. Compound interest can do that for you. Take advantage of the power of compound interest, and you'll be wealthy before you know it!
There are many decent examples of the impact of compounding interest on the Web, but they seem to fail at providing an example that is easy to relate to. I have created a scenario that will help you truly understand what Einstein calls the "8th wonder of the world."
Two students, each 18 years of age, graduate from High School. For their graduation gifts, Matt's father offers to put $20,000 into a savings account and Chuck's father offers to put $20,000 into a mutual fund. In both cases the graduates can not touch their graduation gift until they are retired.
Matt's father goes a step further and says that he will automatically add $20,000 into the savings account every year until Matt is retired. After Matt and Chuck discuss their graduation gifts, Chuck feels cheated.
For simplicity, we will assume that inflation is equal to 3%, Matt's savings account earns exactly enough to cover inflation and Chuck's mutual fund account earns 10% on top of inflation.
10 Year Reunion: At their 10 year reunion, Matt and Chuck compare notes. Chuck's graduation gift turned into $51,875. Matt's gift is now worth $200,000. Chuck feels cheated.
20 Year Reunion: Once again, Matt and Chuck compare notes. Chuck's graduation gift grew to $134,550. Matt's account balance was $400,000. Chuck feels cheated.
3 0 Year Reunion: Although it seemed unnecessary, Matt and Chuck compared notes. Chuck's graduation gift turned into $348,988. Matt's gift is now worth $600,000. Chuck feels cheated.
Don't worry, there was not a 40 year reunion. However, when it was time for retirement at age 65 Chuck did give Matt a call and they ended up talking about their graduation gifts. After 47 years, Matt had accumulated $940,000, all out of his fathers pocket year after year. After a one-time investment of $20,000, Chuck's graduation gift grew to a whopping $1,763,950! It was now Matt and Matt's father who felt cheated.
In what seemed an unfair comparison, compounding interest was powerful enough to overcome a much smaller investment. If we put the two investment on even ground by adding in $20,000 each year to Chuck's account, the resulting balance would have been $17,599,856.
By definition, Bridging Finance or Bridging Loan is a short-term loan used to purchase commercial property. This is something that can come in very handy, depending on your particular situation. There are two main points that you need to consider before you opt for a Bridging Finance package, your needs and the state of the property market.
One of the major benefits of Bridging Finance is that it will allow you to close on a property and purchase a new property before you sell your existing one. You will need to evaluate your current situation to determine if your needs justify taking on this type of finance. Will you lose the new property if you can't offer a deposit? Would you be eligible for a discount on the purchase price if you can come up with the cash fast?
What are the existing market conditions in regard to the sale of your existing property? Is it going to be possible to sell your existing property in the time frame set out in your finance package? Most Bridging Finance typically runs for one year and will need to be paid in full at the end of the term unless it is possible to convert it into a Commercial Loan. You will also need to be aware that the interest rates will be higher on a Bridging Finance package.
If the market is slow and you do not have an urgent need for the new property, it may not be in the best interest of your business to take on this type of loan. On the other hand if the property market conditions are good, you can be out from under a Bridging Loan fast. However, it is still something that will need to make sense for your business.
If you feel taking on this type of loan is the right thing to do, you will be far better off going through a specialist Commercial Lender.
They will shorten the entire process as a specialist will know the market and they can quickly make a judgment on the best loan for you, based on your particular circumstances. Be sure to check that the loan can be converted into a conventional Commercial Finance package. You will also want to check on the type of interest rate and the costs you will entail if you do have to convert.
Most Commercial Lenders will be willing to extend the terms of your Bridging Finance package. Let 's say, for example, you have a buyer and you are waiting for the sale to close. Bridging Finance in general is much more flexible and accommodating than you might expect in this respect.
Paying back your Bridging Loan at the end of the loan term more often than not depends on your ability to sell your existing property. If it does not sell in the required time, you will be paying the existing loan on your current property, your new property and the newly converted Bridge Finance as well.
If you believe this may be a possibility be sure to take a package that can be converted to a Commercial Loan if the need arises. Otherwise you may have to come up with the full Loan sum at the end of the finance term.
