Interest is one of the financial techniques to grow wealth that is being slept on. Most people know interest as the money collected on money being loaned, which is correct as that is the concept of simple interest.
One of the ways of using interest to grow wealth is by investing your money in assets that have the potential to appreciate over time. this requires you to read and understand more about the asset you are willing to invest on works.
When you invest your money, what happens is that you are essentially lending it to a company or government in exchange for the promise of repayment with interest. The interest earned on your investment can be used to reinvest in more assets, which can lead to even more growth over time.
Types of Interest
Simple interest is calculated on the principal amount of the loan or investment, and it is not compounded. This means that the interest earned each period is based only on the principal amount, not on any interest that has already been earned.
Compound interest is calculated on the principal amount of the loan or investment and on any interest that has already been earned. This means that the interest earned each period is based on a larger amount, which can lead to faster growth over time.
Compound interest is a powerful tool that can help your money grow exponentially over time. Compound interest is interest that is earned on both the principal amount invested and on any interest that has already been earned. This means that your money can start to grow faster and faster as time goes on.
Other categories of interest include:
Accrued interest: Accrued interest is interest that has been earned on a loan or investment, but has not yet been paid.
Annual Percentage Rate (APR): The APR is a measure of the total cost of borrowing money, including interest and fees. It is typically expressed as a yearly percentage.
Prime interest rate: The prime interest rate is the interest rate that banks charge to their most creditworthy customers.
Discounted interest: Discounted interest is a type of interest that is paid upfront, rather than at the end of the loan term.
How to leverage interest to accrue wealth
Choose an investment product. There are several different investment products available in Nigeria, such as mutual funds, stocks, and bonds. It is important to understand the risks and rewards of each investment product before you choose one.
Choose an investment platform. There are several different investment platforms available in Nigeria, so it is important to do your research and choose one that is right for you.
Start investing regularly. Even if you can only invest a small amount each month, it will add up over time.
Reinvest your earnings. When you reinvest your earnings, you are essentially compounding your interest.
Specific ways to use interest to grow wealth
- Invest in high-yield savings accounts and certificates of deposit (CDs). These accounts typically offer higher interest rates than traditional savings accounts, which can help your money grow faster.
- Invest in stocks. Stocks are shares of ownership in a company. When you buy a stock, you are essentially lending your money to the company in exchange for a share of its profits. Over time, the value of a stock can increase, which can lead to capital gains.
- Invest in bonds. Bonds are loans that you make to a government or corporation. When you buy a bond, you are essentially lending your money to the bond issuer in exchange for a promise of repayment with interest. Bonds typically offer lower interest rates than stocks, but they are also less risky.
- Invest in real estate. Real estate is a tangible asset that can be appreciated over time. You can invest in real estate by buying a rental property or by investing in real estate investment trusts (REITs).
In conclusion, investing early and regularly can help build significant wealth over the long term.
It is important to note that some risk is always involved in investing. However, by investing in a diversified portfolio of assets, you can reduce your risk and increase your chances of achieving your financial goals. Also, understanding the different types of interest and how they can affect your finances, whether you are borrowing money or saving money is crucial in this type of situation.