The Principle of Compound Growth
The term interest applies to the mechanism in which the money deposited in the savings account is paid out after the time in question (Donald, 2016). There are two forms of interest offered by banks worldwide: basic and compound interest.
Distinction Between Basic and Compound Interest
One of the main distinctions between the two groups is how the capital deposited receives dividends. In simple interest, interest received by the principal sum remained unchanged for every given duration, although interest on compound interest increased considerably from the previous year to the following years.
Compound Growth
Compound growth uses the concept of compound interest. Therefore, this paper focuses on explaining the principle of compound growth.
Importance of Compound Growth
The primary objective of an organization or business is to venture in a profit building activity. Thus, managers will always find the best interest offered by banks in the bid to get more returns for their money. The principle of compound growth cannot be mentioned without the concept of time value for money. The idea of the time value of money justifies the importance of money in business since it gives other forms of return or interest. Investors have used the rule of 72 in the bid to determine the number of periods or the rate of interest at which the principal amount will require to double its initial value. This time can be made shorter if the concept of compound growth is applied. In compound growth, the interest accrued after a financial period is added to the first mount which then becomes the principal amount of the subsequent year. In this regard, the amount will double faster this is because in each year the money gaining interest is larger. Besides, when using the compound growth, there is a significant increase in returns with a small increase in the interest rates (Ebert & Griffins, 2016).
Conclusion
The principle of compound growth is essential to investors and business since they may have a high return on their investment when they take advantage of time value for money. Therefore, individuals should also be advised on proper ways of saving for their plans or in the case of saving to raise capital for their business.
References
Donald, D. W. A. (2016). Compound interest and annuities-certain. Cambridge University Press. Ebert, J. R., & Griffins, W. R. (2016). Business Essentials (11th ed). Pearson Education.
