How does compound interest work?

The concept of compound interest is very simple to define: it's interest that earns interest.

Often underestimated and under-exploited, the financial concept of compound interest is a formidable weapon which, if used wisely, can multiply your initial capital.

This mechanism, described by Albert Einstein as the «8^th wonder of the world» enables you to gradually increase your capital and maximize the return on your savings over the long term.
With compound interest, the interest generated by your initial capital is not simply paid into your account; it is reinvested, but not locked in (unlike the initial capital). This means that this interest will in turn earn interest during the next compounding period, but can also be withdrawn at any time if you wish.

It's a capital accumulation mechanism, with a «snowball» effect favoring exponential growth of your capital over the long term.

 RAK's BTC5Y savings accounts offer compound interest paid annually at up to 7.68%^APY

Let's illustrate this concept with an example
- A person A who saves $20,000 with a fixed compound interest rate of 7%^APY will have a capital of $77,393.69 at the end of 20 years. That's 3.80 times the principal amount.
- A person B who saves $20,000 with a simple interest rate of 7%^P.A. will have a capital of $48,000.00 at the end of 20 years. That's 2.4 times the principal amount.

Although they had invested the same amount at the outset, in 20 years the difference between these two people is $29,393.69.

 Where to save with compound interest?

• Savings accounts are a risk-free choice, as they are available at any time, but their interest rates are low and returns are often below the rate of inflation.
• Despite their relative rates of return, U.S. life availables insurances plans like Whole life, Universal Life or Variable life are a wise choice over the long term, since under certain conditions they offer tax benefits and some capital security.
• Investing in a stock market index (ETFs) with full reinvestment of dividends can fully exploit the power of compound interest, but this method is highly exposed to the risks associated with market volatility.

 RAK Financial Services  BTC5Y savings product lets you harness the power of compound interest while retaining relative protection against market volatility.
It's essential to diversify your investments in order to obtain the best risk/return ratio, and to implement a strategy that&aspos;s adapted to your projects and your situation.

 How can we go faster?

To make the most of compound interest, it's a good idea to combine an initial capital with monthly or annual scheduled payments. This is a highly effective strategy that involves investing a fixed sum in your savings plan at regular intervals.

Let's go back to our calculation and add a monthly programmed payment of $150:
- A person A who saves $20,000 with a fixed compound interest rate of 7%^APY will have a capital of $77,393.69 at the end of 20 years. That&spaos;s 3.80 times his initial amount.
- A person C who saves $20,000 with a fixed compound interest rate of 7%^APY, adding an additional payment of $150.00 per month, will have a capital of $153,954.60 at the end of 20 years. That's 7.7 times his initial amount.

In 20 years, the difference between these two people is $76,560.91.
Amounts invested: person A: $20,000.00, person C: $56,000.00

This extra effort of €150 per month multiplies the return on the savings plan.

 And go even faster with bitcoin?

Let's take a look at bitcoin's performance over the last 5 years:

With an average performance over the last 5 years of 103.42%, bitcoin investments are among the most attractive on the market. What's more, the Halving⁽²⁾ mechanism inherent in bitcoin strongly supports the market price and effectively counters inflation by multiplying the production price by a minimum of 2.8.
⁽²⁾ Division by 2 of the rewards received for processing a batch of inter-bitcoin transactions (block). Halving takes place every 4 years.

Let's go back to our calculations, investing 25% of the starting amount in bitcoins:
- A person A who saves $20,000 plus an additional payment of $150.00, of which 75% in a fixed-interest savings plan at 7%^APY and 25% in a BTC5Y savings plan at 7%^APY with a projected performance of 104% on the bitcoin index, will have a capital of $266,137.96 after just 5 years. That's 9.17 times its initial amount.
Amounts invested: $29,000.00

 How do I open a compound interest savings plan with regular payments?

To subscribe to a RAK BTC5Y savings account with a regular payment, simulate your plan using our online calculator by clicking on the link below and add the amount of your choice in the «Additional Contribution» box. You can also choose monthly or annual payments for your additionnal contribution. Simulate my bitcoin
savings plan now