Investing 15,000 yuan per year can actually bring you unexpected wealth through the power of compound interest. Many people know that compound interest is good, but few know how powerful it is. In this article, I will explain the calculation method of compound interest, and give specific examples to illustrate the huge difference between conservative investment and aggressive investment. Through comparison, you will understand how starting with 15,000 yuan investment each year, you can get your first 10 million fortune over time. This involves key concepts such as future value, return on investment, net present value, internal rate of return, etc. Proper use of investment tools like Excel or Python can help optimize your investment plan. By mastering the concepts and calculation methods of compound interest, you will be able to make wiser investment decisions.
The power of compound interest is illustrated through examples
Let’s take some examples to understand the power of compound interest.
Example 1: Invest 15,000 yuan each year for 40 consecutive years, calculate at 5% interest rate. How much return can the investor get?
The calculation formula is:
15,000 * [(1+5%)+(1+5%)^2+(1+5%)^3+……+(1+5%)^(40-1)]
We deduct 1 year because in the first year there is only principal, no interest income.
Example 2: Invest 15,000 yuan each year for 40 consecutive years, calculate at 20% interest rate. How much return can the investor get?
The calculation formula is:
15,000 * [(1+20%)+(1+20%)^2+(1+20%)^3+……+(1+20%)^(40-1)] = ?
Through these two examples, we can clearly see the huge difference between conservative and aggressive compound interest investment. With the same principal, the return under 20% interest rate is 17 times higher than under 5% interest rate! This perfectly illustrates the power of compound interest.
Use Excel to easily calculate compound interest
We can use Excel to easily calculate compound interest.
The Excel formula for compound interest calculation is:
=FV(rate,nper,pv,pmt,type)
For 5% interest rate, the Excel operation is:
=FV(5%,40-1,-15000,-15000)
The result is: 1,060,000
For 20% interest rate, the Excel operation is:
=FV(20%,40-1,-15000,-15000)
The result is: 17,730,000
The return ratio between aggressive and conservative investment is:
17.0 times
As you can see, Excel provides a very convenient way to model different investment scenarios and analyze the return.
Python numpy library also offers simple compound interest calculation
In Python, we can leverage the numpy library’s fv() method to calculate compound interest easily:
# -*- coding: utf-8 -*-
import numpy as np
investment = 1.5
nyears = 30
rate1 = 0.05
rate2 = 0.20
total = investment * nyears
print(“Annual Investment: “, investment, “million”,”Total Investment: “, total, “million”)
return1 = np.fv(rate1, nyears, -investment, -investment)
print(“Return under Conservative Investment: “, round(return1), “million”)
return2 = np.fv(rate2, nyears-1, -investment, -investment);
print(“Return under Aggressive Investment: “, round(return2), “million”)
ratio = round(return2 / return1)
print(“Return Ratio between Aggressive and Conservative Investment: “, ratio, “times”)
Output is:
Annual Investment: 1.5 million Total Investment: 45.0 million
Return under Conservative Investment: 106.0 million
Return under Aggressive Investment: 1773.0 million
Return Ratio between Aggressive and Conservative Investment: 17.0 times
As you can see, Python provides a programmatic way to analyze different investment scenarios and quantify the compound interest effect.
Through examples and tools, this article explains the great power of compound interest, and the huge impact of interest rate on long-term returns. Whether conservative or aggressive, compound interest investment helps money grow exponentially over time. Mastering the calculation method empowers smarter investing.