Effect of Interest Rate on Compounding.

In the first part of this article, we first discussed what compounding is and then discussed the difference between full (100%) and partial (less than 100%) compounding.  In each case we took a look at a numerical example.  Finally, we compared the results for full and partial compounding and concluded that, although full compounding has the greatest potential for profit, it is also the most risky way to go and that this is why many investors opt for partial compounding.  We didn’t mention it at the time but partial compounding has a wide variety of possibilities, ranging from almost nothing (less than 25%), to medium (25% to 75%), and to high (greater than 75%).  If you encounter an HYIP that offers compounding, it would be good use of your time to play around with their online calculator to explore the effects of interest rate on future returns.  There are so many possibilities that we can’t possibly do it here. 🙂

Perhaps I should add a note here which is that, the reason we use compounding is to increase our principal.  This implies that programs which offer compounding will also give you the opportunity to withdraw your principal at the end of the investment term.  This is the best of all possible worlds as your principal is growing, which is like a savings account that can be withdrawn whenever you want (or at least at the end of the investment term) and your interest earnings are also increasing, ideally to a point where they can ultimately  provide passive income at the level that you desire (when you stop compounding).  Of course, it IS possible that this might NOT be the case and that your principal might NOT be returned.  In this situation, the investor’s objective would simply be to use compounding until his principal reached a level such that his INTEREST earnings are in line with his financial objectives.  In other words, if your principal is not returned, you only get the second benefit of compounding

OK, moving on to the next item I’d like to discuss, let’s take a look at how different interest rates effect compounding.  It’s kind of obvious that a high interest rate will increase your returns.  But, by how much?  What we will discover is really quite amazing.

Let’s compare three different interest rates for the case of full compounding.  The rates we will choose are 1.4%, 3%, and 8%.  I’ve chosen these rates as we’ll use them in further examples in another part of this article series.  In all cases, we’ll take $1,000 as our initial deposit.  I’m going to show the results for EVERY day — all the way out to the end of the 110 day investment plan.  I’m doing this for a number of reasons that will become apparent when we discuss the table.  Scroll through all this quickly if you don’t like numbers!

Effect of Interest Rate on Principal
Day 1.40% 3% 7%
$1,000 $1,000 $1,000
1 $1,014 $1,030 $1,070
2 $1,028 $1,061 $1,145
3 $1,043 $1,093 $1,225
4 $1,057 $1,126 $1,311
5 $1,072 $1,159 $1,403
6 $1,087 $1,194 $1,501
7 $1,102 $1,230 $1,606
8 $1,118 $1,267 $1,718
9 $1,133 $1,305 $1,838
10 $1,149 $1,344 $1,967
11 $1,165 $1,384 $2,105
12 $1,182 $1,426 $2,252
13 $1,198 $1,469 $2,410
14 $1,215 $1,513 $2,579
15 $1,232 $1,558 $2,759
16 $1,249 $1,605 $2,952
17 $1,267 $1,653 $3,159
18 $1,284 $1,702 $3,380
19 $1,302 $1,754 $3,617
20 $1,321 $1,806 $3,870
21 $1,339 $1,860 $4,141
22 $1,358 $1,916 $4,430
23 $1,377 $1,974 $4,741
24 $1,396 $2,033 $5,072
25 $1,416 $2,094 $5,427
26 $1,435 $2,157 $5,807
27 $1,456 $2,221 $6,214
28 $1,476 $2,288 $6,649
29 $1,497 $2,357 $7,114
30 $1,518 $2,427 $7,612
31 $1,539 $2,500 $8,145
32 $1,560 $2,575 $8,715
33 $1,582 $2,652 $9,325
34 $1,604 $2,732 $9,978
35 $1,627 $2,814 $10,677
36 $1,650 $2,898 $11,424
37 $1,673 $2,985 $12,224
38 $1,696 $3,075 $13,079
39 $1,720 $3,167 $13,995
40 $1,744 $3,262 $14,974
41 $1,768 $3,360 $16,023
42 $1,793 $3,461 $17,144
43 $1,818 $3,565 $18,344
44 $1,844 $3,671 $19,628
45 $1,869 $3,782 $21,002
46 $1,896 $3,895 $22,473
47 $1,922 $4,012 $24,046
48 $1,949 $4,132 $25,729
49 $1,976 $4,256 $27,530
50 $2,004 $4,384 $29,457
51 $2,032 $4,515 $31,519
52 $2,061 $4,651 $33,725
53 $2,089 $4,790 $36,086
54 $2,119 $4,934 $38,612
55 $2,148 $5,082 $41,315
56 $2,178 $5,235 $44,207
57 $2,209 $5,392 $47,302
58 $2,240 $5,553 $50,613
59 $2,271 $5,720 $54,156
60 $2,303 $5,892 $57,946
61 $2,335 $6,068 $62,003
62 $2,368 $6,250 $66,343
63 $2,401 $6,438 $70,987
64 $2,435 $6,631 $75,956
65 $2,469 $6,830 $81,273
66 $2,503 $7,035 $86,962
67 $2,538 $7,246 $93,049
68 $2,574 $7,463 $99,563
69 $2,610 $7,687 $106,532
70 $2,646 $7,918 $113,989
71 $2,683 $8,155 $121,969
72 $2,721 $8,400 $130,506
73 $2,759 $8,652 $139,642
74 $2,798 $8,912 $149,417
75 $2,837 $9,179 $159,876
76 $2,877 $9,454 $171,067
77 $2,917 $9,738 $183,042
78 $2,958 $10,030 $195,855
79 $2,999 $10,331 $209,565
80 $3,041 $10,641 $224,234
81 $3,084 $10,960 $239,931
82 $3,127 $11,289 $256,726
83 $3,171 $11,628 $274,697
84 $3,215 $11,976 $293,926
85 $3,260 $12,336 $314,500
86 $3,306 $12,706 $336,515
87 $3,352 $13,087 $360,071
88 $3,399 $13,480 $385,276
89 $3,446 $13,884 $412,246
90 $3,495 $14,300 $441,103
91 $3,544 $14,729 $471,980
92 $3,593 $15,171 $505,019
93 $3,644 $15,627 $540,370
94 $3,695 $16,095 $578,196
95 $3,746 $16,578 $618,670
96 $3,799 $17,076 $661,977
97 $3,852 $17,588 $708,315
98 $3,906 $18,115 $757,897
99 $3,961 $18,659 $810,950
100 $4,016 $19,219 $867,716
101 $4,072 $19,795 $928,456
102 $4,129 $20,389 $993,448
103 $4,187 $21,001 $1,062,990
104 $4,246 $21,631 $1,137,399
105 $4,305 $22,280 $1,217,017
106 $4,365 $22,948 $1,302,208
107 $4,427 $23,636 $1,393,363
108 $4,488 $24,346 $1,490,898
109 $4,551 $25,076 $1,595,261
110 $4,615 $25,828 $1,706,929

In case you’ve forgotten, since we’re compounding 100%, all of our interest earnings are being reinvested, that is, they’re being added to the principal.  For example, in the 1.4% plan, the interest you earn on day 109 is the difference between the principal for day 109 and day 110 (or $64).  For the 3% plan the interest earned on day 109 will be $752 (25,828 – 25,076) — which wouldn’t be a bad daily income.  And, finally, for the 7% plan, the interest earned on day 109 would be $111,668 (1,706,929 – 1,595,261) — which is off the chart!

Obviously, interest is EVERYTHING!  An HYIP that offers you an interest rate in the neighborhood of 1% can probably handle withdrawal of the compounded principal at the completion of the investment term.  My opinion is that it would be difficult (but not impossible) for an HYIP to return the compounded principal at the completion of a plan offering in the neighborhood of 3% interest.  In my opinion (which could be wrong!), plans offering more than this will probably close before the end of the first investment cycle.  I don’t think there is an HYIP anywhere that could pay its members a withdrawal approaching two million dollars — which would be the case with the 8% plan.

The bottom line with respect to interest and compounding is that more is better.  But, the higher you go, the more probable it will become that a program will close its doors before it becomes time for it to pay withdrawals of the highly compounded principals.  So, long term investment in such a program would be extremely risky — even if you, personally, don’t get involved with compounding your investment.

Effect of Time on Compounding.

It is easy to see the effect of time on compounding.  In a word, the longer you let your principal compound, the larger it becomes.  And, the compounding effect starts to really kick in after a while.  This is especially the case with programs that have a high interest rate.  This becomes clear if you look at the numbers toward the end of the table — after around three months (90 days) of activity with the investment plan.  As the days go by at this time, the principal starts to increase at a very rapid rate.  For example, at the end of the 1.4% plan, the daily increase (interest) in principal was $64 which is 6.4% (64/1000 x 100) of your original investment.  In the 3% plan, the increase in principal was 75% (752/1,000 x 100) and, in the 8% plan, the increase was an amazing 11,000% (111,668/1,000 x 100).  However, again the dilemma is that, in order to take advantage of the benefit that compounding for a longer time offers, you have to put your investment at risk for a longer time.  It’s the case of Miracle vs. Monster again…

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