In reviewing the 2017 Berkshire Performance summary, you would be amazed at the impact that compounding has over a number of years. In their report, they show three return calculations: the Berkshire per share “book value” which was a 19.1% compounded annual return, the Berkshire per share “market value” which was a 20.9% compounded annual return, and the S&P 500 compounded annual return of 9.9%. These were from August 31, 1964 to December 31, 2017.
We often get customers asking us “should I do my loan with compound interest or simple interest?”. The answer is borrowers benefit from simple interest and lenders could benefit from compound interest. Often, the financial institutions do not give you a choice.
The magic of compounding can work to your advantage when it comes to your investments and can be a potent factor in wealth creation. While simple and compound interest are basic financial concepts, becoming thoroughly familiar with them will help you make better decisions when taking out a loan or making investments, which may save you thousands of dollars over the long term.