why is the gap between rich and poor growing

It’s not very difficult to imagine why the rich are getting richer and the poor getting poorer. Obviously, those with less money tend not to spend the little money on the current account or simply for the fear that the investment they will have to face will only be a way to lose their money.

Taking a very basic example, try to imagine investing $ 20,000 and getting 10% net interest in one year. This means that at the end of the period you will have generated a capital gain of $ 2,000. Instead of pocketing these interests, you decide to invest them. Imagine that for the second year your investment again generates 10% interest. The yield is now calculated on a $ 22,000 basis. This means that your investment will return you $ 2,200, $ 200 more than it would have returned if you had not reinvested the interest.

Now, a $ 200 difference isn’t particularly significant (considering a 10% return is also relatively high). But let’s see what would happen by carrying out the experiment. In the third year, your interest would be calculated on a basis of $ 24,200, generating a return of $ 2,420 (instead of the usual € 2,000 you would have generated if you had not decided to invest the interest). With the same returns, the extra income that you would have obtained thanks to the reinvestment of interest tends to grow over time, becoming an increasingly large portion of your investment. Precisely this is compound interest, an effect that favours investors who decide to remain invested for a long time while also using the returns obtained.

The effect of compound interest, as mentioned, grows exponentially over time. Below you will find a table in which, by way of example, we simulated the result of an investment of $ 20,000, always imagining an annual return of 10%. In the first column, you can appreciate the result by imagining the reinvestment of interest, in the second column you can see the result without reinvesting the interest (simple interest).

Without giving too much weight to the individual figures, the table shows the crucial difference that the interest composition effect can make over time. As can be seen from the graph, the longer the time horizon extends, the more the positive effect of reinvesting this earned tends to become exponential. The growth of the capital with simple interest (in red) is in fact linear: if the invested base is not increased, the returns will be calculated every year on the initial value. On the contrary, the returns generated by the reinvestment of interest grow year after year, soon becoming the main component of the investment.

Start investing a small amount in the financial markets and start to trust your future.
I personally invest in eToro, because it is easy to use, I have a community where I can discuss with popular investors and above all because I invest without paying commissions.

Take action!

INVEST WITH CONFIDENCE HERE

Click my personal link to GET 10$ FREE investing your 100$ on Coinbase HERE

Click my personal link to GET 5% OFF on commissions on Binance HERE

Disclaimer

The information on this Site is provided for information only and does not constitute, and should not be construed as, investment advice or a recommendation to buy, sell, or otherwise transact in any investment including any products or services or an invitation, offer or solicitation to engage in any investment activity. The information on this Site is provided solely on the basis that you will make your own investment decisions and Muzinich does not take account of any investor’s investment objectives, particular needs, or financial situation. In addition, nothing on this Site shall, or is intended to, constitute financial, legal, accounting or tax advice. It is strongly recommended that you seek professional investment advice before making any investment decision. Any investment decision that you make should be based on an assessment of your risks in consultation with your investment adviser.

Don’t forget to subscribe to our newsletter at the bottom of the page to join our fantastic community! Early access codes, restocks & any news – Directly to your inbox!


Follow the next articles, register at the bottom of the page.

All the best

Elio

why is the gap between rich and poor growing?

Don’t forget to subscribe to our newsletter at the bottom of the page to join our fantastic community! Early access codes, restocks & any news – Directly to your inbox!

WHAT TO INVEST IN: BEST CRYPTO & STOCKS 2022

BEST PLACE TO BUY CRYPTOCURRENCY IN 2022

HOW TO COLLABORATE WITH BRANDS ON INSTAGRAM

why is the gap between rich and poor growing?

Move to the next level!

Join our fantastic community! Early access codes, restocks & any news – Directly to your inbox!

YOU MIGHT ALSO LIKE

Leave a Reply