The Finatical
Week of April 5th, 2022 - Compound vs Simple Interest, Growth of Video Banking and ITEMs, Addressing Financial Cyber Risks
Topic Breakdown - Compound vs Simple Interest
Compound interest has been a topic at the heart of many financial discussions in recent years and more people than ever are learning how to take advantage of it. Still, many do not know the differences between simple interest and compound interest, a topic we will cover in this article. First, we will learn about simple interest, then compound interest, and finally, how to take advantage of compound interest.
Simple Interest
To understand compound interest, it is beneficial to first understand simple interest. The payment that you owe on top of your borrowed amount is known as interest, and it is often stated as an annual percentage rate. In essence, interest is the expense of borrowing money or the cost of lending money. In most cases, simple interest paid or received over a specific time period is a predetermined percentage of the amount borrowed or lent. For example, suppose a student receives a simple-interest loan to pay for one year of college tuition, which costs $40,000, and the loan's yearly interest rate is 5%. The loan is repaid over a three-year period by the student. The amount of simple interest paid is as follows:
40,000 x 0.05 = 2000/year, over 3 years.
This means that on top of the $40,000 tuition, the student would pay an extra $6000 over 3 years, which is the interest that comes from borrowing money.
Compound Interest
Meanwhile, compound interest is interest earned on interest. This causes a sum to increase quicker than simple interest, which is calculated just on the principal amount. If you have learned about exponential growth in math class, you will be able to easily understand this concept. This is because when interest is compounded on the principal amount invested or borrowed, the interest rate is applied to the new (bigger) principal. It's simply interest on interest, which leads to an exponential increase over time.
Power of Compound Interest
Compound interest is especially important for investors. This is because, over a long period of time, money invested can grow significantly using compound interest. If you invest in stocks, taking advantage of compound interest is as easy as reinvesting over an extended period of time. When you reinvest the profits from a stock back into itself, you are essentially generating compound interest. According to investopedia.com, “the primary reason to reinvest your dividends is that doing so allows you to buy more shares and build wealth over time. If you examine your returns 10 or 20 years later, reinvesting is more likely to increase the value of your investment than simply taking the cash.” To calculate your potential compound interest growth over time, we can make predictions using a compound interest calculator (you can easily find this online). Say you invested $1000 into the S&P 500, and never invested again (no monthly contributions, etc.).The S&P 500 average yearly growth is 10%, and with compound interest, a 10% annual return on $1000 would be around $11,000 after 25 years. Now, if you invested an additional $50 every month for the same period of time, that $1000 would be almost $70,000. The more you invest, the more money you will have in the future. Invest $13,000 initially, and $50 every month for the same 25 years and you would have almost $200,000. Again, all of this can simply be calculated using an online compound interest calculator such as www.investor.gov/financial-tools-calculators/calculators/compound-interest-calculator.
To conclude, compound interest is essentially interest earned on top of interest; an example of exponential growth. If you are investing in the stock market over a long period of time, you are generating compound interest. Simple interest is determined based on the amount you deposit or owe once a year. Compound interest, on the other hand, is interest gained that is added to the principal, establishing a new base for determining the following period of interest. When determining how much you want to invest, you should always spend some time playing with a compound interest calculator.
Financial Trends
Growth of Video Banking and ITEMs
Due to the coronavirus forcing banks to adapt and change the ways that they interact with their customers and as a result, they have enhanced their digital platforms to provide their clients with improved customer service. Recently, several banks have found a lot of success in their video banking platforms.These video banking platforms allow banks to allocate their customers’ needs in both a safe and convenient manner, while still providing them with a personal touch from the banks. Due to the success, banks have started to extend their video banking services to mobile devices and create plans to provide their customers with the capacity of full video chat in their call centers.
Banks have also increased the technology staff by over 11-fold in the last six years and now it is a necessity for each bank to invest in digital and video as it scales back the traditional brick-and-mortar presence. They have also started to enhance their mobile banking app in recent years, by adopting online payment platforms such as ApplePay and a hybrid robo-adviser called Nest Egg, which is a digital product that customers can access through a video session with the bank. Despite there being a surge in the investments in digital and video services, there are some bank officials that believe that there needs to be a presence of a brick-and-mortar bank.
Addressing Financial Cyber Risks
The main priority for board directors, insurers, and wealth and asset managers at banks is cybersecurity. They have started to understand that the more sophisticated risks and expanding attack surfaces require banks to need more robust protection. The financial services industry is a leader in cybersecurity, but still remains a major target for hackers. There is now intensifying regulatory oversight that has been established for data privacy, consumer protections, planned responses, to incidents such as ransomware and extensive breaches of data. Chief information security officers (CISOs) and other types of cybersecurity leaders are constantly under intense pressure to identify and get rid of cybersecurity threats, however they often tend to struggle to engage with business leaders as strategic advisors.
The ability to be able to quantify risks and track progress is both critical and essential for companies that want to stay on top of the latest and most dangerous cybersecurity threats. Companies have started to become more aware and cautious of these cybersecurity threats as there was a surge of them during the pandemic. As companies continue to add on advanced technology to enhance their products and services, it is more important than ever to have more advanced capabilities to manage the risks from cyber securities. The average time that it takes a company to detect a cybersecurity threat or major data breaches.
Financial Guidance
""Every once in a while, the market does something so stupid it takes your breath away." - Jim Cramer
Even in the world of finance and economics, there are no certainties. While reasonable predictions based on trends can be made, nothing is 100% certain. Be prepared to be able to deal with unexpected events.
Money Fact
To the shock of many, paper bills are actually dirtier than a household toilet. Various viruses can survive on paper bills for days at a time.