Investing money is a hard choice and is done to gain profits. There are many ways and businesses where you can invest money. But not every investment results in the profits that you are hoping for. The issue might be that the market you have chosen is not blooming or the investment option that you have chosen is just wrong. For this, first of all, knowing how profits are earned should be explained.

The profit gained on the investment or the initial payment is paid by banks in the form of interest. The interest is earned when the money you have invested is given as a loan to borrowers at high interest. According to your initial investment, a percentage of that interest is paid to you.

With that being said, the topic comes to the main point: increasing profits coming from your investments. Now, there are two interest options that you can choose from; simple and compound interest. 

Simple interest depends on the initial payment that you have set for interest. The profit that comes remains the same every year and completely depends on the initial investment that you gave to the bank. 

Compound interest is the opposite. It depends on the total amount which includes the initial investment and the profit you have gotten. After getting the profit for one year, the next profit is calculated on the total amount which increases the profit coming for the next year.

It might get a little confusing, but here is an example that will make you understand this difference better. Suppose you and your friend both have invested 1000 riyals in the bank on a 20% interest in 2012. The difference is that your friend chose compound interest while you chose simple interest for your investment.

Now, after a year, in 2013, you both will get 200 riyals as a profit and you both will have 1200 ryals each. Then what happens? In 2014, you will get 200 ryals more since the simple interest will be 20% on the initial investment which was 1000 riyal, while your friend who chose compound interest will get 240 ryals since his 20% interest will be on the total amount of 1200 ryals rather than 1000. 

In this way, your friend will gain more profit every year. Only 40 ryals might seem minimal at first, but as time passes, your wealth will increase exponentially.

So, by this, if you calculate properly, you will be amazed to know that in just ten years, your investment of 1000 ryals will grow to 6190 ryals! This is just the result of making smart choices and sticking by them till the end.

To know more about investments, check out the other articles on the ThriftPlan website. They will help you know different techniques and plans that will help you secure financially.

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