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Accounting

Compounding Interest

At Stop Flipping we advocate our investors to become fully educated on the nuts and bolts of their investments.  The deeper their understanding and the more familiar our investors are with these finance fundamentals, the more they feel in in control and comfortable with their investment. Lets discuss a concept that lies at the foundation of note investing, the effects of compound interest.

At the core of financial analysis there is the simple truth that a dollar today is worth more than a dollar tomorrow. The farther off in the distance that “tomorrow” is, the fewer dollars it is worth. The term interest is used to describe how much you will pay for money today and the method in which you will pay the interest back is referred to as compounding.  Compounding describes the mathematical operation of taking the interest and adding it to the initial principal, which will then generate a new principal. The most common type of compounding that you as the investor will see in your investments is annual compounding. Meaning that the interest owed to you on the note that you hold will be calculated on a yearly basis.  So what does this mean for your investments? Understanding the concept of compounding and the time value of money will help you as an investor, be aware of your “dollar earning power.” When your dollars are stagnant or sitting in a savings account, the compounding that is happening is only a fraction of what it could be if you were to invest your money in a strategy which fully capitalizes on the high interest rates that you will be collecting on your investments. At Stop Flipping we feel that educating prospective investors on the magnitude of their money’s interest earning power with notes through sample calculations is an eye opening experience. We will often compare the interest accrued over a 10 year span with a mortgage note investment vs. the interest accrued by a typical savings account. If you would like to discuss the interest earning power of your money, please visit our contact page and fill out the contact form and request a time to meet with us or view our testimonials page to hear about a few of our current investors.

 

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