Peel the veil off the interest rate

In the case of a simple interest payment, the interest will not be accrued in year 2, so the result is HUF 1,050,000. If interest is also tied up at the end of the first year, the amount will be HUF 625 higher, based on the interest rate formula.

From a purely financial point of view, the natural explanation for the difference is that we reinvest interest already paid instead of a 0% alternative return on interest payments (that is, it just stands in our own or the financial institution’s account); can be interpreted.

Here’s an important conclusion

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Anyone who re-invests the return on their investment will have a 50% higher amount for 30 years (for example, at a 4% interest rate) than he spends in the meantime.

At 8%, which has been more prevalent over the past 30 years, 200% more returns, which is three times the amount of final capital available.

You can also watch an easy-to-read video about the interest rate here

In what time frame is it worth investing for a one-time extra interest?

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However, there is a common optical illusion of interest that, without this knowledge, appears to be more than what is known as a periodic one-time, interest rate premium, bonus , but the same applies to state aid for paying a given year (only the latter typically to maturity), which are available for home savings, retirement, health, Start account savings.

True, they are typically much higher than current interest rates, but the less they impact on the average yield available, the longer the product is attached to the product. I do not want to scold these constructions, I do use them, just to be aware of their working principle and their final impact.

Let’s take a look at a simplified home bill savings example

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Since all home bills can be canceled (for housing purposes, with state subsidy) after 4 years, I am counting on 4 year installments, and it is possible to make an annual payment at the beginning of the year. So let’s look at a 4-year, $ 20,000 ($ 240,000) monthly 30% state subsidy product. The deposit rate is 1% and exclude the account opening and account management fee and the time of transfer.

What do you think will be the average interest rate for the entire investment period? 30% of the state subsidy to be paid in a given year and 1% of the deposit interest . 31%? Somewhere between 1-30%?