Maximising your Debt Investments

By using the concept of compound interest, you can maximize your returns by reinvesting the repayments from your investments. Investors receive repayments in the form of a monthly or bullet basis depending on the product invested. Therefore you can compound your returns by reinvesting the repayments into new notes, generating additional returns on both your principal and interests earned.

[blockquote cite=”Albert Einstein” type=” centre”]“Compound interest is the eighth wonder of the world. He who understands it earns it … he who doesn’t … pays it.”[/blockquote]

Consider the following scenarios.

Scenario 1: No Reinvestment

Consider investor A who invests a principal amount of $10,000 into a note at 12% for a period of 12 months.
At the end of the 12 months, he is repaid his principal amount $10,000 and interest of $1,200.
His return on investment is therefore 1200 / 10000= 0.12 = 12%

Illustration when there is no reinvestment

Scenario 2: Reinvesting principal and interest

Consider investor B who invests a principal amount of $10,000 into a 3-month invoice financing note at 12%.
At the end of the first 3 months, he receives his principle of $10,000 and $300 in interest.
Interest = [($10,000 X 0.12) / 12] X 3 = $300
Assuming that he is able to invest in a similar invoice financing note every 3-months, he will be able to get an interest that totals up to = $300 + $300(1.03) + $300(1.03)^2 + $300(1.03)^3 = $1255.09
His return on investment is therefore 1255.09 / 10000= 0.1255 = 12.55%
Reinvestment Illustration

Scenario 3: Reinvesting monthly repayments and interest

Consider investor C who invests a principal amount of $10,000 into a 12-month note at 12% for a period of 12 months.
In the first month, he receives $833.33 in principal repayment and $100 in terms of interest.
Assuming every month, he reinvests his repayment and his interest earned into a note at 1% per month, his interest earned by the end of 12 months would be = $2,054.61
His return on investment is therefore 2054.61/10000= 0.2054 = 20.54%

reinvestment illustration3

As shown in the illustrations above, by reinvesting your repayments and interest into more notes, you will be able to yield higher interest rates.

 

Disclaimer: This article is not meant to constitute/be construed as a form of recommendation, financial advice, or an offer, invitation or solicitation from Funding Societies to buy or subscribe for any securities and/or investment products. The content and materials made available are for informational purposes only and should not be relied on without obtaining the necessary independent financial or other advice in connection therewith before making an investment or other decision as may be appropriate.

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Lynn
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