What Does APR Mean? And Why You Should Compund

If you spend any time in crypto or in finance you might have come across the letters APR followed by a %. You might be wondering what this number means and why is it important.

APR stands for Annual Percentage Rate

This is the percentage of interest you are making on an investment in a year. So If an investment says they have an APR of 10% that means you will earn 10% if you hold that investment for a year. You can calculate your rates per month, or weekly but APR gives you the return for the entire year. So if you have an APR of 12%, then you will gain 1% interest on your investment every month. And depending on how the investment is paid out, you will receive that money through-out the year.

Lets do some math.

If you invest 10,000 in a stock with an APR of 20% (which is really high) you would make 2,000 a year. That doesn't sound like a lot but that is $2,000 added to your bank account for doing nothing. And if you reinvest that, you are now getting that 20% on 12,000 instead of $10,000. That means you will earn $2,400 for the next year that the money is put away. As you can tell this gets higher and higher every year and can really explode with enough compounding. This is why they tell you to put money away early for retirement as it can grow substantially over years.

In crypto the numbers get crazier. Some coins promise APR of 50, 100 or even 200%. The problem with a lot of these are they are based on the numbers from a short time. So the dividends might be really high when a dapp is new and they can say you are making an APR of over 100%. But realistically that number is going to drop when people are less interested in the dapp, or the volume of the coin gets diluted so always watch out for that.

However there is one big advantage that crypto investments have over traditional ones. As I mentioned earlier if you invest in a stock you will get paid monthly or even quarterly. That means that you will only get paid 4 times a year! And for those in crpyot we got spoiled with daily returns (I've even used a site that paid me twice a day). This might not sound like a big deal but if you get paid smaller amounts more often you can compound faster and earn more for your investments quicker. You might be getting the same percentage over the year, but you are taking a percentage off of the number that you have re-invested in more often.

Let's use the APR of 365% to make the math easy. At this rate I will earn 1% on my investment (which is insanely high). So if I invested $100 I will be making $1 a day. If I get paid yearly that means I will make $365 on my investment. But lets says I get paid daily and reinvest my profit. On day one I will make $1. But now that I reinvested it on day 2, I will be getting 1% of $101 instead of $100 and will make $1.01 instead of a dollar. And on day 3 I am now getting 1% of 102.01 dollars. This doesn't seem like a lot but it adds up fast and by the end of the year you would make $3778.07 instead of the $465 you would have gotten for the yearly pay out.

Yeah big difference. So make sure you are compounding when and as often as you can, if it is an investment you want to keep long term that is.

CRYPTO IS A VERY RISKY INVESTMENT, PLEASE ONLY INVEST WITH MONEY YOU CAN AFFORD TO LOSE

Posted Using LeoFinance