Should You Reinvest Interest Earned From Short-Term Plans?

Investing is a great way to earn money and build wealth over time. When you invest your money, you are actually putting your money to work. As a result of this, you create a financially secure future for yourself and your family.

But should you re-invest the interest earned from short-term plans? Let’s find out.

What is Interest?

Before we go into the details of reinvestment strategies, let’s understand what interest is. If we define it in simple words, interest is the reward you earn by lending money. When you deposit money into a savings account or invest it in short-term plans like bonds and P2P investments, the institution uses this money for various purposes. However, they pay you an interest in return for letting them use your money.

How Does Reinvesting Interest Work?

When you reinvest your interest, you are putting the money you earned from your investment back into the same investment. Let’s understand it through an example – Assume you have ₹10,000 in a short-term investment opportunity with a 5% interest rate. So, after a year, you would earn ₹500 as interest. Now, if instead of withdrawing this ₹500 you choose to invest it back into the same plan, you would be reinvesting your interest. Next year, you would earn interest not just on your initial ₹10,000 but also on this ₹500 you reinvested.

Pros of Re-Investing Interest

The major pros of interest reinvestment include:

  • Unprecedented Growth

    Reinvesting your interest would allow your money to grow exponentially over time on account of investment compounding. As you earn interest on both, your initial investment and the interest it earns, the value of your investment will increase. And this would lead to significant growth over the long term.

  • Maximum Returns

    When you re-invest your interest earned, you are actually maximising the potential returns on your investment. Wondering how? Well, you are putting your earned interest back to work and with this, you are making the most out of your investment opportunities.

Cons of Re-Investing Interest

While there are several advantages of reinvestment, there are also some drawbacks you should be aware of. These include:

  • Liquidity Issues

    If you choose to reinvest your interest, you will be tying up your money for a longer period. As your money and the interest earned would be blocked till the lock-in period, you may not be able to access your earnings if you suddenly need cash for unexpected expenses or opportunities.

  • Risk of Loss

    All investments carry some level of risk and this is a known fact. By reinvesting interest, you would risk more of your money to losses if the investment doesn’t perform as expected. Moreover, if the investment value declines, you not only lose your initial investment but also the reinvested interest.

What Should You Do?

To understand whether you need to reinvest interest, you should first consider your financial goals and risk tolerance. If you are saving for the long term and do not have any immediate need of funds, then you can certainly consider reinvesting interest. But, if you are in dire need of the money at present or may need it in the near future, then you must keep the interest separate and not reinvest it.

Alternatives To Re-Investing

ReInvesting

Withdrawal:

Instead of reinvesting, you can choose to withdraw the interest earned and use it for other purposes such as meeting your personal needs, or covering other expenses.

Different Investments:

You can also diversify your portfolio by using the interest earned to invest in different options such as P2P investing. This not only reduces your risk but also provides you with alternative sources of income. With 13Karat, you can earn good investment returns of up to 13% per annum.

Conclusion

So, reinvesting interest can be a powerful strategy for you if you wish to grow your wealth over time. However, make sure you evaluate your financial situation and goals before jumping into it. If you are not sure about the best approach for you, you can also seek advice from a financial advisor.