What is Compound Interest?
Compound interest is the addition of interest to the principal sum of a loan or deposit, or in other words, interest on principal plus interest. It is the result of reinvesting interest, rather than paying it out, so that interest in the next period is then earned on the principal sum plus previously accumulated interest.
The Power of Compounding
Albert Einstein famously called compound interest the “eighth wonder of the world.” The reason is that it makes your money grow exponentially. The longer you leave your money invested, the more it grows because you earn interest on your interest.
Formula
A = P (1 + r/n)^(n*t)
- A = the future value of the investment/loan, including interest
- P = the principal investment amount
- r = the annual interest rate (decimal)
- n = the number of times that interest is compounded per year
- t = the number of years the money is invested or borrowed for
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