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Magic Of Compounding

Compound interest is the interest on savings calculated on both the initial principal and the accumulated interest from previous periods.

  • Generating “interest on interest” is known as the power of compound interest.
  • Compounding multiplies money at an accelerated rate.
  • Compound interest is interest calculated on the initial principal, which also includes all of the accumulated interest from previous periods.
  • Interest can be compounded on any given frequency schedule, such as continuous, daily, or annually.

Here’s the compound interest formula:

A = P (1 + [r / n]) ^ nt

  • A = the amount of money accumulated after n years, including interest
  • P = the principal amount (your initial deposit or your initial credit card balance)
  • r = the annual rate of interest (as a decimal)
  • n = the number of times the interest is compounded per year
  • t = the number of years (time) the amount is deposited for