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
