The Power of Compound Interest

Compound interest is the interest on a loan or deposit calculated based on both the initial principal and the accumulated interest from previous periods.

Thought of as "interest on interest," compound interest will make a sum grow at a faster rate than simple interest, which is calculated only on the principal amount.

The Formula for Compound Interest

The formula is A = P(1 + r/n)^(nt), where:

• A = the future value of the investment/loan, including interest
• P = the principal investment amount (the initial deposit or loan amount)
• r = the annual interest rate (in decimal)
• n = the number of times that interest is compounded per year
• t = the number of years the money is invested or borrowed for

The power of compounding is one of the most important concepts in finance. The earlier you start investing, the more your money can grow.