You’ve probably heard people talk about compound interest. So what is it?
Compound interest is “interest on interest”. He pushes on both principal (the original amount you invested) and accrued interest.
The key to taking advantage of compound interest is to start early! Interest only is calculated on just that initial amount, but compound interest helps your money grow faster over time.
You can start small. The time you give your money to earn compound interest is the important part.
Some examples of capitalization frequency schedule: daily, monthly or semi-annually. The more frequent they are, the better it is for you, if you save.
However, compound interest can hurt you if you’re trying to pay off debt.
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Here is the formula to calculate it:
A = P (1+r/n)^(nt)
A = Amount
P = main
r = annual interest rate, in decimal form
n = number of times the interest is compounded per year
t = how long the money is deposited/borrowed, in years
Or, if you’re like me and the thought of solving a math equation you haven’t touched since freshman algebra is anxiety-provoking, you can use a simple online calculator.
Sources
Business Insider: Understanding Compound Interest Is Key to Building Wealth or Avoiding Crushing Debt
United States Securities and Exchange Commission: Compound Interest Calculator
Investopedia: The power of compound interest: calculations and examples
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