Compound interest is interest calculated on your initial principal plus all the interest you have already earned. It helps your money grow faster over time.
The Compounding Equation
The basic formula for compound interest is:
A = P * (1 + r/n)^(n*t)
- A is the final balance.
- P is the starting amount.
- r is the annual interest rate.
- n is the compounding frequency per year.
- t is the total time in years.
Frequency Matters
Compounding monthly or daily yields slightly more money than compounding annually. When you pair compound interest with regular monthly additions, your investment curve starts to rise steeply after the first few years.