How Compound Interest Works

Compound interest is interest calculated on both the initial principal and the accumulated interest from previous periods. This "interest on interest" effect can significantly increase your investment over time.

The Power of Compounding

The more frequently interest compounds, the faster your money grows. For example, $10,000 invested at 7% annually for 30 years grows to $76,123 with yearly compounding, but $81,449 with daily compounding – a difference of over $5,000!

Understanding the Formula

The compound interest formula is: A = P(1 + r/n)^(nt), where A is the final amount, P is the principal, r is the annual interest rate, n is the compounding frequency, and t is the time in years.