In a nutshell, compound interest is the interest of the interest<\/strong>.<\/p>\n Say that one year you earn 10% interest on a $1,000 investment. Now you have $1,100 and have earned $100 in interest.<\/p>\n The following year, you earn another 10% interest. This time you already have $1,100, so you earn $110 in interest – $10 more than last year.<\/p>\n This is the compounding effect, which Albert Einstein called the 8th wonder of the world.<\/p>\n Compound interest allows you to earn interest on the interest you earned<\/em> in previous years. <\/p>\n The way compound interest<\/a> works are\u00a0that the interest is added to the principal balance for each term. <\/p>\n This means that interest is then earned on the additional interest added to the original sum over the course of the next compounding period.<\/p>\n You can see an example of how the compound interest effect works on a $1,000 investment below.\u00a0<\/p>\n As you can see in the graph, compound interest grows\u00a0exponentially over the years.<\/p>\n The primary benefit of compound interest is that you can earn interest on the money you never invested, allowing your\u00a0investments to grow quicker than they could without it.<\/p>\n <\/p>\n The annual compound interest formula is as follows:<\/p>\n In this case:<\/strong><\/p>\n A = The future value of the loan or investment,\u00a0including interest This compound interest equation above will show the future value of an investment or loan<\/strong>, which is the initial principal amount, plus compound interest.<\/p>\n If you want to know how to calculate compound interest only<\/em>, the formula is as follows:<\/p>\n Total compound interest = P (1 +r\/n) (nt)<\/sup> \u2013 P<\/p>\n Here is an example to show how the compound interest formula works:<\/p>\n If you deposit $1,000 into a savings account with a 5% annual interest rate that’s compounded monthly, then the investment value after five years could be calculated as follows:<\/p>\n P = $1,000 A = $1,000 (1 +0.05\/12) ^ (12(5)) = $1,283.36<\/p>\n Of course, no one is expected to break out this equation every time you need to figure out compound interest. <\/p>\n Instead, you can use our free compound interest calculator<\/a>, found at the top of this page for your convenience.<\/p>\nHow Compound Interest Works<\/h2>\n
![\"Compound](\"https:\/\/financer.com\/app\/uploads\/sites\/11\/2017\/02\/compound-interest-example.png\")
3 Ways You’re Affected By Compound Interest<\/h3>\n
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Annual Compound Interest Formula<\/h3>\n
A = P (1 + [r \/ n]) ^ nt<\/h3>\n
P = The initial principal amount
r = The annual interest rate
n = The number of times the interest will compound on an annual basis
t = The number of years the money is borrowed<\/a> or invested<\/p>\nUsing the Formula: An Example<\/h3>\n
r = 5\/100 = 0.05
n = 12
t = 5<\/p>\nCompound Interest and Credit Cards<\/h2>\n