Understanding 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. This process allows your investment to grow at a faster rate compared to simple interest, which is only calculated on the principal.
Formula for Compound Interest
The formula for calculating compound interest is:
A = P(1 + r/n)^(nt)
Where:
- A = the future value of the investment/loan, including interest
- P = the principal investment amount (initial deposit or loan amount)
- r = the annual interest rate (decimal)
- n = the number of times that interest is compounded per unit t
- t = the time the money is invested or borrowed for, in years
Key Components Explained
- Principal (P): This is the starting amount of money that you invest or borrow.
- Interest Rate (r): This is the percentage at which your investment grows per period.
- Compounding Frequency (n): This refers to how often interest is applied to the principal (e.g., annually, semi-annually, quarterly, monthly).
- Time (t): The duration for which the money is invested or borrowed.
Benefits of Compound Interest
- Accelerated Growth: The more frequently interest is compounded, the more interest you earn.
- Long-term Wealth Building: The benefits of compound interest are most significant over longer periods, making it ideal for savings and investments.
By understanding the compound interest formula and its components, you can effectively plan your investments and loans to maximize your financial growth.

principal (1+r/100 )-1