Compound Interest

Published on

Compound interest is a way of calculating how much money you can earn on a deposit or investment over time. Unlike simple interest, where you earn interest only on the initial amount of money, with compound interest you earn interest on both the initial amount and any interest that you have already earned.

For example, let's say you have 100inasavingsaccountthatearns5100 in a savings account that earns 5% interest annually. After the first year, you would earn 5 in interest, bringing your total balance to 105.Inthesecondyear,youwouldearn5105. In the second year, you would earn 5% interest on the new balance of 105, which would be 5.25.Thiswouldbringyourtotalbalanceto5.25. This would bring your total balance to 110.25.

As you can see, your balance grows faster with compound interest than with simple interest. This is because you are earning interest on a larger and larger balance each year.

It's important to note that compound interest can work against you as well. If you have a loan or credit card balance with compound interest, the interest can add up quickly and make it harder to pay off the debt.

Understanding compound interest can help you make informed decisions about saving and investing your money.

© 2023
All rights reserved
We use cookies to improve your experience