Compound interest: How it works, plus how it can help (or hurt) you
You’ve probably heard people talk about compound interest. So what is it?
Compound interest is “interest on interest.” It grows on both the principal (the original amount you put in) and the accumulated interest.
The key to taking advantage of compound interest is getting started early! Interest alone is calculated just on that original amount, but compound interest allows your money to grow faster over time.
You can start small. The time you give your money to earn compound interest is the important part.
Some examples of the compounding frequency schedule: daily, monthly, or semiannually. The more frequent, the better for you — if you’re saving.
However, compound interest can hurt you if you’re trying to pay off debt.
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This is the formula for calculating it:
A = P (1+r/n)^(nt)
A = Amount
P = Principal
r = annual rate of interest, as a decimal
n = number of times that interest is compounded per year
t = how long the money is deposited/borrowed, in years
Or, if you’re like me and the idea of solving a math equation you haven’t touched since freshman-year algebra is anxiety-inducing, you can use an easy online calculator.
Sources
Business Insider: Understanding compound interest is key to building wealth or avoiding crushing debt
U.S. Securities and Exchange Commission: Compound Interest Calculator
Investopedia: The Power of Compound Interest: Calculations and Examples
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This story was originally published October 13, 2022 at 3:32 PM with the headline "Compound interest: How it works, plus how it can help (or hurt) you."
