Understanding Compound Interest
Compound interest is often called the "eighth wonder of the world" because of its powerful ability to grow wealth over time. Unlike simple interest, which is calculated only on the principal amount, compound interest is calculated on both the principal and the accumulated interest.
The Formula
A =
P(1 +
r/n)nt
+ PMT ×
(1 + r/n)nt − 1
r/n
Where:
- A = Future value of the investment
- P = Principal (initial deposit)
- r = Annual interest rate (decimal)
- n = Number of times interest compounds per year
- t = Number of years
- PMT = Monthly contribution
Key Takeaways
- Start early - time is your biggest advantage
- Contribute regularly, even small amounts add up
- Higher interest rates significantly increase growth
- More frequent compounding means slightly more growth
