Compound Interest: The Key to Growing Your Money
What is compound interest and how can it help you grow your money?
Compound interest, also known as interest on principal and interest, is the practice of adding interest to the principal amount of a loan or deposit. It allows you to earn interest on both your initial investment and the interest you have already earned.
Understanding Compound Interest
Compound interest is a powerful tool that can help you achieve your financial goals. When you invest money, it earns interest over time. With compound interest, the interest you earn is added to your principal, so you earn interest on that as well. This compounding effect can significantly increase the value of your investment over time.
Imagine you invest $5000 at an interest rate of 4% per year. After 5 years, your investment would grow to $6,083.26. This is the power of compound interest in action.
The formula for calculating compound interest is:
A = P(1 + r)^n
Where:
A = the amount accumulated after n years
P = the principal amount (initial investment)
r = the annual interest rate
n = the number of years the money is invested for
Using this formula, we can calculate the future value of an investment after a certain period of time.